ECON 455 Lecture 15_Fiscal reforms

ECON 455 Lecture 15_Fiscal reforms - Econ455 Economic...

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1 1 Econ455: Economic Development in China Lecture 15: March 12 Fiscal reforms: What Have Been the Benefits and Costs of Fiscal Decentralization? Sandra Poncet Lorch Hall, room 207 Email: [email protected] Office Hours: Mondays 16:30-18:30 & Wednesdays 10:30-12 2 Lecture Outline I- Structure of China’s fiscal system A-Pros and Cons of decentralization B-Structure of government in China C-Pre-reform fiscal system D-Impetus for change E-The 1994 recentralization Reform II-Outcomes of the reform A-Performance B-Problems Conclusion
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2 3 Introduction Question: What Have Been the Benefits and Costs of Fiscal Decentralization? China's fiscal system is highly decentralized : Sub-national governments account for more than 70% of total budgetary expenditures China's inter-governmental system is the product of incremental changes over the past two decades of transition. The major reforms undertaken in 1994 re-centralized revenues while leaving expenditure responsibilities unchanged. Impact: fiscal gaps not offset by inter-governmental transfers growth of regional disparities lack of transparency 4 A-Pros and Cons of decentralization PROS Local incentives Exploit local information Meet local needs • Experimentation CONS • Inequity • Nonuniform standards Breeds localism (e.g., protectionism) Makes coordination difficult I- Structure of China’s fiscal system
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3 5 Recall: A two-phase framework of reforms 6 B-Structure of government in China I- Structure of China’s fiscal system
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4 7 1. No real tax policy : revenues come from profit retention systems from enterprises owned by different government levels 2. Centralized system : center sets spending priorities and approved local budgets -center responsible for national defense, industrial policy… -day to day public adm and social services are delegated to the local gvt 3. Revenue sharing: Local levels are agents of the center: Inter- governmental transfers are set at a level equal to the gap between locally collected revenues and permitted local expenditures. C-Pre-reform fiscal system: highly centralized budget with decentralized resource allocation channels I- Structure of China’s fiscal system 8 C-Pre-reform fiscal system: highly centralized budget with decentralized resource allocation channels I- Structure of China’s fiscal system 3 features of this revenue-sharing system -based on extensive negotiation
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