By Xi Si

News, page 2,

Issue No. 528, July 18, 2011

Translated by Zhu Na    

Original article: [Chinese]  

 According to the fiscal revenue data released in June, income tax generated 1.473 trillion yuan, with corporate income tax and personal income tax both growing by 35%.

Officials from the Ministry of Finance told the EO that local governments received 531 billion yuan from the central government in balanced-fiscal transfer payments, of which 507.7 billion yuan came from income tax revenue.

Due to the high growth in income tax this year, the Ministry of Finance plans to make another series of transfer payments to local governments before the end of this September. This means that most local governments with weaker financial resources will get a more balanced fiscal transfer payment for the second half of the year.

The methods and formulas used for the central government’s fiscal transfer payments are set out in a recent Ministry of Finance document which enables local governments to check the calculations.

The Most Transparent Funding

Transfer payments are the means to reallocate state funds from higher levels of government to lower ones. They are divided into general or special transfer payments. The balanced fiscal transfer payments are included in the general transfer payments. Local governments can use funds that they receive in this way as their financial resources, while other transfer payments tend to be allocated for have specific purposes of projects.  

Local governments like balanced fiscal transfer payments most. “The local governments often face problems, such as a gap in social security expenditures. We have been allocated all kinds of special transfer payments, but are not allowed to divert those funds, said an official from Qinghai (青海) Provincial Finance Department. Under similar circumstances, balanced fiscal transfer payments can be used flexibly for all sorts of expenditures.

For many local governments, the total amount of various transfer payments amounted to half of their total revenue, and western provinces derived most of their revenue from such payments.

For example, Ningxia Uyghur Autonomous Region’s (宁夏回族自治区) total public fiscal expenditure in 2010 was 55.6 billion yuan, while public fiscal income was just 15.3 billion yuan. “There was about a 30 billion yuan gap. Central government gave Ningxia more than 30 billion yuan in transfer payments that year,” said an official from Ningxia’s local finance department.

In order to balance the development between the eastern and western regions of China and promote the equality of basic public services after the tax-sharing reform (分税制改革) in 1994, the central government established and gradually improved the transfer payment system to local governments while keeping the pre-reform settlement subsidies and other transfer payment projects. The main funding source for balanced transfer payment is from additional income tax revenue received by the central government under the income tax revenue sharing reform implemented by the State Council in 2002.

In 2002 the central government and local governments each received 50% of income tax |revenue, but the central government’s share grew to 60% share in 2003 and has stayed at that level. Most of the balanced transfer payments go to financially poor regions, especially the central and western regions.

Presently, balanced transfer payments have increased from 2.1 billion yuan in 1995 to more than 400 billion yuan in 2010. According to a person from the Ministry of Finance, in 2011 only 6 provinces and 5 cities with separate budgets didn’t get balanced transfer payment because there was no gap in their fiscal revenue and expenditure, such as Beijing, Shanghai, Tianjin, Jiangsu, Zhejiang, Guangdong, Dalian and Qingdao.

Related to Income Tax Revenue

Balanced transfer payments consist of three parts: the first part, as mentioned above, is the additional income tax revenue received by the central government; the second part are budget funds allocated by the treasury; the third part is the leftover amount from the balanced transfer payments the previous year. The first part accounts for more than 95%, so the stable growth of the balanced transfer payment mainly depends on the growth of income tax revenue.

When the international financial crisis broke out in the second half of 2008, it had a significant impact on the transfer payment, which is closely related to income tax revenue. The data showed the growth rate of balanced transfer payment was 64% in 2007, 40% in 2008 and only 12% in 2009. However, local governments are still very confident that the transfer payments will grow.

An official from Ningxia’s local finance department said that the growth rate of tax revenue declined in 2009 in many places, and even shrank in some areas. However measurements at the beginning of 2009 found that transfer payments couldn’t guarantee the expenditure base in the first half of the year, which worried local governments. While allocating transfer payments, the central government compensated by means of other other budget arrangements, which ensured the expenditure base in the first half of the year.

An official from the Provincial Finance Department of western regions optimistically said that the Ministry of Finance promised to gradually increase balanced transfer payments and their proportion among other transfer payments.

“The increase of balanced transfer payments is the basis for accomplishing equality of basic public service and uniform development among regions. The central government and local governments share the same view,” said an official from the Budget Division of the Ministry of Finance.

Impact on other Funding Payment

The above official also told EO that the allocation of balanced transfer payment is measured and calculated through formulas, adopting fair and transparent methods. These factors take into account local population size, population density, elevation, temperatures and other factors, and also consider local revenues and expenditures.

Due to the above advantages, the allocating methods now apply to special transfer payments. Funds for key projects that require large amounts of funding such as low-rent housing subsidies, agricultural subsidies, are all allocated according to the formulas.

An official from Ningxia’s local finance department told the EO that this system is very standardized and relatively fair.

If local fiscal revenue increases or standard expenditure decreases, then balanced transfer payments allocated from central government also will decrease. Clearly, this is all calculated by formulas. For example, a county in the central region made a false report on their fiscal revenue, which caused their balanced transfer payment received from the central government to greatly decrease the following year.

“In the past, provinces were afraid to let other provinces know how much transfer payments they receive because they competed with each other. But now it is all open to the public. It can be calculated according to the formula, and the data can be requested from the Ministry of Finance,” said an employee at a local finance department.