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Transfer Payments – Is the East Paying the West's Bills?

The Economic Observer ran a series of five articles this autumn that examined how China's tax and fiscal system operates, focusing on how central and local authorities share government revenue. To read the other articles in the special feature, click here. 

Issue No. 544
Nov 14, 2011
News, page 3
Original article:

A County in the West

A county government in western China, which is typical of many others, is forecasting fiscal revenue of 647 million yuan in 2011 and expects to receive a transfer payment of 620 million yuan from higher levels of government. This will be the first time that the county has taken more in fiscal revenue than in it has received in transfer payments.

"We are recognised as an official national-level "poor county," and have always received major support through transfer payments from higher levels of government. Ten years ago, the transfer payments that we received were twice as much as our local fiscal revenue," one of the county's officials, Zhang Zhijun (张之君), told the EO.

In recent years, his county's fiscal revenue has increased annually by 20 percent, or around 100 million yuan. But every time its fiscal revenue grows by 100 million yuan, the transfer payments it receives have been reduced by around 20 million yuan.

Calculating Transfer Payments

The amount of funds that each local government will receive in transfer payments is calculated using a special method which is based, among other factors, on comparisons between local per-capita revenue and expenditure. So, if local fiscal revenue increases, transfer payments will also come down. A finance ministry official said that the size of transfer payments had previously been kept secret in order to prevent disputes between local governments, but that this changed in June, when the method for calculating payments was made public.

Gaming the System

This principle has also been applied to transfer payments specifically earmarked for funding public housing construction or spending on education and health care reform.

This year, the National Audit Office announced the results of a fiscal audit of 90 counties, where expenditures totaled 263 billion yuan, 56 percent of which came from transfer payments from higher levels of government. However most eastern provinces and cities are opposed to the current system of fiscal transfers, which they argue has made the east of the country a net contributor to the west.

The Ministry of Finance argues that that net fiscal transfers aren't a sign of favoritism for central or western regions, pointing out that China draws its oil, gas, coal, minerals and grain from these regions without fully compensating them. The ministry added that central government's duty is to ensure a relatively uniform standard of public services across the country.

Changing the System

The central government's share of China's total fiscal revenue has grown to 52 percent in 2010, up from 22 percent in 1993, bringing it closer to the global average, which the finance ministry estimates at more than 60 percent. Sources have told the EO that China will make changes to its transfer payment system during the 12th Five Year Plan period (2011-2015), but that the central government's role in reallocating fiscal revenues will not be reduced. For now, the MOF is simply looking at ways to simplify the system of transfer payments.

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