Intergovernmental Fiscal Transfers for China's Harmonious Society *

Abstract

China's current system of fiscal transfers suffers from severe weaknesses. the absence of a clear and coherent principle for distribution of fiscal transfers is a major weakness and results in the current distribution that favors the wealthier provinces. Furthermore, fiscal transfers have failed to secure a better alignment of budgetary expenditures with national priorities. Against this background, this paper examines how refocusing of China's fiscal transfers could help in better achieving national economic priorities. the paper analyses the issue of whether fiscal capacity equalisation should become the dominant principle for future distribution of fiscal transfers, or whether categorical fiscal equalisation - using fiscal transfers targeted at national priorities - would be more effective in progressing towards China's vision of a harmonious society. It is concluded that fiscal equalisation is not the right approach for China and an alternative approach is proposed according to which fiscal transfers are targeted at national priorities. Finally, after noting that the current status of management of specific purpose payments in China is quite deficient, a framework for more effective intergovernmental fiscal coordination and monitoring the implementation of outcome-focused fiscal transfers is outlined.