Local, Regional Governments Become Less Self-Sufficient

(Beijing) — Financial self-sufficiency has declined among regional and local governments in China, as local taxes slowed while spending rose, the official Xinhua News Agency reported on Wednesday, citing a study.

The study, by the Chinese Academy of Fiscal Sciences (CAFS), found that during the first three quarters of this year, 50.8% of local government spending on average was funded by local taxes, down from an average of 54.1% in 2015, the report said.

To make up for the shortfall, local authorities have turned to the central government or the financial market to pay the bills. Growing local debt and higher fiscal demands on the central government could put a greater strain on the broader economy and the country’s fiscal state, the study said.

The tapering growth of tax revenue, the study said, could be the result of the transition from traditional industries like manufacturing to so-called new-economy industries. Meanwhile, public spending has risen as the government is paying more in pensions and to address climate change.

Financial self-sufficiency is also skewed geographically, the report said. The average self-sufficiency rate from 2015 to 2017 is at high 74.3% in China’s affluent eastern provinces, while the inland regions had an average rate of 30.4%.

Southwest China’s Guizhou province serves as an example of how economic transformation has brought about a decline in self-sufficiency, the study said. In Guizhou, the traditional coal, power, tobacco and liquor industries contributed 62% of the tax income, the study said. However, tax revenues from these sectors grew only 5% in 2017, down from 26% in 2011. On the other hand, new-economy industries such as finance and information technology, which accounted for only 10% of local tax revenue, grew much faster.

The study examined the finances of 23 Chinese provinces, 158 cities and 667 counties from 2014 to 2017, the report said.

Contact reporter Pan Che (chepan@caixin.com)