[Weekly Preview] How Are Local Governments Adapting to Life Under Tight Fiscal Constraints? (AI Translation)

【周刊提前读】地方财政习惯过紧日子 具体如何执行？

The article discusses the challenges faced by Chinese local governments as they adjust to the central government’s call for a “habit of austerity” (“过紧日子”) amid ongoing fiscal pressures and tight budget circumstances. This directive, reiterated at the end of 2023, reflects years of cost-cutting and advocates for rigorous control of government expenditures at both central and local levels. [para. 1]

Despite many provinces reporting strong fiscal revenue growth in 2023, with year-on-year increases often above 7% and some as high as 10%, officials in economically developed provinces such as Jiangsu and Zhejiang attribute these figures primarily to low bases in 2022 due to large-scale tax rebates and deferred taxes, not a genuine recovery in economic tax sources. [para. 2] Provincial budget reports highlight persistent weak demand and economic expectations, constraining revenue growth while rigid spending on basic livelihoods, wages, government functions, and debt risk control (“三保”) continues to rise. Many provinces, like Jiangsu and Anhui, predict even greater fiscal pressures in 2024. [para. 3]

Against this backdrop, optimizing the fiscal expenditure structure becomes critical. Sichuan’s 2024 budget report emphasizes strict control over general spending, focusing resources on key projects, and innovating in financial support. Investments are prioritized and constrained, with a focus on large strategic projects, and economically inefficient or image-driven projects are suspended. Notably, at least 13 provinces mandate that 70% to 80% of public finance expenditure is devoted to social welfare. [para. 4][para. 5] Investment spending is also under pressure: high-debt provinces must manage government investment projects more stringently, and even provinces with lower debt like Henan and Sichuan are tightening project controls. [para. 6]

Local governments seek to cut administrative costs and reduce expenses on personnel, utilities, and unnecessary meetings. Some regions, such as Tianjin, Shandong, and Chongqing, are pushing for broader financial resource coordination by deepening state-owned asset reforms and raising the proportion of state-owned enterprise profits remitted to the government. [para. 7]

However, optimism about increasing fiscal income is low. In 2023, 27 out of 31 provinces saw public budget income rise by over 5%, with 23 surpassing a 7% increase. Yet income growth projections for 2024 have been adjusted downward, with only a handful of provinces expecting rates above 7%. Key sectors like finance and real estate continue to depress overall revenue growth, while government fund income (mainly from land sales) has plummeted in most regions, except for a recovery in some northern provinces. [para. 9][para. 10][para. 11]

To support growth and social services, provinces still place priority on livelihood spending: education, social security, and healthcare consistently account for the largest portions of budgets. For example, education spending ranges between 16.5% and 19.4% of general budget expenditure in Jiangxi, Hunan, Yunnan, and Guizhou. However, efforts to encourage economic growth via investment are restrained by national debt-control policies, especially in high-risk provinces. There is increasing focus on industry investment through government-backed funds, leveraging public-private partnerships, and attracting social capital. [para. 15][para. 16]

The drive to economize dovetails with intensified efforts to “open source” revenue: reforms include broader state capital budget management and increases in SOE remittance ratios (e.g., Tianjin from 23% to 30%). Asset management improvements are underway, such as activating idle government assets to increase available fiscal resources. [para. 22][para. 23]

Debt risk remains a top concern, particularly following a series of local government liquidity crises in 2023. Many provinces are implementing comprehensive monitoring, prioritizing risk prevention and systemizing government debt management. “Three Guarantees” (basic living standards, wages, and operations) remain foundational at the grass-roots fiscal level, with systems for emergency support in distressed counties. [para. 24][para. 25][para. 29]

In summary, as China’s local governments face weaker revenues, rising rigid expenditures, and significant debt pressures, strict fiscal discipline, focus on livelihood guarantees, administrative cost-cutting, state asset reforms, and vigilant debt risk management are the core strategies guiding their adaptation to the “habit of austerity.” [para. 1][para. 32]