Third Plenary Session Analysis: How to Increase the Financial Autonomy of Local Governments? (AI Translation)
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文｜财新周刊 程思炜
By Caixin Weekly's Cheng Siwei
在地方财力出现拐点式变化、地方债务风险上升等背景下，未来财税改革的方向备受社会各界关注。中央财办分管日常工作的副主任、中央农办主任韩文秀在《〈中共中央关于进一步全面深化改革、推进中国式现代化的决定〉辅导读本》（下称《辅导读本》）中撰文称，科学的财税体制是优化资源配置、维护市场统一、促进社会公平、实现国家长治久安的制度保障，深化财税体制改革对于以高质量发展全面推进中国式现代化意义重大。谋划推动新一轮财税体制改革，要正确处理政府与市场、中央与地方、效率与公平、全局与局部、长远与当前等重大关系，确保改革始终沿着正确的方向推进。
Against the backdrop of pivotal changes in local fiscal strength and rising local debt risks, the direction of future fiscal and tax reforms has garnered significant attention from various sectors of society. Han Wenxiu, Deputy Director of the Central Financial and Economic Affairs Commission in charge of daily operations and Director of the Central Rural Work Leading Group Office, stated in the "Guidance Reader on the 'Decision of the Central Committee of the Communist Party of China on Further Comprehensively Deepening Reform and Promoting Chinese-Style Modernization'" (hereinafter referred to as the "Guidance Reader") that a scientific fiscal and tax system is essential for optimizing resource allocation, maintaining market unity, promoting social equity, and achieving long-term national stability. He emphasized that deepening fiscal and tax system reforms is of significant importance for comprehensively advancing Chinese-style modernization with high-quality development. Planning and driving a new round of fiscal and tax system reform requires correctly handling major relationships between the government and the market, the central and local authorities, efficiency and equity, the overall picture and specific parts, as well as long-term and immediate interests, to ensure reforms are always advancing in the right direction.
《中共中央关于进一步全面深化改革、推进中国式现代化的决定》（下称《决定》）从健全预算制度、优化税制结构、完善中央和地方财政关系三大方面作出部署。三者之中，央地财税关系改革占据了较大篇幅。
The "Decision of the Central Committee of the Communist Party of China on Further Comprehensive Deepening of Reform and Promoting Chinese-Style Modernization" (hereinafter referred to as "the Decision") outlines measures in three major areas: improving the budgetary system, optimizing the tax system structure, and refining the fiscal relations between the central and local governments. Among these, the reform of central and local fiscal and tax relations occupies a significant portion.
上海财经大学校长刘元春认为，过去十年间，财政体制面临的问题发生了剧烈的变化：一是房地产变化导致地方财政财权与事权不匹配的问题更加严峻，二是债务风险的问题，这两个变化决定了财税体制改革的重点发生了变化。
Liu Yuanchun, President of Shanghai University of Finance and Economics, contends that over the past decade, the issues facing the fiscal system have undergone drastic changes: First, changes in the real estate sector have exacerbated the mismatch between local governments' fiscal power and administrative responsibilities. Second, the issue of debt risk has become more pronounced. These two changes have shifted the focus of fiscal and tax system reforms.
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- The Central Committee of the Communist Party of China emphasizes that scientific fiscal and tax reforms are essential for promoting Chinese-style modernization and long-term stability.
- Measures include improving the budgetary system, optimizing tax structures, and refining fiscal relations between central and local governments.
- Local fiscal pressures, exacerbated by declining land transfer fees and rising debt risks, necessitate increasing local fiscal autonomy and adjusting central-local revenue sharing.
**Summary**:
Among the key issues driving interest in future fiscal and tax reforms in China are shifts in local fiscal strength and increasing local debt risks. Han Wenxiu, Deputy Director of the Central Financial and Economic Affairs Commission, stresses that a scientific fiscal and tax system is crucial for optimizing resource allocation, promoting social equity, and achieving national stability. He emphasizes that deepening fiscal and tax reforms is essential for advancing Chinese-style modernization and balancing the roles of government and market, as well as central and local authorities. [para. 1] [para. 2]
Liu Yuanchun, President of Shanghai University of Finance and Economics, notes that recent changes in the real estate sector and rising debt risks have escalated the focus on local fiscal system reforms. [para. 3]
Amidst the pandemic's impact and structural economic issues, Feng Qiubin highlights the increasing importance of fiscal policy in macroeconomic governance to resolve local fiscal hardships. [para. 4] Luo Zhiheng, Chief Economist at Yuekai Securities, underscores that fiscal and tax system reforms must be systematic and problem-oriented, aligning with national strategies. [para. 5]
An essential component of these reforms is to increase local fiscal autonomy. Wang Dehua explains that this involves moving tax collection stages and adjusting tax distribution and special bond allocation, not merely increasing the local share of fiscal revenue. [para. 6][para. 7] Minister of Finance Lan Fo’an states that detailed task lists and timelines for these reforms are being formulated to ensure their phased and prudent implementation. [para. 8]
Local fiscal difficulties have been exacerbated by declining land transfer fee revenues, falling from 8.7 trillion yuan in 2021 to an expected 1.53 trillion yuan in the first half of 2024. As a result, improving central-local fiscal relations is imperative; local governments currently face high expenditure demands but have limited revenue sources. [para. 9][para. 10][para. 11] Proposed measures include consolidating certain local surcharges into a new Local Surcharge Tax, delegating some non-tax revenue management to local governments, and optimizing the shared tax distribution ratio. [para. 12][para. 13][para. 14]
To support local governments, the central government plans to study reallocating the responsibility for tax refunds and potentially adjusting the VAT allocation method. These steps aim to balance local financial needs with central fiscal control. The gradual shift in consumption tax collection to local governments and broader support for less-restricted use of special bonds are also proposed. [para. 15][para. 16][para. 17]
Additionally, the plan mandates reducing the delegation of central fiscal responsibilities to local governments and increasing central fiscal expenditure to lessen local fiscal pressures. Improved transfer payment efficiency is targeted through incentives and constraints promoting high-quality local development. [para. 18][para. 19]
On budget management, the "Decision" emphasizes integrating all government income sources into budget management, including the newly added "government credit." Clarifications on implicit debt management and resource allocation are necessary for effective fiscal governance. [para. 20][para. 21] Complementary measures, such as exploring a national macro balance sheet management system, are suggested to provide comprehensive insights into asset and liability stocks. [para. 22]
Individual income tax reform aims to standardize tax policies across different income types, moving towards a unified tax on labor income to address tax inequities. Additionally, increasing personal income tax deductions related to childbirth, education, and upbringing costs are proposed to support population development. [para. 23][para. 24][para. 25]
- Guangdong Development Securities
粤开证券 - Guangdong Development Securities is mentioned through the perspective of its Chief Economist, Luo Zhiheng, who emphasizes the importance of financial and tax system reform in macroeconomic governance. Luo suggests that the reforms should be systemically planned and coordinated with other macroeconomic strategies to effectively address current financial and economic issues.
- In 2023：
- The revenue scale from land transfer fees fell to 5.8 trillion yuan, significantly lower than the historical peak of 8.7 trillion yuan in 2021.
- First half of 2024：
- The revenue from land transfer fees continued to drop to 1.53 trillion yuan.
- By July 19, 2024：
- At a press conference on July 19th, Han Wenxiu introduced fiscal and taxation reforms as part of interpreting the spirit of the 20th Central Committee's Third Plenary Session.
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