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THE revisions last August to China’s Budget Law were the first since it took effect in 1995. It has thus taken more than a decade to revise a law so important it has been dubbed the“Economic Constitution.”
Response to the Demand for Change
China’s Budget Law was promulgated in 1994 and took effect in 1995. Over the ensuing two decades Chinese society has witnessed dramatic changes – in economic development， state governance， and also public opinion and understanding of the budget. Social progress demanded that state authorities improve the old budget management system so as to remove impediments in the nation’s fiscal system and resolve the most controversial problems.
First of all， this is a requirement of economic and social development. Laws usually reflect the times. The old Budget Law was adopted when China was at the early stages of establishing a market economy. In addition to affirming the achievements of reforms to the tax sharing system， the law laid emphasis on steady growth of fiscal revenue， so giving a legal dimension to the formation of China’s budget management system framework. Looking back， this system corresponds to the idea raised in 1992 that the policy of reform and opening-up would continue to be carried out.
However， as economic efficiency improves and social wealth continues to grow， amassing public funds to build the country up is not too big a challenge for today’s China. Ensuring that a sizable amount of money is allocated in a fair and effective way is now the priority. One of our aims is to carry forward financial restructuring according to law， so making the government’s collection of taxes and fees and distribution of its fiscal money more transparent. To some extent， this is the aim of revising the old Budget Law.
Next， the revision responds to the legal requirement of modernized state governance. Though the Budget Law focuses on public finance， it mirrors the pursuit of building a law-based government and a modern fiscal system. The Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Deepening the Reform， approved in November 2013， states “... promote the modernization of the national governance system and capacity” and points out that “finance is the foundation and an important pillar of state governance.” This means that reform of the fiscal system should be implemented in accordance with national governance demands； it is expected to facilitate modernization of the national governance system and capacity. In June 2014， the CPC politiburo ratified an overall plan on deepening the reform of the fiscal and taxation systems wherein improving the budget management system is defined as one of the reform’s three major strategic tasks. The plan also emphasizes that a modern budgetary system should perform functions of reinforcing budgetary constraints， regulating governmental actions， and exercising effective supervision. As the old Budget Law was clearly incapable of realizing the expected functions， a revision was necessary to advance modernization of the national governance system and capacity in the financial field through adoption of the concept and way of rule of law.
Third， the revision has responded to public concerns. Economic and social progress has raised public awareness of public finance and law-based management in state revenue and spending. From a macro-perspective， everyday people pay more attention to such issues as how the country spends its revenue and how much of it， who has a say about the money， and who the supervisors are. From a micro-level， the public shows a deeper concern about details of the nation’s fiscal expenditure. Issues such as transparency of the state’s annual budget， openness of the “three public consumptions” （purchases of official cars， spending on overseas travel， and on receptions）， and ways of avoiding and resolving the risks associated with local government debt are all hotly debated among the public. Such problems are inevitable in a modern society， and must be responded to and solved by law. Failing to meet the emerging social demands， the old Budget Law had to be revised.
Ushering in a New Concept
Finance is both the foundation and an important pillar of state governance. Current economic and social problems in China， along with modernized and legal-based national governance， call for reforms to the fiscal and taxation systems and establishment of a public finance system. Revising the old Budget Law comprehensively and systematically not only reshapes the role of the law but also develops the concept of statutory budget.
On one hand， the status and function of the law are redefined. Under the revised law， the previously stated“strengthening of the budget’s functions in allocation and supervision” changes to “putting government income and spending under a more stringent legal constraint.” It also underlines enhancing budget management and supervision， rather than simply complementing state budget management， implying that the law has transformed its function from “helping the government manage its purse”to “ensuring the government manages its purse in a fair and transparent way.” The government， whose role was formerly to manage and supervise the country’s budget， is now itself under management and supervision. To be specific， the revised law， as it standardizes government spending， is a regulation that controls and supervises public income and expenditure； but it is also a legal basis upon which China can build a modern national governance system and capacity. On the other hand， great efforts have been made to shape a statutory budget principle. By regulating government budgeting， the revised law will not only guarantee that budget management and supervision is scientific， democratic， and legal， but also that it is an important safeguard to achieving rule by law and advancing modernization of national governance system and capacity. Of course， the country can only make reasonable use of fiscal revenue through scientific and integrated budgeting， valid and standard budget enforcement， and open and transparent budget supervision. As the old saying goes， what is taken from the people must be used in the interests of the people. The revised Budget Law stipulates that any budget authorized by the National People’s Congress shall not be adjusted without legal procedures； all expenditure by governments， departments， and units at all levels must be based on an approved budget； no unlisted budget items can be expended. This specification will prompt transformation of China’s budget management system from that which follows the “statutory taxation principle” to that operating according to a “statutory budget principle.” However， this will require both strong and effective supervision and examination from the National People’s Congress and deep political restructuring.
Return to Rationality
The new Budget Law has achieved the transformation from “a law of government management” to “a law to manage the government.” In addition， institutional changes and innovations can be spotted in legislative purposes， budget range， and from budget planning， examination， approval， supervision and adjustment to legal liability. The institutional reform is a reflection of the competition between realistic demand and rational choice， and also the quintessence of China’s financial and taxation system and legal construction.
First， the revised law has improved the budgetary system and brought into effect full-cover budget management， which includes all public income and expenditures under budget standardization and supervision. This is the basic precondition to establishing a modern fiscal system. According to the revised law， a budget consists of budget revenues and budget outlays. All government income and expenditure， therefore， must be included in the budget. The law also emphasizes that a budget includes the general public budget， governmental funding budget， state-owned capital management budget， and social insurance fund budget. By interpreting these four budgets in principle， the law has preliminarily established a legal mechanism that will comprehensively regulate government receipts and payments. Second， budget openness is required to intensify rigid budgetary restraint. Transparency is the best solution to corruption. The new Budget Law has for the first time made an overall provision for budget openness. It clarifies the fundamental principle and requirement of budget openness， specifies the scope， subject and time of budget openness， and demands special explanation and openness for items of high public concern， like transfer payments， and government debt and government agency operational expenditure. Nevertheless， budget openness does not necessarily denote budget transparency. The new law has added the stipulation “budget preliminary examination” to heighten budget openness and supervision. Meanwhile， the law has stipulated legal liabilities that violate the budget openness requirement， so accentuating the legally binding nature of budget openness.
Third， the law has improved the financial transfer payment system. To address the inherent problems of transfer payments， such as capital abuse and corruption， the new Budget Law has proposed a fiscal transfer payment system， detailed regulations about special transfer payments， and the establishment of a regular assessment and withdrawal mechanism. Special transfer payments may not be established for items that can be effectively adjusted by market or competitive mechanisms. In the face of pressure emanating from excessive supporting funds of lower-level authorities， the law provides that apart from items that be jointly undertaken by supervising and subordinate governments， no supporting funds should be required for transfer payments allocated by the toplevel government. Transfer payments should impel the equalization of fundamental public service. This implies that transfer payments should be used for public utilities but not to intervene in market economic activities. In this way， problems like corruption and power rent-seeking can be effectively reduced.
Fourth， the law has strengthened the debt management mechanism to prevent the risk of local government debt， which is a matter of great concern both at home and abroad. Whether or not to allow local governments to issue bonds was a difficulty and highlight of Budget Law amendments. At present， although the debt risk can be controlled in general， there are still hidden dangers because the majority of debts have not been brought under budget management and high-level supervision. On the premise of tight risk control， local government borrowing can be released， which is of great importance to regulating local government debt financing.
To sum up， the new Budget Law， based on the requirement of modernized national governance system and capacity， has made comprehensive and scientific revisions. They are beneficial not only for resolving current contradictions in the fiscal and taxation operating mechanism， but also for highlighting the reform direction towards establishing a modern fiscal system. Of course， the revised law will have certain shortcomings， but defects cannot obscure virtues. After all， the new Budget Law has made a promising step. “The introduction of new Budget Law is an important achievement of China’s legal system construction， and also a milestone in the country’s fiscal system construction，” minister of finance Lou Jiwei said，“It signifies that China has made a solid step towards hastening construction of a comprehensive， transparent and modern budget system.”
Response to the Demand for Change
China’s Budget Law was promulgated in 1994 and took effect in 1995. Over the ensuing two decades Chinese society has witnessed dramatic changes – in economic development， state governance， and also public opinion and understanding of the budget. Social progress demanded that state authorities improve the old budget management system so as to remove impediments in the nation’s fiscal system and resolve the most controversial problems.
First of all， this is a requirement of economic and social development. Laws usually reflect the times. The old Budget Law was adopted when China was at the early stages of establishing a market economy. In addition to affirming the achievements of reforms to the tax sharing system， the law laid emphasis on steady growth of fiscal revenue， so giving a legal dimension to the formation of China’s budget management system framework. Looking back， this system corresponds to the idea raised in 1992 that the policy of reform and opening-up would continue to be carried out.
However， as economic efficiency improves and social wealth continues to grow， amassing public funds to build the country up is not too big a challenge for today’s China. Ensuring that a sizable amount of money is allocated in a fair and effective way is now the priority. One of our aims is to carry forward financial restructuring according to law， so making the government’s collection of taxes and fees and distribution of its fiscal money more transparent. To some extent， this is the aim of revising the old Budget Law.
Next， the revision responds to the legal requirement of modernized state governance. Though the Budget Law focuses on public finance， it mirrors the pursuit of building a law-based government and a modern fiscal system. The Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Deepening the Reform， approved in November 2013， states “... promote the modernization of the national governance system and capacity” and points out that “finance is the foundation and an important pillar of state governance.” This means that reform of the fiscal system should be implemented in accordance with national governance demands； it is expected to facilitate modernization of the national governance system and capacity. In June 2014， the CPC politiburo ratified an overall plan on deepening the reform of the fiscal and taxation systems wherein improving the budget management system is defined as one of the reform’s three major strategic tasks. The plan also emphasizes that a modern budgetary system should perform functions of reinforcing budgetary constraints， regulating governmental actions， and exercising effective supervision. As the old Budget Law was clearly incapable of realizing the expected functions， a revision was necessary to advance modernization of the national governance system and capacity in the financial field through adoption of the concept and way of rule of law.
Third， the revision has responded to public concerns. Economic and social progress has raised public awareness of public finance and law-based management in state revenue and spending. From a macro-perspective， everyday people pay more attention to such issues as how the country spends its revenue and how much of it， who has a say about the money， and who the supervisors are. From a micro-level， the public shows a deeper concern about details of the nation’s fiscal expenditure. Issues such as transparency of the state’s annual budget， openness of the “three public consumptions” （purchases of official cars， spending on overseas travel， and on receptions）， and ways of avoiding and resolving the risks associated with local government debt are all hotly debated among the public. Such problems are inevitable in a modern society， and must be responded to and solved by law. Failing to meet the emerging social demands， the old Budget Law had to be revised.
Ushering in a New Concept
Finance is both the foundation and an important pillar of state governance. Current economic and social problems in China， along with modernized and legal-based national governance， call for reforms to the fiscal and taxation systems and establishment of a public finance system. Revising the old Budget Law comprehensively and systematically not only reshapes the role of the law but also develops the concept of statutory budget.
On one hand， the status and function of the law are redefined. Under the revised law， the previously stated“strengthening of the budget’s functions in allocation and supervision” changes to “putting government income and spending under a more stringent legal constraint.” It also underlines enhancing budget management and supervision， rather than simply complementing state budget management， implying that the law has transformed its function from “helping the government manage its purse”to “ensuring the government manages its purse in a fair and transparent way.” The government， whose role was formerly to manage and supervise the country’s budget， is now itself under management and supervision. To be specific， the revised law， as it standardizes government spending， is a regulation that controls and supervises public income and expenditure； but it is also a legal basis upon which China can build a modern national governance system and capacity. On the other hand， great efforts have been made to shape a statutory budget principle. By regulating government budgeting， the revised law will not only guarantee that budget management and supervision is scientific， democratic， and legal， but also that it is an important safeguard to achieving rule by law and advancing modernization of national governance system and capacity. Of course， the country can only make reasonable use of fiscal revenue through scientific and integrated budgeting， valid and standard budget enforcement， and open and transparent budget supervision. As the old saying goes， what is taken from the people must be used in the interests of the people. The revised Budget Law stipulates that any budget authorized by the National People’s Congress shall not be adjusted without legal procedures； all expenditure by governments， departments， and units at all levels must be based on an approved budget； no unlisted budget items can be expended. This specification will prompt transformation of China’s budget management system from that which follows the “statutory taxation principle” to that operating according to a “statutory budget principle.” However， this will require both strong and effective supervision and examination from the National People’s Congress and deep political restructuring.
Return to Rationality
The new Budget Law has achieved the transformation from “a law of government management” to “a law to manage the government.” In addition， institutional changes and innovations can be spotted in legislative purposes， budget range， and from budget planning， examination， approval， supervision and adjustment to legal liability. The institutional reform is a reflection of the competition between realistic demand and rational choice， and also the quintessence of China’s financial and taxation system and legal construction.
First， the revised law has improved the budgetary system and brought into effect full-cover budget management， which includes all public income and expenditures under budget standardization and supervision. This is the basic precondition to establishing a modern fiscal system. According to the revised law， a budget consists of budget revenues and budget outlays. All government income and expenditure， therefore， must be included in the budget. The law also emphasizes that a budget includes the general public budget， governmental funding budget， state-owned capital management budget， and social insurance fund budget. By interpreting these four budgets in principle， the law has preliminarily established a legal mechanism that will comprehensively regulate government receipts and payments. Second， budget openness is required to intensify rigid budgetary restraint. Transparency is the best solution to corruption. The new Budget Law has for the first time made an overall provision for budget openness. It clarifies the fundamental principle and requirement of budget openness， specifies the scope， subject and time of budget openness， and demands special explanation and openness for items of high public concern， like transfer payments， and government debt and government agency operational expenditure. Nevertheless， budget openness does not necessarily denote budget transparency. The new law has added the stipulation “budget preliminary examination” to heighten budget openness and supervision. Meanwhile， the law has stipulated legal liabilities that violate the budget openness requirement， so accentuating the legally binding nature of budget openness.
Third， the law has improved the financial transfer payment system. To address the inherent problems of transfer payments， such as capital abuse and corruption， the new Budget Law has proposed a fiscal transfer payment system， detailed regulations about special transfer payments， and the establishment of a regular assessment and withdrawal mechanism. Special transfer payments may not be established for items that can be effectively adjusted by market or competitive mechanisms. In the face of pressure emanating from excessive supporting funds of lower-level authorities， the law provides that apart from items that be jointly undertaken by supervising and subordinate governments， no supporting funds should be required for transfer payments allocated by the toplevel government. Transfer payments should impel the equalization of fundamental public service. This implies that transfer payments should be used for public utilities but not to intervene in market economic activities. In this way， problems like corruption and power rent-seeking can be effectively reduced.
Fourth， the law has strengthened the debt management mechanism to prevent the risk of local government debt， which is a matter of great concern both at home and abroad. Whether or not to allow local governments to issue bonds was a difficulty and highlight of Budget Law amendments. At present， although the debt risk can be controlled in general， there are still hidden dangers because the majority of debts have not been brought under budget management and high-level supervision. On the premise of tight risk control， local government borrowing can be released， which is of great importance to regulating local government debt financing.
To sum up， the new Budget Law， based on the requirement of modernized national governance system and capacity， has made comprehensive and scientific revisions. They are beneficial not only for resolving current contradictions in the fiscal and taxation operating mechanism， but also for highlighting the reform direction towards establishing a modern fiscal system. Of course， the revised law will have certain shortcomings， but defects cannot obscure virtues. After all， the new Budget Law has made a promising step. “The introduction of new Budget Law is an important achievement of China’s legal system construction， and also a milestone in the country’s fiscal system construction，” minister of finance Lou Jiwei said，“It signifies that China has made a solid step towards hastening construction of a comprehensive， transparent and modern budget system.”