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In recent years, China’s fiscal revenues have shown leapfrog growth. According to the Ministry of Finance (MOF), the country’s fiscal revenues grew 24.8 percent year on year in 2011 to hit a record high of 10.37 trillion yuan ($1.63 trillion), of which the central fiscal revenues reached 5.13 trillion yuan ($807 billion), up 20.8 percent from the previous year. Meanwhile, local governments collected 5.24 trillion yuan ($824 billion), a year-on-year increase of 29.1 percent.
However, accompanying the robust fiscal increase is the absence of a corresponding budget system. As more reports concerning huge government expenses appear in the media, calls for reforming the existing budget system have become louder.
“Since 1994, when China implemented a major fiscal reform redefining the distribution of fiscal incomes between central and local governments, the country has become a big power in finance. With changes in the national situation, the public has become more concerned about the openness of the government budget,” said Lu Wei, a member of the Standing Committee of the National People’s Congress (NPC), China’s top legislature, adding that circumstances require revising the current Budget Law.
Last December, the Budget Law ushered in its first amendment since it went into effect in 1995. On June 26, a bi-monthly session of the NPC Standing Committee conducted the second reading of the draft amendment to the law and the proposed changes were published online to seek public opinion from July 6. As of August 5, the deadline of the month-long feedback period, more than 331,000 comments and suggestions were submitted.
This is the second largest number of comments received by a draft law since the practice of publishing drafts online for feed- back was introduced in 2005. The largest number, 560,000 comments, was received in response to a Labor Contract Law draft amendment that is being revised. A proposed amendment that would slash the tax burden levied on personal income elicited more than 230,000 comments last year.
Providing clarity
A new clause in the draft clarifies that a government budget includes four aspects, which are public budget, governmental fund budget, state-owned capital operation budget and social security budget. For the first time, the draft requires governments at all levels to include all revenues and spending in their annual budgets and proposes all government budgets except those implicated in classified state secrets must be revealed to the public in a timely fashion after being approved by lawmakers.
All budget planning must take into consideration the current economic and social conditions as demonstrated by detailed lists of items, the draft stipulates. No undeclared income from the previous year is allowed to be counted in a new year’s record.
“Considering the proposal, a strict performance evaluation system is needed as a key measure when setting government budgets over the next year, to ensure the best use of state resources,” said Li Peilin, a national lawmaker.
Meanwhile, the exact budget numbers, as well as methods for adjustment and public releases, will be formulated by the State Council, China’s cabinet, according to the draft.
The draft also regulates the fiscal transfer payment system. In 2010, tax transfer payments from both the Central Government and between sub-government organs made up about 66.9 percent of the total Central Government’s financial costs.
Jia Kang, Director of the MOF’s Fiscal Science Research Center, said the clarification of the contents of the government budget and including them into the Budget Law laid a solid foundation to further establish a sound budget system.
“Guaranteeing the public’s right to know will lead to rights of suggestion and supervision and decision-making authority, which are the premises of an effective budget system,” Jia said.
Liu Jianwen, a financial law professor at Peking University, said the draft made progress in outlawing undeclared incomes and setting up a system to supervise all revenues and spending.
Making budgets public
Li Weiguang, a professor of government finance at Tianjin University of Finance and Economics, approved of some of the changes proposed in the draft, but said the proposal dodged the basic principle of budget making and implementation.
For instance, he said, although the draft requires a government budget and adjustments to be approved by lawmakers before being carried out, it does not specify the procedures if the proposed budget is vetoed.
The authority of legislatures in reviewing and approving budgets is the cornerstone of other measures in the draft law to regulate government income and spending, according to Li.
Another controversial issue in the draft is the legalization of special accounts opened by finance departments in commercial banks. In the draft, local departments should deposit their budget revenues in both the national treasury and finance departments’ special accounts.
“The drafted amendment has increased finance departments’ power, which would increase risks to the country’s financial system,” said Shi Zhengwen, Director of Center for Research in Fiscal and Tax Law of China University of Political Science and Law, at a seminar on the amendment to the Budget Law on August 3.
Meanwhile, as government spending on vehicles, receptions and overseas trips continues to make headlines, there have been growing calls for lawmakers to clarify the expenses in the Budget Law, in hopes to facilitate public scrutiny on the government’s wallet.
According to figures released by the MOF in June, central government departments spent 9.36 billion yuan ($1.49 billion) in fiscal funds on the three items last year.
In breaking down the figures, about 2 billion yuan ($317.46 million) was spent on overseas trips, 5.9 billion yuan ($936.51 million) on purchase and maintenance of vehicles, and about 1.5 billion yuan ($238.1 million) on public receptions.
Although a regulation introduced in 2008 requires governments to release annual reports on the “three expenses,” the current Budget Law does not specifically put forward such a requirement or a request to cut them.
Shi said that because the “three expenses”are not clearly defined in the Budget Law, people hold various interpretations of what should be included in the expenses.
“The lack of standards has enabled governments to put off their obligation to release details of spending on the three expenses and instead release a general figure,” he said.
According to Liu at Peking University, more detailed reports are significant to prevent the optional implementation of budgets and check the power of the government.
He Zhenyi, an honorary academician of the Chinese Academy of Social Sciences, felt disappointed that the draft amendment only requires publishing details of the public budget but has no specific requirements to other three aspects—governmental fund budget, state-owned capital operation budget and social security budget.
“In fact, expenditures of the latter three budgets take a fairly large part of the total spending, so there should be a special item in the Budget Law to require revealing the refining details of the three budgets,” He said.
Local government bonds
The latest draft amendment to the Budget Law removes an article introduced in a previous draft amendment last November, which would have allowed local governments to issue bonds directly within a quota set by the State Council and approved by the NPC.
Liu at Peking University said, “The lift of the ban on local governments’ debt issuance has a high risk due to the uncompleted supporting systems, and the debt that cannot be paid off will finally be transferred to the Central Government. So the Central Government should take a prudent attitude toward it.”
Figures from the National Audit Office show local debt totaled 10.7 trillion yuan ($1.7 trillion) at the end of 2010, in which local governments were responsible for 70 percent of the debt repayment. This and next year will witness the climax of local government debt maturity, with more than 3 trillion yuan ($476.19 billion) of debt maturing over these years.
According to the latest draft to the Budget Law, the MOF can issue bonds on behalf of local governments only in accordance with the laws and regulations issued by the State Council.
In response, some experts expressed concern that the cancellation of direct bond issuance will put local authorities under greater financial strain.
“It is imperative to open the bond market to local governments as a proper financing channel. China has made efforts to legalize local governments’ financing systems for years, but the latest draft amendment has changed all of that,” said Jia with the MOF’s Fiscal Science Research Center.
He believes allowing local governments to issue bonds will help improve their fundraising transparency. “It would have been a chance to prevent further hidden debt and risks,” he said.
However, accompanying the robust fiscal increase is the absence of a corresponding budget system. As more reports concerning huge government expenses appear in the media, calls for reforming the existing budget system have become louder.
“Since 1994, when China implemented a major fiscal reform redefining the distribution of fiscal incomes between central and local governments, the country has become a big power in finance. With changes in the national situation, the public has become more concerned about the openness of the government budget,” said Lu Wei, a member of the Standing Committee of the National People’s Congress (NPC), China’s top legislature, adding that circumstances require revising the current Budget Law.
Last December, the Budget Law ushered in its first amendment since it went into effect in 1995. On June 26, a bi-monthly session of the NPC Standing Committee conducted the second reading of the draft amendment to the law and the proposed changes were published online to seek public opinion from July 6. As of August 5, the deadline of the month-long feedback period, more than 331,000 comments and suggestions were submitted.
This is the second largest number of comments received by a draft law since the practice of publishing drafts online for feed- back was introduced in 2005. The largest number, 560,000 comments, was received in response to a Labor Contract Law draft amendment that is being revised. A proposed amendment that would slash the tax burden levied on personal income elicited more than 230,000 comments last year.
Providing clarity
A new clause in the draft clarifies that a government budget includes four aspects, which are public budget, governmental fund budget, state-owned capital operation budget and social security budget. For the first time, the draft requires governments at all levels to include all revenues and spending in their annual budgets and proposes all government budgets except those implicated in classified state secrets must be revealed to the public in a timely fashion after being approved by lawmakers.
All budget planning must take into consideration the current economic and social conditions as demonstrated by detailed lists of items, the draft stipulates. No undeclared income from the previous year is allowed to be counted in a new year’s record.
“Considering the proposal, a strict performance evaluation system is needed as a key measure when setting government budgets over the next year, to ensure the best use of state resources,” said Li Peilin, a national lawmaker.
Meanwhile, the exact budget numbers, as well as methods for adjustment and public releases, will be formulated by the State Council, China’s cabinet, according to the draft.
The draft also regulates the fiscal transfer payment system. In 2010, tax transfer payments from both the Central Government and between sub-government organs made up about 66.9 percent of the total Central Government’s financial costs.
Jia Kang, Director of the MOF’s Fiscal Science Research Center, said the clarification of the contents of the government budget and including them into the Budget Law laid a solid foundation to further establish a sound budget system.
“Guaranteeing the public’s right to know will lead to rights of suggestion and supervision and decision-making authority, which are the premises of an effective budget system,” Jia said.
Liu Jianwen, a financial law professor at Peking University, said the draft made progress in outlawing undeclared incomes and setting up a system to supervise all revenues and spending.
Making budgets public
Li Weiguang, a professor of government finance at Tianjin University of Finance and Economics, approved of some of the changes proposed in the draft, but said the proposal dodged the basic principle of budget making and implementation.
For instance, he said, although the draft requires a government budget and adjustments to be approved by lawmakers before being carried out, it does not specify the procedures if the proposed budget is vetoed.
The authority of legislatures in reviewing and approving budgets is the cornerstone of other measures in the draft law to regulate government income and spending, according to Li.
Another controversial issue in the draft is the legalization of special accounts opened by finance departments in commercial banks. In the draft, local departments should deposit their budget revenues in both the national treasury and finance departments’ special accounts.
“The drafted amendment has increased finance departments’ power, which would increase risks to the country’s financial system,” said Shi Zhengwen, Director of Center for Research in Fiscal and Tax Law of China University of Political Science and Law, at a seminar on the amendment to the Budget Law on August 3.
Meanwhile, as government spending on vehicles, receptions and overseas trips continues to make headlines, there have been growing calls for lawmakers to clarify the expenses in the Budget Law, in hopes to facilitate public scrutiny on the government’s wallet.
According to figures released by the MOF in June, central government departments spent 9.36 billion yuan ($1.49 billion) in fiscal funds on the three items last year.
In breaking down the figures, about 2 billion yuan ($317.46 million) was spent on overseas trips, 5.9 billion yuan ($936.51 million) on purchase and maintenance of vehicles, and about 1.5 billion yuan ($238.1 million) on public receptions.
Although a regulation introduced in 2008 requires governments to release annual reports on the “three expenses,” the current Budget Law does not specifically put forward such a requirement or a request to cut them.
Shi said that because the “three expenses”are not clearly defined in the Budget Law, people hold various interpretations of what should be included in the expenses.
“The lack of standards has enabled governments to put off their obligation to release details of spending on the three expenses and instead release a general figure,” he said.
According to Liu at Peking University, more detailed reports are significant to prevent the optional implementation of budgets and check the power of the government.
He Zhenyi, an honorary academician of the Chinese Academy of Social Sciences, felt disappointed that the draft amendment only requires publishing details of the public budget but has no specific requirements to other three aspects—governmental fund budget, state-owned capital operation budget and social security budget.
“In fact, expenditures of the latter three budgets take a fairly large part of the total spending, so there should be a special item in the Budget Law to require revealing the refining details of the three budgets,” He said.
Local government bonds
The latest draft amendment to the Budget Law removes an article introduced in a previous draft amendment last November, which would have allowed local governments to issue bonds directly within a quota set by the State Council and approved by the NPC.
Liu at Peking University said, “The lift of the ban on local governments’ debt issuance has a high risk due to the uncompleted supporting systems, and the debt that cannot be paid off will finally be transferred to the Central Government. So the Central Government should take a prudent attitude toward it.”
Figures from the National Audit Office show local debt totaled 10.7 trillion yuan ($1.7 trillion) at the end of 2010, in which local governments were responsible for 70 percent of the debt repayment. This and next year will witness the climax of local government debt maturity, with more than 3 trillion yuan ($476.19 billion) of debt maturing over these years.
According to the latest draft to the Budget Law, the MOF can issue bonds on behalf of local governments only in accordance with the laws and regulations issued by the State Council.
In response, some experts expressed concern that the cancellation of direct bond issuance will put local authorities under greater financial strain.
“It is imperative to open the bond market to local governments as a proper financing channel. China has made efforts to legalize local governments’ financing systems for years, but the latest draft amendment has changed all of that,” said Jia with the MOF’s Fiscal Science Research Center.
He believes allowing local governments to issue bonds will help improve their fundraising transparency. “It would have been a chance to prevent further hidden debt and risks,” he said.