Study On Public Finance Operating Mechanisms At Counties & Townships Levels In China

This paper holds that analyzing generation, congestion, conduction and release of fiscal pressuress can reveal comprehensively public finance operating mechanisms at counties & townships levels including revenue, expenditure, transfers and debt.The logic of the paper is: with dual action from revenue and expenditure, local finance undertook high and unsustainable expenditure assignments which had been stand out after the Tax Sharing System (TSS). Fiscal resources incoordination in initial assignment was not corrected in inter-governmental fiscal relations, specially sub-provincial levels. As a result, local finance had to choose debt as a major canal to release fiscal pressures.On revenue assignment, in fact, finance discentralization which mobilized local finance to increase their revenue had transferred fiscal pressures to lower governments with the need of increasing local finance interests from the planned economy to market economy. Under the re-integration of revenue assignment in the 1994 TSS reform, fiscal centralization reform has resulted in revenue core outwards, from budgetary to extra-budgetary resources at counties level and from fiscal to extra-fiscal resources at townships level.This paper shows that local expenditures grew much larger than revenue they could use. Counties & Townships Finance (CTF) has thrown public expenditure responsibilities to get rid of fiscal pressures. Public expenditure responsibilities may be thrown to local governments, peasants and the executive or public service units (PSUs). The paradox between internal highly efficient expenditures and external lowly efficient expenditure in CTF operating resulted in expenditure dissimilation. There are different transformations for education and health service which are important public goods in rural China. The paper also uses quantitative method to research the influence which county deficit reacts to public expenditure structure.Central and provincial finance did not provide CTF with significant degree of autonomy in inter-governmental fiscal relations. This was not only in counties and the higher levels of fiscal relations, but also in townships-counties level fiscal relations. That means the expenditure assignments were not adequately supported by an effective system of inter-governmental transfers after TSS. In the case, accompanying the descent of fiscal level, the fiscal system tends to reinforce the disparities to CTF in inter-governmental fiscal relations.Responsibility System (RS) and TSS make clear the interests of local and central finance. Local finance has not been granted a meaningful degree of debt autonomy because central government worried about undertaking the joint responsibility in the Unitary State Credit System (USCS). Central finance would not like to revise the assignments of revenue and expenditure, as a result, they had to accept the fact that CTF had run into debt. Under the function of the USCS, townships finance were apt to get loan from Rural Credit Cooperation (RCC).In brief, the paper gives a series of policy recommendations for releasing fiscal pressures at counties and townships levels in China.