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Public finance key to reform

By Yu Jiantuo (China Daily)
Updated: 2010-10-27 08:10

Government revenue and spending will decide whether the development mode can improve people's well-being

The second decade of this century will be an important period of strategic opportunities for China's development, as it is possible that it will concentrate various deep contradictions that have emerged during the country's economic and social transformation over the past decades.

Many issues are involved in the country's bid to overhaul its long-controversial development mode and achieve its goal of comprehensively improving people's welfare. The transformation of the development mode should ensure the people have access, not only to a decent material life, but also to a healthy lifestyle, as well as equal opportunities for self-development, the acquiring of knowledge, and a sense of dignity and security. People should also be able to enjoy a pleasant living environment, including a clean environment and water, under this development mode.

All these demand that the country focus on improving people's welfare as it develops the economy, strengthens public services, adjusts the current income distribution structure and changes the long-established development mode.

Signals transmitted from the just-concluded Fifth Plenary Session of the 17th Communist Party of China (CPC) Central Committee indicate that deepening reforms will become the central theme of the 12th Five-Year Plan (2011-2015) for national economic and social development.

China's reforms mean it faces an environment and conditions completely different from those in the preceding decades. The previous from-easy-to-difficult model of reforms, which did not touch the fundamental interests of vested interest groups, is now facing a narrower space in which to advance further. As a result, any individual reform is likely to trigger other reforms and thus lead to some profound adjustments to the established vested interest distribution pattern.

For a big country like China, in the process of transformation, any comprehensive economic, social and political reform package will be difficult to advance.

So the reform of the public financial system, which contains not only economic and social dimensions but also a political one, will possibly be the first step toward transformation of the country's development model.

Financial systems and policies serve as the basic means for the government to regulate the national economy. All government education, healthcare, social security, and environmental services are based on public finance, their openness, transparency and comprehensiveness will help transform government functions and promote Socialist democracy and the legal system in China.

Since 1998, when the concept of the public financial framework was put forward, China has achieved substantial progress in building its public financial system. Achievements include the implementation of the policy of the departmental budget, as well as the "county government administrating township finance" and "provincial government directly managing county finances" formula. All these, together with the establishment of the financial performance appraisal system, have laid a solid foundation for the country's public finance reforms in the 12th Five-Year Plan period.

During this period, the public finance reforms will reduce the finance managing levels from the current five to three. The administrative and financial power of central and local governments will be re-divided to forge a financial and tax system in which the financial power of local governments matches their administrative power. Not matching their financial power to their administrative power has resulted in a series of problems, such as the long-controversial land sales as a means of raising revenue.

In the 12th Five-Year Plan period, outlay on such public services as social security, primary education and basic medical care should be gradually shifted from lower government to higher and measures taken to expand local governments' revenues.

Measures should also be taken to promote reforms of the country's current financial and income system under the premise that financial burdens on local governments will be eased. Experimental reforms of business tax and added tax will be pushed forward to reduce the financial burden on small and medium-sized enterprises and service sectors. At the same time, a property tax should be imposed at a proper time to make it one of the main tax sources of local governments. In addition, taxes on environment and resources utilization should be adopted to promote the transformation of the country's economic growth model.

Focus should be shifted to the expansion of domestic demand in order to increase the proportion of public service spending. Financial input should lean to the construction of the social welfare network to help develop the country into a society with comprehensive access to education, healthcare, pensions, employment, housing and a minimum living allowance within the next three to five years.

While aiding urban construction, public finance should also play a bigger role in promoting balanced development between urban and rural areas and between different regions. Preferential policies should be adopted to increase public spending on scientific research and the cultivation of new core industries, in a bid to create new engines for the country's economic growth in the next 20 to 30 years.

New energy and new technology industries, as well as energy conservation, emission reduction and environmental protection should also get a bigger share of the public coffers.

The author is a researcher with the China Development Research Foundation.