Introduction

Lessons from International Experience

Current Challenges in Intergovernmental Relations in the PRC

Policy Recommendations

Abstract

• International experience shows that fiscal decentralization leads to improved efficiency and effectiveness in the delivery of public services. Subnational governments’ better knowledge of local preferences results in improved allocative efficiency and better targeting.

• As one of the most fiscally decentralized countries in the world, the People’s Republic of China (PRC) undertook two major decentralization reforms, in 1979 and 1994. However, the focus on the revenue side rather than expenditure assignments has generated large fiscal imbalances at the subnational government level, threatening fiscal stability. Other challenges include administrative discretion and overlap of responsibilities in the delivery of public services, limited taxation autonomy, and underprovision of public services due to disparities in revenue per capita across provinces.

• The Government of the PRC is committed to implement reforms to build a modern fiscal system that will optimize resource allocation and promote a fair distribution of income. One critical target of the action plan is to provide subnational governments with resources to meet increasing demands for infrastructure and social services as the country moves toward higher income status.

• Based on a review of international experiences and the main challenges in intergovernmental fiscal relations in the PRC, this policy note provides policy recommendations on reforming expenditure assignments and fiscal transfers, strengthening revenue autonomy, and developing subnational borrowing.