ASSESSMENTS

China Goes Local

Feb 10, 2018 | 16:42 GMT

Beijing is promising underdeveloped regions such as Xinjiang that starting next year it will cover 80 percent of the costs associated with many public services.

(JOHANNES EISELE/AFP/Getty Images)

Highlights

China is accelerating fiscal reforms to more evenly distribute wealth across China. Tax reform is a key part of that effort.
The new rules, which will go into effect in January 2019, are an important step toward correcting the fiscal imbalances between the central and local governments, largely caused by the 1994 tax reform.
The move is meant to limit local debt and curb the risky financial activities — such as speculative property sales — that local governments have had to rely on to cover costs.

China has long been working to reform its highly centralized tax system, but it has been slow going. The country made an important step forward on Feb. 8, though, when the Chinese Cabinet released a plan to redistribute tax revenue and public expenditures among central and local governments. Under the plan, central and local governments will now share the cost of public services falling under eight broad categories, including compulsory education, basic employment services and basic health insurance. Before, local governments either relied on risky maneuvers to cover the costs of public services or depended on federal fiscal reallocations, giving the federal government in Beijing outsize influence but also causing considerable economic distortions....

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