County govts get helping hand from Beijing

The central government pledged on Wednesday to provide more financial support to county governments in a bid to reach sound operations at the grassroots level.

Xie Xuren, minister of finance, announced the plan in a report to the National People's Congress Standing Committee, China's top legislature.

This is the first time that the top legislature has moved to hear a report on the fiscal capabilities of county governments.

It is also the second time in a row that the lawmakers' bimonthly session has addressed such finances.

At the last session in June, legislators suggested distributing more tax revenues to local governments to meet increasing city construction and public welfare costs, a move that would reduce their heavy reliance on land sales for revenue.

That suggestion was made in response to an audit report that said fiscal capabilities of local governments are facing difficulties and that their fiscal management is "substandard". 

Liu Jiayi, China's top auditor, said that because of the limited access to tax revenues, county governments have been relying heavily on non-tax income - about 60 percent of their total annual revenues.

At Wednesday's session, Xie said the central government will allocate more subsidies to local governments according to their responsibilities and workload. He also suggested increasing general transfer payments to promote fiscal capabilities in underdeveloped areas to improve public services.

The central government said it will offer 107.5 billion yuan ($16.9 billion) in subsidies for county governments in 2012, which is almost double the figure in 2010 and 30 billion yuan more than last year.

Apart from revenue shortages, Xie also noted ill-managed expenditures by local governments. For instance, he said, some local governments have hired many more new employees than they need and are not spending enough on public services.

The current taxation system, based on a fundamental financial reform in 1994, has reversed the fiscal power of the central and local governments. Research by the Institute of Fiscal Science, a think tank affiliated with the Ministry of Finance, showed that the central government takes more than half of the total tax revenues, leaving a smaller proportion for local governments.

That is in stark contrast to the distribution ratio before the reform, when local governments could use up to 65 percent of the revenues, the research report said.

It also said local governments are obliged to cover more than 75 percent of public expenses, including education and the construction of affordable houses, while the central government makes up the remaining 25 percent.