On March 25, China’s Ministry of Finance publicly released the central government’s budget for the 2013 fiscal year, which was approved by the National People’s Congress (NPC) during the closing ceremony of the annual Two Sessions meeting. Though one of the most significant legislative motions the NPC processes each year, information about the budget has been underreported by the domestic media and paid only modest attention by the public, perhaps because it is both an uneventful continuation of previous budget patterns and lacking in detail. Nevertheless, a close look at the fine print may help paint a picture of China’s fiscal structure and practices.
Since 2009, the central government’s budget has been steadily increasing, reaching 6.96 trillion RMB (about US$1.12 trillion) in 2013. Since the increase in spending is in line with an increase in revenue, the deficit has never gotten out of control:
Central government spending is divided into two parts: central-level expenditures (中央本级支出), which includes spending by central government ministries and bureaus; and transfer payments/tax refunds (税收返还和转移支付), which includes money reallocated from the central to the provincial authorities (transferred-down payments). For years, the latter has been the dominant part of overall spending. In 2013, money reallocated to provincial authorities accounted for 70.2% of the total budget:
This fiscal arrangement traces its root to the 1994 tax reform, the most monumental fiscal reform of the last 30 years. In the 1980s and early 1990s, tax collection was delegated to local governments, who kept most of the revenues at the local level. Although this system motivated local governments to catalyze regional economic development, it severely weakened the financial capacity of the central government and skewed the balance of power between central and local authorities. In 1994, the central government enacted a radically new policy, requiring that most taxes be collected and kept at the central level. The central government then distributed the revenues to provincial authorities to cover their expenses. In 2012, the transferred-down payments made up 42.6% of all of the revenue of local governments. The post-1994 system engendered made local governments financially dependent on the central government, and turned the tables in the balance of power, as reflected in the previous chart.
Central-level expenditures fall into 21 categories, grouped by Tea Leaf Nation into nine super-categories:
- Administrative affairs
- Diplomacy (including foreign aid)
- Military spending
- Internal security
- Intellectual spending (education, science and technology, culture, and media)
- Social spending (social security, healthcare, community affairs, and housing aid)
- Environmental spending
- Industrial spending
- Debt payments
Here is the breakdown of central-level expenditures according to this taxonomy:
Unsurprisingly, military spending tops the priority list, followed by intellectual spending and industrial spending. Some may note that very little of the overall spending is social spending, which gives the impression that the government is strongly pro-development and neglects social welfare. This is not necessarily the case, as the burden of social spending is primarily shouldered by local governments. Thus, in order to gather how much government really prioritizes social welfare, one must consider the breakdown of transferred-down payments:
In 2009, the Finance Ministry publicly released the central government budget for the first time in history. Since then, the budget released each year has been criticized for its lack of detail and transparency. Numbers are given without a detailed breakdown and explanation. Expenditures are classified into more than 20 “main items,” and several “sub-items,” within each main item. However, each “sub-item” remains blank. For example, even though the budget reveals that a certain amount of money goes to the sub-item “higher education,” within the main item of “education,” no further information is available as to what specific programs this money will go towards. Needless to say, the “blank” budget easily facilitates corruption and embezzlement of public tax dollars.
On the bright side, the Budget Law is highly likely to be amended during the meeting of the 12th National People’s Congress. Hopefully, the amendment will pave the way for a more transparent budget system.