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The average fiscal self-sufficiency rate for county-level governments in China was only 38 percent last year, according to a recent survey conducted by the School of Finance and Taxation at Southwestern University of Finance and Economics.
Fiscal conditions among county regions across China vary widely, with some areas facing significant financial challenges. One of the key metrics used to assess local government finances is the fiscal self-sufficiency rate, which measures the ratio of general public budget revenue to total fiscal expenditure.
For example, a county in western Qinghai Province has the lowest rate, at just about 1 percent, while a district in Nanjing, in eastern Jiangsu Province, boasts the highest rate at approximately 252 percent. The report, analyzing the fiscal revenue and expenditure of 2,774 county-level regions nationwide, highlights stark disparities primarily due to differences in overall financial capacity, population size, and economic output.
A case in point is Fuding City in Fujian Province, where public budget revenue increased by 46 percent in the first three quarters of the year, fueled by growth in taxes from the local supply chain of the new energy industry. Conversely, Nan’an City in the same province saw a 15 percent decline in revenue over the same period.
This trend indicates that as economic activity and population tend to concentrate in more developed areas, the gap in fiscal health among districts and counties is likely to continue widening.
Local governments are increasingly under financial stress amid declining fiscal revenues and rising expenditure demands. The dean of the School of Finance and Taxation at the university explained that this situation is exacerbated by a slowdown in the profitability of market entities and tax cuts aimed at stimulating economic growth. The property market’s ongoing adjustment has also led to reductions in land transfer income, further straining local revenues.
Compounding these challenges is the rising demand for social security, quality education, healthcare, employment initiatives, environmental improvements, and better public infrastructure—all requiring stable increases in fiscal spending, which heightens financial tensions.
To address these issues, enhancing the fiscal independence of local governments is crucial. Accelerating reforms related to consumption tax implementation is a key step. This includes shifting the collection of consumption taxes on automobiles and refined oil from production stages to retail or wholesale levels, and granting local authorities the authority to levy taxes on specific goods and services.
Additional measures include refining the sharing ratios of shared taxes, increasing the proportions of enterprise income tax and individual income tax allocated to local governments, and establishing a unified local surcharge tax with a stable benchmark rate. This would allow local authorities to adjust tax rates upward if necessary.
Furthermore, local governments should curtail unnecessary spending and eliminate ineffective projects to free up resources. It’s also important to clearly define the division of responsibilities between the government and the market. To ease fiscal pressures, the central government might need to enhance its financial responsibilities and extend more funding, while scaling back certain local government expenditures.
These reforms aim to strengthen the fiscal foundation of local governments, ensuring they can better meet their financial obligations and support economic stability.
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