Policy Brief | LV Bingyang: Collaborative Government: A Perspective in Sub-national Fiscal Systems

China implements a unitary government system characterized by “centralized leadership and hierarchical local management” in intergovernmental relations, requiring close cooperation between central and local governments to address asymmetric information and promote economic development, regional balance, and public services. The fiscal system serves as a core mechanism for intergovernmental cooperation, providing the foundation for understanding and advancing cooperation among Chinese governments, guiding reforms in sub-national fiscal systems.

Cooperative fiscal authority clarifies decision-making, expenditure, and oversight rights across government levels, enhancing the efficiency of public goods provision and alleviating fiscal pressures on lower-level governments. Governments at all levels must collaborate to address spillover effects and information asymmetries in cross-provincial, cross-municipal, cross-county, and intra-county affairs. The State Council’s reform guidelines in 2016 standardized fiscal authority and expenditure responsibilities between central and local governments, yet challenges persist, including ambiguity in responsibilities and coordination difficulties, necessitating further clarification of government responsibilities at each level to enhance governance effectiveness and service delivery.

The revenue-sharing system incentivizes governments at all levels to jointly cultivate tax sources and drive economic development through equitable distribution of tax benefits. Following the 1994 tax-sharing reform, local governments resolved financial constraints through flexible revenue sharing, leading to increased county-level government revenue shares and promoting grassroots economic development. However, the current system relies heavily on production-based taxation, prompting local governments to excessively pursue industrial expansion at the expense of neglecting residential needs.

Future reforms should address sub-national fiscal revenue systems to guide local government functional transformations and promote high-quality development. Local governments face risks in economic development, such as tax fluctuations and fiscal expenditure pressures, necessitating rational revenue and expenditure arrangements to mitigate risks. Revenue sharing balances fiscal risks and developmental needs across different regions through adjustments in tax types and sharing ratios. Expenditure responsibility allocation emphasizes upper-level government support for disadvantaged areas to foster regional balanced development.

Existing challenges in the current system include unclear revenue and expenditure allocations and inappropriate local tax types, necessitating further optimization to drive government functional transformations and achieve high-quality economic development. (Translated by ZHANG Yuqing; Proofread by YANG Fanxin)