Research Reports
06
JanuaryCentral-local relationship is of great significance to a country’s smooth and steady economic growth, income distribution and pollution control. Scientifically arranging central-local relationship based on public and corporate demands for public services in a specific social period and adjusting such relationship according to change of situation is a key reflection on national governance capability. The government system of most economies is divided into several layers. On the basis of properly sharing labor with the market, public service functions should be rationally allocated to different levels within the government so as to avoid government failure while addressing market failure by, for example, offering fitting public services, effectively regulating monopoly, addressing positive and negative externality, establishing extensive social security system and maintaining social welfare system containing stimuli and restraint so as to promote fast and steady economic growth. Pollution should be reduced, growth quality enhanced and distribution improved to allow more people to share growth fruits.
Global practice and research shows that a never-changing and all-purpose central-local relationship model barely exists. Difference in economic system and economic development level, change of major social tasks and goals in certain periods and even ethnic composition difference will influence government size, functional composition and central-local relationship. Even in the same economy, as time goes by, change of people’s demand for public services and public financing methods will also lead to adjustment of such relationship. In 1994, main features of the financial and taxation system were as follows: financial power was in the hand of the central government, expenditure duty was transferred to local governments, and each region was responsible for its own social security revenue and expenditure. Internal results of this system include huge transfer payment from the central government to the local ones and high-degree dependence of local governments on their superiors’ transfer payment. According to scientific principles, the financial and taxation system in 1994 is not bad. Revenue wise, revenue being collected to the central government is actually a reasonable institutional arrangement. In market economy, mobility of products, elements and people is high. So, if local governments collect revenue, tax competition will be caused. Expenditure wise, regional difference in demand for public goods at that time in China was huge. So, local governments providing such goods based on local situation is in line with the efficiency principle. At that time, issues such as business cycle, income distribution and pollution in need of coordination by central government were not severe. So, the central-local relationship featured by local governments taking such responsibilities and central government sustaining the role of policy maker and coordinator was rational.
With economy and society progressing to the current state, our goals and constraint conditions have undergone some huge change. Therefore, the financial and taxation system in 1994 needs to be re-discussed. On the one hand, China is still a developing country and our priority goal is to develop the economy in quite a period of time. On the other hand, issues of economic fluctuation, income distribution and environmental pollution have become very serious and addressing them is a very important policy objective for the time being. From solely promoting economic development to integrating the four objectives, the financial and taxation system in 1994 needs to, while maintaining government size, alter income structure and expenditure structure, reverse central-local relationship on a large scale and expand and strengthen the central government so as to better promote the achievement of the four objectives, realize smooth and steady growth and green growth, and allow growth achievements to be shared by all citizens.