China’s State Council on Monday unveiled guidelines for tax reform for governments below the provincial level to strengthen local debt management while improving a debt quota mechanism. This underscores the central government’s unwavering efforts to mitigate debt risks as part of measures to shore up the world’s second-largest economy.
China will establish a reasonable mechanism for transfer payments and gradually increase the scale of general transfer payments with priority given to underdeveloped areas, the guideline said, adding that local governments will increase spending on education, scientific and technological research, social security, food security, as well as the construction of major infrastructure projects.
The guidelines also called on local governments to strengthen debt management in development areas, maintain compliance with the financial management system, tighten constraints on debt financing by government agencies such as management of development zones, to resolutely curb the increase in the hidden debt of local authorities, to reasonably control the extent of the public debt and to deal effectively with the risks of indebtedness.
China will also improve the debt quota mechanism for local governments under which the special debt quota must match project revenue and revenue, the guidelines added.
The latest reform comes against the backdrop of the pandemic and an increasingly fluctuating external economic environment, in addition to mounting pressures resulting from both reduced tax revenue and increased spending.
Recent statistics show that finance departments at all levels have stepped up their efforts to implement proactive fiscal policies. In the first two months, the increase in budgetary expenditure was 14.3%, the highest in the past five years, according to data from the Ministry of Finance.
The local special bond quota for construction projects was fully issued, totaling about 1.25 trillion yuan ($185 billion) as of the end of March. At present, local governments have reserved 71,000 special bond projects, Vice Finance Minister Xu Hongcai said at a press conference on April 12.
The country’s tax revenue stood at 7.43 trillion yuan ($1.1 trillion) in the first four months, down 4.8 percent year on year, official figures showed. If the effect of the refund of the VAT credit is deducted, the national tax revenue recorded an increase of 5% during the period. The gains moderated after an 8.6% increase in the first quarter.
The reform also comes as Chinese authorities have repeatedly stressed the importance of curbing the rise of new “hidden debt” and stabilizing the mechanism that settles existing “hidden debt” to guard against systemic financial risks. since last year.
Local government debt levels have come under scrutiny in recent years. The overall debt ratio of local authorities was 93.6% in 2020, although it is not at a high level by international standards which fluctuate between 100% and 120%.