IMF: China's complex fiscal system needs ‘crucial’ overhaul

In its latest report, the International Monetary Fund (IMF) highlighted that China’s local government financing system needs “crucial” reforms to increase consumption, build prosperity and encourage economic rebalancing.

Key Quotes:

“China’s fiscal system is the world’s most decentralized, with local bodies responsible for 85 percent of government spending, citing the breadth across 31 provincial-level governments, 334 prefectures, 2,850 counties, 40,000 townships and 900,000 informal village jurisdictions. Including off-budget spending by local government financing vehicles brings the ratio up to 89 percent of all public expenditures.

Such a complex network must be overhauled to better deliver services, increase social spending and reduce regional disparities

Revenue changes are needed to reduce risk from “excessive sub-national borrowing” and increase efficiency.

These reforms will allow China’s government to improve social safety nets and better protect citizens from adverse economic and health shocks.

In turn, this would improve welfare and promote consumption and economic rebalancing.

Efforts to improve government borrowing and contain fiscal risks will only succeed if supported by reforms to reduce unfunded mandates for sub-national governments.”