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Intergovernmental Fiscal Transfers for China’s Harmonious Society

PFM, Vol. 8 No. 4, (2008)

China’s current system of fiscal transfers suffers from se-vere weaknesses. The absence of a clear and coherent principle for distribution of fiscal transfers is a major weakness and results in the current distribution that favors the wealthier provinces. Further-more, fiscal transfers have failed to secure a better alignment of budgetary expenditures with national priorities. Against this back-ground, this paper examines how refocusing of China’s fiscal trans-fers could help in better achieving national economic priorities. The paper analyses the issue of whether fiscal capacity equalisation should become the dominant principle for future distribution of fis-cal transfers, or whether categorical fiscal equalisation - using fis-cal transfers targeted at national priorities - would be more effec-tive in progressing towards China’s vision of a harmonious society. It is concluded that fiscal equalisation is not the right approach for China and an alternative approach is proposed according to which fiscal transfers are targeted at national priorities. Finally, after not-ing that the current status of management of specific purpose pay-ments in China is quite deficient, a framework for more effective intergovernmental fiscal coordination and monitoring the imple-mentation of outcome-focused fiscal transfers is outlined.

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