China's local governments are losing fiscal independence

China's local governments are losing fiscal independence

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The financial self-sufficiency of China's regional and local governments is declining as growth in local tax revenues slows and spending rises, according to a study cited by Caixin. The study, conducted by the Chinese Academy of Fiscal Sciences (CAFS), found that during the first three quarters of this year just 50.8% of local government spending on average was funded by local taxes, down from an average of 54.1% in 2015.

Local governments are making up the shortfall by turning to the central government or the financial market, but the growing local debt and higher fiscal demands on the central government could increase the pressure on the broader economy and the country's fiscal state, the study said. The growing shortfall is likely caused by the transition from traditional industries like manufacturing to so-called new-economy industries, which generally pay less tax, as well as a rise in public spending due to increased pension payments and environmental costs, the study suggests.

Financial self-sufficiency is also skewed geographically, with the average self-sufficiency rate from 2015 to 2017 as high as 74.3% in China's wealthy eastern provinces, while the inland regions had an average rate of 30.4%.