China’s local governments are heavily burdened with debt. To address this financial strain, China’s central government is considering the introduction of a new local tax, potentially amounting to around one trillion yuan. Reports suggest that the Central Committee of the Communist Party is studying a consolidation of existing taxes—such as the Urban Maintenance and Construction Tax, Education Surcharge, and Local Education Surcharge—into a new Local Additional Tax. Local authorities would have some autonomy in setting the tax rate within specified limits.
Data from the Ministry of Finance reveals that in 2023, China’s VAT and consumption tax revenues totaled approximately 8.54 trillion yuan. The combined revenues from the existing taxes to be consolidated are estimated at around 949.6 billion yuan. This reform is aimed at addressing the imbalance between central and local financial powers, which has led to a cycle of fiscal disorder.
Analysts offer two interpretations of this policy shift: one suggests decentralizing fiscal authority, while the other implies strengthening central control. Some experts argue that centralizing fiscal control aligns with President Xi Jinping’s strategy for unified national management, reducing the likelihood of substantial decentralization.
The Wall Street Journal highlights that local governments are facing severe debt issues, with hidden liabilities estimated between 7 to 11 trillion yuan, double the central government’s debt. In the first half of 2024, local debt issuance exceeded 3.5 trillion yuan, with expectations for a peak in the third quarter.
To address these issues, some suggest issuing 2 trillion yuan in national bonds for local use. However, experts like Wang Guocheng believe this amount would be insufficient compared to the vast debts of major property developers and local governments. Without comprehensive tax system reforms, local deficits are likely to persist.
Additionally, economist Li Daokui proposes issuing 500 billion to 1 trillion yuan in consumption vouchers to stimulate spending and economic recovery, citing potential multiplier effects from consumer incentives. However, concerns remain about the effectiveness of such measures given current economic conditions and consumer behavior.
Source: Radio Free Asia, July 25, 2024
https://www.rfa.org/mandarin/yataibaodao/jingmao/hcm1-china-taxation-local-economy-education-07252024054647.html