The Chinese government is facing a fiscal crisis as plummeting land sales revenue has severely strained local government budgets. To cope with this, local governments across China have implemented austerity measures, including limiting air conditioning temperatures, requiring public officials to dine in government cafeterias, and restricting use of official cars.
These “belt-tightening” policies have also led to widespread pay cuts for civil servants and other public sector workers. Public sector employees report salary reductions of 20-30%, with the most developed regions seeing the biggest cuts. Annual bonuses have also been eliminated in many cases. This is seen as the first wave, with pay cuts expected to spread to state-owned enterprises and other institutions.
Experts attribute this fiscal crunch to an over-reliance on land sales revenue by local governments, which has dried up due to the property market slump. Land sales revenue plummeted 55.7% in the first half of 2024 compared to 2019. Tax revenue has also been under pressure due to declining corporate profits.
To address this, policymakers have promised to reform the fiscal system by increasing the share of tax revenue for local governments and expanding their taxing powers, such as by potentially shifting the consumption tax to the local level. However, experts warn that this may incentivize local governments to promote polluting or unhealthy industries to boost revenues. Tackling local government debt will also be crucial to putting their finances on a sustainable footing.
More directly, some suggest that China should raise the share of fiscal revenue to GDP, which at 26% is lower than advanced economies and even other developing countries. Implementing a property tax is seen as one option to boost local government revenues.
Source: BBC, August 19, 2024
https://www.bbc.com/zhongwen/simp/chinese-news-69274197