China National Development and Sub-National Finance a Review of Provincial Expenditures
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Report No. 22951 -CHA China National Development and Sub-National Finance A Review of Provincial Expenditures April 9, 2002 Poverty Reduction and Economic Management Unit East Asia and Pacific Region Document of the World Bank CURRENCY EQUIVALENTS (As of April 9, 2001) Currency = Renminbi Currency Unit = Yuan (Y) $1.00 = Y8.277 Y1.00 = $0.12067 WEIGHTS AND MEASURES Metric System FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS CEP - Compulsory Education Project CT Consumption Tax CZNJ - China Fiscal Yearbook, Caizheng Nianjian EBF - Extra-Budgetary Fund EIT - Enterprise Income Tax EPI - Immunization for Children EPS - Epidemic Prevention Stations GDP - Gross Domestic Product GNP - Gross National Product IGF Inter-Govemmental Fiscal IMF - Intemational Monetary Fund MCH - Matemal and Child Healthcare MOE - Ministry of Education MOF - Ministry of Finance MTEF - Medium-term Expenditure Framework NPC - National People's Congress NTS - National Tax System OECD - Organization for Economic Co-operation Development PEB - Provincial Education Bureau PIP - Public Investment Program PIT - Personal Income Tax PSU - Public Service Unit R&D - Research and Development RMB - Renminbi SCPSSEA - State Commission for Public Sector Structure and Establishment Administration SOEs - State-owned Enterprises TCM - Traditional Chinese Medicine THC - Township Health Centers TSA - Treasury Single Account TSS - Tax Sharing System,feishuizhi UCE - Universal Compulsory Education UNICEF - United National Intemational Child Education Fund UPE - Universal Primary Education VAT - Value-added Tax WHO World Health Organization ZBB - Zero-based Budget Vice President: Jemal-ud-din Kassum Country Director: Yukon Huang Sector Director: Homi Kharas Task Manager: Deepak Bhattasali ACKNOWLEDGEMENTS The task manager of this study is Deepak Bhattasali, and the final version of the report was prepared by Sudarshan Gooptu. The principal authorof the report is Christine Wong, who designed the study, assembled and supervised the work of the team, and conducted the field visits while she was a staff member of the World Bank. She continued working on the report after assuming the Henry M. Jackson Professorship at the University of Washington, and led the technical discussions with government counterparts. Substantive inputs were provided by Jorge Martinez (tax policy and budgeting); John Burns (personnel management); Wang Rong and Hu Wenbin (education); Gerald Bloom, Gao Jun, Liu Yunguo, Zhao Yuxin and Qian Juncheng (health); and by Zuo Xuejin and Chen Haihong (Hunan and Jiangsu) and Govinda Rao. Fieldwork was carried out in Hebei Province in June 2000, and Gansu Province in December 2000. In addition, studies of Hunan and Jiangsu Provinces were commissioned in order to capture a more representativepicture of sub-nationalfinance. The study was carried out under the guidance of Deputy Director-General Wang Weixing of the Ministry of Finance Budget Department, who provided invaluable advice and comments throughout the study. The team would like to express its sincere thanks to Mr. Zhao Yongwang, Director of Local Budget Division I, for making the arrangements for interviews in Beijing and for the fieldwork. In Hebei we wish to thank Director Wang Jialin of the ProvincialFinance Bureau, Mr. Gao Zhili, then-Chief of the Budget Section (and currently Deputy Director of the Provincial Finance Bureau), and Mr. Zhang Yongjun, Deputy Chief Interviews at the sub-provincial levels were organized by Mr. Guo Lufang, Deputy Director, Xingtai Municipal Finance Bureau. In Gansu we received excellent cooperation from Mr. Wu Yangdong, then-Chief of the Budget Section and currently Deputy Director, Provincial Finance Bureau. We were warmly received in Hezheng, Yuzhong and Jishishan Counties by Mr. Yang Chunyan, Director of Hezheng Finance Bureau, Mr. Wang Weizhong, Directorof Yuzhong Finance Bureau and Mr. Ma Zhanshan, Directorof Jishishan Finance Bureau. At various stages, helpful comments were provided by many World Bank staff and staff of the International Monetary Fund. Peer reviewers for the first draft of this report were: Roy Bahl, Richard Bird, Barry Naughton, David Shand and Dana Weist. The team was ably assisted by Guangqin Luo in Gansu and Wang Guijuan in Hebei. Guangqin Luo and Muriel Greaves helped compile the final version of the report. TABLE OF CONTENT EXECUTIVE SUMMARY.................................................................................................I 1. INTRODUCTION .......................................................... 1 Scope and Coverage of the Report .......................................................... 1 2. FISCAL DECENTRALIZATION IN CHINA: AN OVERVIEW .................................... 4 The 1994 Tax Sharing Reform: A Watershed ......................................................... 13 The Present Inter-Governmental System and Fiscal Status ............................................... 15 3. EXPENDITURE ASSIGNMENTS ......................................................... 27 The Roles of Sub-National Governments ......................................................... 27 Main Policy Issues ......................................................... 35 Policy Recommendations ......................................................... 46 4. REVENUE ASSIGNMENTS AT THE LOCAL LEVEL ................................................ 50 Current Revenue Assignments ......................................................... 50 Main Policy Issues ......................................................... 62 Recommendations for Reform ......................................................... 72 5. BUDGET PROCESS AND INSTITUTIONS AT THE LOCAL LEVEL ...................... 78 Is budgetary autonomy adequate at the local level? ......................................................... 80 Issues in Budget Structure and Formulation ......................................................... 84 Budget Execution ......................................................... 84 Budget Audit and Oversight ......................................................... 84 Policy Recommendations ......................................................... 84 6. PROVIDING EDUCATION ......................................................... 94 Background ......................................................... 95 Financing ......................................................... 98 Budgeting Practice ......................................................... 103 Expenditure Outcomes in Education ................... ...................................... 109 7. PROVIDING HEALTH SERVICES .......................................................... 111 Background ......................................................... 113 The System of Rural Health Finance ......................................................... 115 Budgeting ......................................................... 120 Expenditure Outcomes in the Health Sector ......................................................... 124 Policy Recommendations ......................................................... 127 8. IMPROVING SUB-NATIONAL PUBLIC EXPENDITURE MANAGEMENT FOR BETTER RESULTS ..................................................... 129 Summary Diagnostics ..................................................... 129 Policy Recommendations ..................................................... 134 ii TABLES IN TEXT Table 2.1: The "two ratios .................................................................... 16 Table 2.2: Central Transfers by Type ................................................................... 19 Table 2.3: Transitional Transfer Scheme ................................................................... 19 Table 2.4: Distribution of Earmarked Grants by Percent ......................................................... 21 Table 2.5: Comparisons of Ratios of Per Capita Expenditures for Selected Provinces .......... 22 Table 2.6: Fiscal and Economic Concentration in Rich and Poor Provinces ........................... 23 Table 2.7: Trends in Prefectural Per Capita Revenues Across Government Levels: Hunan, Gansu and Jiangsu ................................................................... 24 Table 2.8: Distribution of Expenditures and Revenues by Administrative Level .................... 26 Table 3.1: Structure of Govemment Expenditure ................................................................... 29 Table 3.2: Central and Local Budgetary Expenditures, 1978-1999 ......................................... 31 Table 3.3: Recalculated Local Expenditures ................................................................... 33 Table 3.4: Expenditure on Selected Items in Gansu Province .................................................. 35 Table 3.5: Expenditure Assignment in Selected Countries ...................................................... 37 Table 3.6: General Government Expenditures and Portion Administered by Each Level of Government in Selected Countries /a ................................................................... 38 Table 3.7: Wei County Government Organization, 2000 ......................................................... 40 Table 3.8: Health and Education Status of the Poor, 1988 and 1995 ....................................... 43 Table 3.9: Intra-provincial Disparities ................................................................... 44 Table 3.10: Composition of Provincial Expenditures ................................................................ 45 Table 4.1: Current