What’s wrong with this picture?
Well, it’s kind of obvious; China isn’t spending enough on social security. In the paper highlighted this week from the IMF, Philippe Wingender explains one of the main problems China has to address is clarify who pays for what in terms of central versus local government?
China has perhaps the most decentralized government of any major economy. There is of course the central government, below that there are the 31-provincial level governments, below them 334-prefectural governments with 2, 850 counties comprising 40,000 townships. All of these units have some taxing power and spending responsibility.
This leaves individual and corporations in a constant state of uncertainty as to where taxes will fall due in the future and where benefits can be obtained from. Better, suggests Mr. Wingender, if like in the rest of the developed world at least pensions and unemployment insurance were centralized. Healthcare, education and social assistance are better administered locally but the center has to provide adequate top-up funding to make sure poor provinces don’t short change their citizenry. Where the central government should also be putting their best foot forward is in the area of the arts, science, research and development, environmental protection, infrastructure and income redistribution.
As if the above weren’t a daunting enough task to make it all work the domestic tax regime will need to be extended and harmonized. With China planning to bring another 300m souls off the land and into the cities in the next two decades all the above is a can that can’t be kicked down the road any longer.
The paper concludes that without radical fiscal reform the problem of too-high savings rates will persist. This in turn will retard the transformation of the economy into a more grown-up model as individuals continue to refuse to become the consumers that a more highly developed domestic economy requires; and nobody, least of all the central government, wants that.
You can access the paper in full via the following link Intergovernmental Fiscal Reform in China.
Happy Sunday