Transparency seen as the key to budget reform

With nearly 13 trillion yuan ($2.08 trillion) in revenue last year, the Chinese government might be one of the best money spinners globally, but its financial ability is not necessarily in line with its massive fortune.

Preparing a budget for a country with 1.3 billion people is never an easy task, and neither is balancing income and expenditure, but the top decision-makers are keen to improve governance via reform of the budget system.

"More transparency should be the first priority of budget reform," Finance Minister Lou Jiwei said in an interview earlier this month. In March, the Finance Ministry's annual budget report stated that government-funded organizations at all levels should disclose their budget and final accounts unless the information is classified.

But the government's account book has become more unclear for taxpayers in recent years despite the rapid growth in fiscal revenue, as local governments explore irregular revenue sources and sometimes fling their money around.

The growth rate of China's broad government revenue has been expanding at a speed nearly twice as fast as GDP growth during the past two decades. In contrast, the share of tax revenue in total government income has been declining, from 98 percent in 1994 to 86 percent in 2013. The rest, which is non-tax revenue such as fines and confiscations, amounted to nearly 2 trillion yuan last year.

While experts call for more efficient budget execution, Wei Sen, deputy director of the school of economics at Fudan University, said the key to a transparent budget system is to bring in more supervision.

"Fiscal reform is an economic term, whereas reform in the budget control system is more about bringing in more democracy and the rule of law. They are different concepts, though very much related," Wei said.

Until recently, the budget system reform officials talked about was more on the economic side, and Wei said a more important issue, a forceful supervision on budget planning by the National People's Congress, the top legislative body, is yet to be written on China's reform agenda.

"The more money a government has, the more difficulties there are for management, and a better management system is needed," said Bai Jingming, deputy director of the Research Institute for Fiscal Science under the Finance Ministry.

According to the budget report, the public revenue and other government revenues will amount to 18 trillion yuan this year, while expenditure is 20 trillion yuan.

The first step, he said, is to extend the cycle for budget planning. "There are ups and downs in government revenue due to fluctuations in the economy, but the growth of government spending is consistent," Bai said.

He said under the annual budget planning mechanism, budget planning is drafted based on an estimate for economic prospects for that year alone, and execution is also reviewed on yearly targets, resulting in a shortsighted and unsustainable fiscal system.

"Governments would spend lavishly when the economy and revenues are good, but, in the face of an economic downturn, they can only borrow to meet the expenditure needs."

Bai said there should be a midterm budget planning mechanism for three years, in addition to annual budget planning, so that the budget planning can be balanced over the year.

A second reform should be to bring in more flexibility into the current fixed expenditure items, such as education, which is regulated to equal 4 percent of the GDP. In total, such items accounted for 47.5 percent of the aggregate fiscal expenditures last year.

Bai said such fixed expenditures are likely to cause a mismatch between expenditure and actual needs. "In some cases, some departments may invent all sorts of unnecessary names to spend the money, when other departments face fund shortages," he said.

While practicing fiscal prudence, there should also be a dynamic monitoring system to make sure that the budget is executed on time. An often criticized phenomenon, resulting from inadequate supervision of budget execution, is the aggressive spending by some local governments during the year-end to meet the appropriation budget.

"An effective budget execution could inject 20 trillion yuan capital to the economic cycle in the form of investment or consumption, which will play a vital role for stabilizing growth," Bai said.