Lv Bingyang, Director of Department of Finance, School of Finance, Renmin University of China
It is fairlyimportant to study regional finance for China,a large country with a vast territory and complex regional conditions. Regional finance construction is closely related to the transfer payment system. Transfer paymentsareimportant institutional arrangementsto solve the problem of uneven development among regions. There are three forms:general transfer payments, special transfer paymentsand classified transfer payments which have varied theoretical logics. Comprehensive application of the three forms of transfer payments will promote regional coordinated development.
General transfer payments are used to bridge regional financial disparities and are meant to solve the problem of uneven local financial resources; no conditions can be set for the use of funds, and local governments enjoy full autonomy in theuse of such funds. Traditional theory holds that the function of special transfer paymentsis to solve external issuesof public productprovision. Butspecial transfer paymentshaveanother theoretical logic in the Chinese context, i.e.such paymentscan change the preference of local governments and the direction of fiscal expenditure to a certain extent.Special transfer payments can quickly lock in the direction of government expenditure and public product provision, and improve the supply of infrastructure or public services in underdeveloped areas. This is called a "positive equilibrium strategy".
Another formof transfer payments- classified transfer paymentsdeserveattention. Classified transfer paymentsare theclassified appropriationfor certaindirectionsof fund use but no specific purpose designated. The fund use is not limited to a specific public project, but to a broad category of public services (education and medical care and such). Therefore, the fund use is in a relatively wide range despite of its restriction.
Compared with general transfer payments, classified transfer paymentscan lock the overall direction of government expenditure. Compared with special transfer payments, classified transfer paymentsgive local governments greater autonomy in the use of funds. Classifiedtransfer paymentsnot only facilitate local governments to match governance goals of the central government, but also help improve the governance capability of local governments. Therefore, it should become the major direction of China’s reform of the special transfer payment system.
After the tax sharing reform in 1994, with the central government having much more financial resources, there is a shift from "giving priority to coastal areas" to "coastal areas helping inland areas". The transfer payment system has played an important role in balancing regional disparities. In future reform of the financial system, we should act inthe direction of clearly defined powers and responsibilities, appropriate financial resource allocation and greater balance between regions, well deal with the relations between incentives and balance, and make the transfer payment system more scientific and standardized and continue to play an important role in the coordinated development of regional economy.
Published on September 8, 2022