Sub-Provincial Fiscal Conditions in China: Local Fiscal Autonomy and Inter-Jurisdictional Disparities

Abstract

While most studies conclude that China is fiscally much decentralized based on the sub-national percentages of expenditure, the within province perspective lacks due attention. This paper reveals that within provinces, the local fiscal capacity and autonomy of districts, especially counties, are still far from sufficient. Additionally, regional (eastern, interior, and western) and urban-rural (districts vs. counties) differences symbolize the fiscal conditions of China. As the two most important types of local governments, this paper highlights the different fiscal scenarios of districts and counties and the different effects of intergovernmental grants. Since most inter-governmental grants go to counties, even though inter-jurisdictional disparities within provinces in own revenue before the transfers were higher for counties than for districts, after the transfers, the disparities in public expenditures were lower due to the equalization effects of intergovernmental grants. The large amount of intergovernmental grants dramatically eliminates the big district-county disparities that previously existed in the interior and western regions, bringing the average public expenditures for the localities to almost the same level. In the eastern region, the heterogeneity of own revenue in counties contribute more to the local expenditure variation than the interior and western regions, where the intergovernmental transfers effectively decrease the large local disparities among counties and between districts and counties. Finally, while the intergovernmental grants are effective in reducing the fiscal disparities within provinces, the large inter-province/region heterogeneities due to the level of economic development still dominate the fiscal scenario. Recent developments indicate that to a large extent, the above trends still exist and will continue over a long run.