Related to 10 trillion yuan in fiscal transfer payments! This report from the State Council reveals five major reform trends

The economic downturn, coupled with a sluggish land market, has led to an increasing reliance on central government support for local finances. This year, the scale of central government transfer payments to local governments has exceeded 10 trillion yuan for the first time. The changes in the allocation and management of this huge amount of funds have attracted the attention of local governments and are also related to the vital interests of the people.

On September 1st, the website of the National People's Congress of China released the "Report of the State Council on the Situation of Fiscal Transfer Payments". This over 5000 word report not only introduces the basic situation, management reform, efficiency, etc. of fiscal transfer payments, but also clarifies the five major reform directions for the next step of the fiscal transfer payment system.

Trend 1: Transfer Payment Legislation

The above report discusses five main considerations for further improving fiscal transfer payments, with the primary focus on promoting the improvement of the legal system for transfer payments. Obviously, the legislation on transfer payments with a large scale of funds has become the focus of the next step of reform.

Financial transfer payments refer to the funds allocated by higher-level governments to lower level governments without compensation, including central to local transfer payments and local higher-level government to lower level governments transfer payments. They are mainly used to solve regional financial imbalances, promote equalization of basic public services between regions, and are important policy tools for the government to achieve regulatory goals.

In 1994, China's tax sharing system reform established a fiscal transfer payment system. At that time, the central government's transfer payment scale was only 46.1 billion yuan, but in 2023, this number reached 10.06 trillion yuan. However, there is no specific law regarding the transfer payment system involving over 10 trillion yuan of fiscal funds, and currently the relevant regulations are mainly departmental regulations of the Ministry of Finance.

Therefore, in order to enhance the standardization and authority of the transfer payment system, it is crucial to accelerate the legislation and institutional construction of transfer payments.

The above-mentioned report states that it is necessary to promote the revision of the Budget Law, separate the management of transfer payments of common fiscal powers as a separate category, elevate management measures that have been proven effective in practice into law, and provide legal support for deepening transfer payment reform.

In 2019, the central government integrated and established a common fiscal authority transfer payment, mainly used to fulfill the central government's expenditure responsibilities in basic areas of people's livelihood such as education, medical care, elderly care, and employment. In order to align with the provisions of the Budget Law, general transfer payments were temporarily included in the budget preparation. The scale of joint transfer payments in 2023 is approximately 3.8 trillion yuan.

According to the above report, future common fiscal transfer payments are expected to be on par with general transfer payments and special transfer payments.

The report also stated that timely research and development of supporting regulations such as fiscal transfer payment regulations should be conducted, and comprehensive and systematic provisions should be made on the functional positioning, classification system, establishment procedures, distribution management, and exit mechanism of transfer payments.

This means that the current transfer payment system, which is mainly based on the regulations of the Ministry of Finance, will be upgraded to the regulations of the State Council in a timely manner. According to the previous deployment of the State Council, when conditions are ripe, this regulation will also be promoted to become a law.

Trend 2: Three types of transfer payment classification strategies

At present, fiscal transfer payments are divided into three categories, namely general transfer payments, common fiscal authority transfer payments, and special transfer payments. The corresponding fund scales for these three types of transfer payments from the central government to local governments are approximately 4.9 trillion yuan, 3.8 trillion yuan, and 0.9 trillion yuan, respectively.

The second key point to consider when discussing the next step in the report is to establish and improve a classification management mechanism for transfer payments. Based on the functions and characteristics of various transfer payments, classify and implement policies, make precise efforts, continuously improve management measures, and enhance scientificity.

Among them, general transfer payments have steadily increased in combination with financial conditions, and are inclined towards areas with weak financial resources in the central and western regions, improving distribution methods, and promoting a more balanced distribution of financial resources among regions.

The transfer payment of common fiscal authority is based on the full allocation of central fiscal expenditure responsibilities, exploring the implementation of differentiated subsidy policies, and promoting a more balanced level of basic public services among regions.

Special transfer payments are reasonably arranged according to major decisions and deployments of the Party Central Committee and the State Council, with targeted and precise use of funds, strengthened guidance and incentives for local governments, and gradually withdrawn from areas that can be effectively regulated by market mechanisms.

Trend 3: Budget Preparation Improvement

In recent years, the Audit Office has been closely monitoring the allocation and management of transfer payment funds, and has found some problems in budget preparation. Previously, it was discovered that some common transfer payments did not correspond to the division of fiscal authority and expenditure responsibility in the corresponding fields. The cleaning and integration of transfer payments are not yet in place, and the old problem of cross duplication still exists.

In addition, in the central fiscal budget report at the beginning of recent years, there were over 1 trillion yuan of funds that were not allocated to specific regions in the table of regional transfer payments.

The third major focus of this report on the next step of transfer payment reform is to improve the preparation of transfer payment budgets. And focus on the current problem to solve the above problems.

For example, the report states that according to the division of fiscal authority and expenditure responsibility, the setting of transfer payment projects should be adjusted and optimized to better reflect the achievements of fiscal authority reform. Strengthen the overall coordination of fiscal funds, clean up and standardize transfer payments that support the same strategy, field, and industry, and reduce cross duplication. Refine the budget preparation for transfer payments and increase the proportion of budget implementation to regions at the beginning of the year.

Trend 4: Strengthen allocation, utilization, and performance management

This year, the Audit Office found that some transfer payment allocation methods are not scientific and accurate, and some investment plans are issued slowly. This also reflects that there is still room for improvement in the allocation and utilization of funds in current transfer payments.

The fourth major focus of the next step of transfer payment reform in the report is to strengthen the allocation, utilization, and performance management of transfer payments.

For example, optimizing the allocation of transfer payments, improving tools such as expenditure cost differences and financial difficulty evaluation, exploring the establishment of regional balance evaluation mechanisms and indicator systems, and reasonably determining expenditure standards and expenditure responsibility sharing ratios. Accelerate the progress of transferring payment funds.

In recent years, many transfer payment regulations have been revised, with a major focus on incorporating performance management regulations to improve the efficiency of fund utilization.

The report states that improving transfer payment performance management, steadily advancing pre performance evaluation, establishing a sound transfer payment performance indicator system, improving the quality of transfer payment performance goals, increasing the application of performance evaluation results, and adjusting expenditure policies in a timely manner in combination with policy implementation effects and changes in the situation to ensure that funds are used on the cutting edge.

Trend 5: Promote the reform of transfer payment systems below the provincial level

In addition to central to local transfer payments, transfer payments from provincial governments to lower level governments are also an important component.

The report mentions the fifth major focus of the next step of reform, which is to further promote the reform of the transfer payment system below the provincial level.

For example, supervising and guiding provincial-level governments to implement their main responsibilities, clearly defining the fiscal authority and expenditure responsibilities below the provincial level, streamlining the division of income between governments below the provincial level, and improving the transfer payment system below the provincial level.

In June last year, the General Office of the State Council issued the Guiding Opinions on Further Promoting the Reform of the Financial System below the Provincial Level, which focused on solving problems such as unclear positioning of transfer payments and high pressure on local "three guarantees", and improving the transfer payment system below the provincial level. This includes clarifying the positioning of various transfer payment functions, increasing the scale of general transfer payments, controlling the scale of special transfer payments, and scientifically and reasonably allocating various transfer payment funds.

The report also proposes that promoting the integration of provincial financial resources may increase the intensity of general transfer payments to cities and counties, and promote financial balance within the province. According to the basic public service guarantee standards, expenditure responsibility sharing ratios, and the size of the permanent population, combined with policy needs and financial resources, sufficient arrangements will be made for the transfer of common fiscal powers to ensure the full implementation of common fiscal powers.