China Local Government Finances Are Unsustainable, Auditor Says

The finances of China’s county-level governments are unstable and unsustainable as the majority of their fiscal income comes from sources other than taxation, the nation’s top auditor said.

About 60 percent of revenue raised last year by 54 counties investigated by the National Audit Office wasn’t derived from taxes, Liu Jiayi, the head of the agency, told a meeting of the legislature yesterday, according to a transcript of his speech on the audit office’s website. Total fiscal revenue at those counties rose 17 percent to 112 billion yuan ($17.6 billion) last year, Liu said.

China shelved a plan earlier this week to allow local governments to sell bonds directly amid concern that the companies they set up to borrow money will default on some loans. Debt racked up by local governments and their entities stood at about 10.7 trillion yuan at the end of 2010, with 17 percent maturing this year and 11 percent next year, according to an audit office report released last year.

“The proportion of non-tax income in fiscal revenue is relatively high at county-level governments, pointing to relatively poor stability and sustainability,” Liu said, without specifying the other sources of revenue.

Non-tax revenue includes administrative fees, fines, lottery income, foreign aid and income from “the use of state- owned resources,” according to information on the Ministry of Finance website.

Growth Targets

Central government subsidies to county and township authorities last year were more than three times the level of 2005, Liu said. At the same time, local governments are facing larger expenditure pressure, with mandatory growth targets for spending on areas including education, agriculture and science and technology, he said.

China has more than 1,600 county-level governments, according to the Ministry of Civil Affairs.

The central government should distribute more tax revenue to local authorities to help them meet rising city construction and public welfare costs, lawmakers said yesterday, according to a report in today’s China Daily.

Local governments have been forced to turn to non-tax income such as land sales and to increase debt because of the imbalance in tax revenue and spending obligations with the central government, Jia Kang, director of the finance ministry’s Institute of Fiscal Science, was cited by the paper as saying.

In a separate investigation, the audit office found some ministries misstated revenue or violated fiscal regulations, according to Liu.

The Ministry of Finance underreported 1.92 billion yuan of revenue in its budget implementation report to the legislature last year, he said. The National Development and Reform Commission ordered investments of 46.8 billion yuan last year in a manner that failed to strictly follow procedures, Liu said.

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