China`s Fiscal Predicament

Abstract

Chinese current fiscal situation exists a huge gap between the available resources and the inevitable fiscal need for the Chinese government. Beijing was unable to significantly improve its fiscal position through adopting new fiscal systems because of the strong opposition of local governments. As a result, the Chinese government heavily relys on debts to sustain the fiscal function and the fiscal sustainability of the Chinese government is fatally threatened in the future. Specifically, on the one hand, it is imperative for Beijing to continue its proactive fiscal policy to maintain necessary and vital rapid economic growth; on the other hand, the Chinese fiscal expansion needs to be reduced as soon as possible because of the concerns of mounting deficit and debts. This poses a serious dilemma for China. In addition, Chinese current tax system does not moderate, but exacerbate regional inequalities. China needs to install an adequately funded system of equalization grants in order to balance regional inequalities. Moreover, China must change the basis of rural taxation in order to prevent deteriorating social instability in the rural area.