ofGovernment,2003

Local Government Organization and Finance: China 159

transfers are important mainly because ofmismatching revenue and expenditure assignments in the current fiscal system.The current intergovernmental transfer system is primarily oriented toward filling the gap.

A greater degree ofexpenditure decentralization coupled with a high degree oftax centralization create vertical fiscal gaps for lower levels ofgovernment.In 2003,local governments received 45.4 percent oftotal fiscal revenues,and their expenditures (mainly concentrated in the county and township levels) accounted for 70 percent oftotal expenditures.In fact,47 percent oftotal local expenditures were financed by intergovernmental transfers in 2003.Specifically,47,45,and 58 percent oflocal expenditures were financed by intergovernmental transfers for provincial,prefecture,and county and lower-level governments,respectively.Table 4.10 shows transfers as a percentage oftotal local expenditures for different levels ofgovernment in 2003.

Intergovernmental transfer is the least transparent area in China’s fiscal system.According to the budget process defined by the Budget Law,the lower-level governments submit the approved budget to the higher-level governments and so on to the central government,and the central budget is the last one to be approved.Consequently,the intergovernmental transfer for subnational governments is unknown until the budget ofthe central government is approved.Apparently,the local budget is not able to take account ofintergovernmental transfers;consequently,such transfers are difficult to track through budgets.According to a report by the state audit bureau,only 27 percent oftotal intergovernmental transfers from the central government were reported in provincial accounts.

The Ministry ofFinance is not the only department that determines the size and allocation ofintergovernmental fiscal transfers.Several

TABLE 4.10 Transfers as a Percentage ofTotal Expenditures of Levels ofGovernment, 2003

Transfer as a percentage oftotal expenditures

Level ofgovernment (consolidated) Average Maximum Minimum

Provincial 47 92 25 Prefecture 45 98 15 County and lower 58 100 10

Source: Data from Ministry ofFinance ofChina.