Reforming public finances is the name of the game these days. Governments across the developed world know they have to spend less, or risk a Greek-style bomb exploding in their faces.
Rich countries, which generally provide robust social safety nets, fare particularly badly in the debt stakes. By 2014, the UK’s public debt is set to rise to 88% of GDP, at which point the US government will owe an enormous 107% of GDP, according to IMF forecasts.
China, as ever, bucks the trend. In 2009, government debt was around 20%, lower than every G20 nation apart from the cashed-up resource-rich economies of Russia, Australia and Saudi Arabia. Even the budget deficit – the national overdraft, if you like – was a frugal 2%. Hard-headed Germans would approve.
Critics will contend that China’s national debt statistics don’t capture local government debt, which has exploded in the wake of Beijing’s fiscal and monetary stimulus. Although the headline figure is US$586 billion, around US$1.7 trillion will have been pumped into the economy by the end of 2010.
Much of that cash has been borrowed by local government investment companies (LICs) and remains off balance sheet. Many LICs will struggle to pay the funds back, and Beijing will almost certainly have to bail out a number of local authorities in three or four years’ time. The most pessimistic accounts put China’s local government debt at around 50% of GDP, giving a total debt-to-GDP ratio of 70%. But this remains far lower than the growing debt mountains facing many other countries, and is a very manageable total for an economy growing at more than 8% per year.
China’s debt numbers tell us two things. First, that the country’s overall fiscal situation is pretty healthy. Second, that the central government – as opposed to local governments – should be spending far more.
By international standards, the burden of financial responsibility in China’s fiscal system is bizarrely skewed toward localities. Local governments – the majority at county and township level – finance nearly all public services, including 80% of basic health and education expenditure. Since a large slice of locally collected taxes goes into central government coffers, the vast majority of local authorities struggle to meet their financial responsibilities. Instead, they must rely on fiscal transfers from Beijing to make up the shortfall.
When Hu Jintao and Wen Jiabao came to power in 2002, they promised to build a "harmonious society" that would be fairer for all. In many respects they have succeeded: Rural fees and agricultural taxes were abolished, every child is now entitled to nine years of free education, and more than 90% of the population is officially covered by basic health insurance.
There is one simple problem: The reforms are blowing ever-bigger holes in local-government budgets. And since poor rural counties and townships bear much of the financial burden, the reforms are likely to intensify some of the very inequalities they are designed to counter.
What to do? Increasingly, the challenge facing China is not a lack of funds per se, but how to channel them to the right people. That means reforming the dysfunctional fiscal system so that the central government covers more social welfare, education and health services spending.
Until Beijing learns to assign fiscal responsibilities more appropriately, attempts to create a fairer society will fail. China may not be in the same financial dire straits as more developed countries, but reform is just as necessary.
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