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September 1, 2014

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China’s revised Budget Law voted to clear ambiguity and loopholes

CHINA’S top legislature yesterday adopted a revision to the Budget Law which clears ambiguity and closes loopholes in managing the trillions of yuan in fiscal revenue and spending.

This is the first time the Budget Law has been revised since it took effect in 1995.

As the law is closely interrelated with China’s ongoing fiscal reform, it took an unusually long time to revise it — seven years to draft a bill for the first reading in 2011 and four readings to get it passed.

Members of the Standing Committee of the National People’s Congress adopted the bill through a vote at the bi-monthly legislative session, saying the revision has responded to improvement in the fiscal system and the most controversial and worrisome problems.

In 2014, China’s fiscal revenue is budgeted at 13.9 trillion yuan (US$2.26 trillion) and government spending to be more than 15 trillion yuan.

The management of such a huge amount of public funds and supervision of its use remain key challenges for the Chinese government.

The revision to the law is a major move to further the fiscal reform and establish a modern fiscal system, Zhang Dejiang, chairman of the NPC Standing Committee, said at the close of the session.

More transparent

The revised law will help establish a complete and transparent budgetary system, transform government functions and modernize governance, Zhang said.

One of the most controversial issues is local government bonds. The old version of the law banned local governments from issuing bonds, but in practice some local governments have sought to raise funds via backdoors, mostly to finance infrastructure. But the money is not supervised.

To tackle this situation, the revision gives the green light to bond sales by provincial-level governments but places them under strict conditions. It not only restricts the amount of bonds but also regulates how to issue them and use the funds raised through them.

The new version lets provincial governments issue bonds within a quota set by the State Council, China’s Cabinet, and approved by the NPC or its standing committee.

Money raised by the bonds can only be used for public services, and not for government operations.

The debts must be included in the provincial budget and supervised by provincial people’s congresses.

The central government will assess risk in local debts. If the risk is out of control, it will issue warnings and has promised a fast response and punishment for those responsible.

The old Budget Law was adopted when China was still strongly influenced by planned economy concepts and at an early stage of applying budget management. It had only a very general definition of what the government budget covered, leaving a huge room for interpretation by governments.

The revised law defines the government budget into the general budget, the budget for government-managed funds, the budget for state-owned assets and the budget for social insurance funds.

For years, China’s government budgets only included the general budget, largely made up of tax revenue and spending on public services and government operations.

The revised law sees the revenue from land transactions covered by the budget for government-managed funds, while the financial situations of state-owned enterprises are supervised via the budget for state-owned assets.




 

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