“Central-local Relations Revisited: the 1994 Tax Sharing Reform and Public Expenditure Management in China”

As China moves forward in its transition toward a market economy, the budget becomes increasingly important as a policy instrument. Along with monetary policy, it is the Government’s main tool for maintaining macroeconomic stability and allocating resources to achieve policy objectives, taking over the role that used to be preformed by the Plan. As the Plan is stripped of its resource support and transformed into an indicative guide, the budget becomes more clearly a reflection of Government’s policy intentions. Through the transition, the budget finances some new tasks, such as the social responsibilities formerly financed by state-owned enterprises (SOEs), and phases out some old ones, such as investments in commercial operations. The budget will also have a role in resolving the legacy of the planning system, which left banks severely undercapitalized, pension systems underfunded, and many SOEs in the red. In the economic slowdown of the late 1990s, government spending became China’s key tool for stimulating domestic demand and employment growth.