In recent years, under the policy requirements of "tight days", local governments in China have taken a series of spending-cutting measures to cope with fiscal pressure. Frugal policies such as limiting official receptions, controlling air conditioning temperatures, and reducing travel costs have been frequently introduced, while the salaries of some civil servants and public institution staff have also declined to varying degrees. Behind these measures, it reflects the huge challenges facing China's local finances and the imbalance between central and local fiscal and tax relations.

"Tight days" policy and salary cuts

As local government revenue sources dry up, civil servants and fiscally supported personnel across the country have begun to feel unprecedented salary pressure. Ms. Liu is a section-level civil servant in southwest China. Her monthly salary is less than 4,000 yuan. In previous years, her year-end bonuses have become an important source of supplementary income in her life. However, before the Spring Festival this year, she heard that the bonus would be cancelled and couldn't help crying. Last year, China's civil service team ushered in a wave of salary cuts, and this year this trend has extended to public institutions and state-owned enterprise employees, gradually forming a common "tight days" phenomenon.

On social media, many civil servants complained that their salaries had been cut by 20% to 30%, especially in economically developed regions such as Guangdong and Zhejiang. This trend has also caused public concern about China's fiscal situation. At this year's National People's Congress, "tight days" was mentioned again, indicating that the financial tension of local governments is still continuing.

The dilemma of fiscal revenue and the hidden dangers of land dependence

The fiscal revenue of local governments in China has long relied on land transfer income, and with the sluggish real estate market, this source of income has declined sharply. Data show that in the first half of 2024, China's land transfer income was only 15.3 trillion yuan, down nearly 56% from the same period in 2019. The sluggish real estate market not only dealt a heavy blow to local finances, but also gradually exposed the fragility of the model of land-based economic development.

A report released by Moody's at the end of last year pointed out that China's local debt levels continued to rise, coupled with a weak real estate market, resulting in limited financial resources for the Chinese government to stimulate the economy. This situation has forced local governments to take spending cuts to control fiscal deficits. Although China's tax revenue has rebounded slightly this year, the decline in corporate profits and the slowdown in residents' income growth have made the tax base still weak.

Local measures to cut spending

In terms of cutting spending, local governments have introduced frugal policies. Suzhou requires that business trips along the high-speed rail line must not be equipped with official vehicles, and official receptions must use employee meals in the canteen of the agency. Anhui stipulates that the temperature of air conditioners in winter and summer must be controlled within the energy-saving range, and paperless office is promoted. Shaanxi and Hunan and other places have also introduced similar measures, requiring the reduction of office maintenance, the extension of the service life of official vehicles, and strict approval of travel expenses.

These measures have not only caused repercussions within the government, but also caused heated discussions in society. Some netizens believe that ordinary people are already struggling in a difficult economic environment, and the "iron rice bowl" of civil servants should also be moderately "tightened" to show fairness. But behind the local government's spending cuts, in essence, is a helpless move that fiscal revenue is unsustainable.

Imbalance in the fiscal relationship between the central and local governments

The fiscal difficulties of local governments are closely related to the imbalance in the fiscal and tax relations between the central and local governments. Since the tax-sharing reform in the 1990s, the central and local governments have divided taxes according to the type of tax, and "national taxes" and "local taxes" belong to each. Although this system effectively increased the central government's fiscal revenue at the time, as time went on, the fiscal pressure on local governments has increased. Local governments bear most of the expenditure on public services, but receive less than half of the tax revenue.

Lou Jiwei, former Minister of Finance of China, pointed out that the proportion of China's fiscal revenue to GDP has gradually decreased in recent years and is now lower than that of countries with similar income. The main source of local fiscal revenue currently relies on the land economy, but as the real estate market cools, the revenue base of local governments has been greatly impacted.

The direction of fiscal system reform and the decentralization of consumption tax

In order to ease the pressure on local finances, the recently concluded Third Plenary Session of the 18th CPC Central Committee proposed new reform measures aimed at improving the relationship between central and local finances and taxes. The decision-making level promised to increase central government spending support for local finances while expanding local taxation powers. After the Third Plenary Session, the Ministry of Finance of China said it would consider moving the consumption tax collection link to local governments to expand local government fiscal resources.

Consumption tax is one of China's important taxes, mainly levied on tobacco, alcohol, luxury goods, high-energy consumption and high-pollution products. In 2023, consumption tax accounted for 8.9% of national tax revenue. Although decentralizing the power to collect consumption tax can increase local fiscal revenue, it may also lead to potential problems such as local governments encouraging the tobacco and alcohol industry and luxury consumption in order to increase revenue.

The possibility of tax increase and real estate tax

Against the backdrop of fiscal austerity, whether to increase taxes has become an option to solve fiscal problems. Lou Jiwei believes that China's fiscal revenue accounts for a relatively low proportion of GDP, and it is necessary to increase it to more than 30% in order to meet the standards of countries with the same income. He also suggested that real estate tax, as a local tax, may be an ideal choice to promote the transformation of local government functions.

However, the current economic weakness makes it difficult to rashly implement new taxes. The slowdown in economic growth in the second quarter makes it more difficult for the Chinese government to achieve its full-year growth target. Experts believe that although fiscal and tax reform is a long-term solution to local fiscal problems, the implementation of a new tax system still needs to be cautious in the context of a poor economic environment.

A difficult balance

Faced with the grim reality of shrinking fiscal revenue, the Chinese government has eased short-term pressure through a "tight-fisted" policy and sought structural adjustments in the fiscal and taxation system to achieve sustainable development of local finances. However, relying solely on increasing revenue and reducing expenditure is not enough to solve the fundamental problem. Although measures such as expanding the tax base, strengthening taxation on high-income industries, and promoting real estate taxes have potential, they all need to seek a balance in steady progress to avoid negative impacts on economic growth.

In the future, China's fiscal and taxation reform will face multiple challenges, including the need to enhance the independence and sustainability of local finances and gradually adjust tax policies under the premise of economic recovery. How to find a balance between cost savings and structural reform will determine the stability of China's local government finances.