chapter  2
12 Pages

CHINA'S FISCAL DEFICITS, 1986-1995

ByTamar Manuelyan Atinc, Bert Hofman

China's fiscal decline has become a major policy issue over the reform period since 1978. The reforms initiated a major shift of the tax base away from the sources traditionally tapped by the tax system, and government revenues declined from over 34 percent of gross national product (GNP) in 1978 to less than 12 percent in 1995 (figure 2.1). Tax buoyancy was undermined by the chronic inefficiency of the state-owned enterprises (SOEs), the traditional tax base for government, and by loose collection and tax exemptions induced by intergovernmental fiscal contracts and facilitated by the decentralized tax administration system. l The reduced budgetary resources further weakened a budget system that was still geared toward financing the State Plan, and a proliferation of extra-and off-budget funds increasingly undermined the macroand micro economic functions of the budget.