Macroeconomic Trends and Cycles
- China has been able to navigate around the large macroeconomic pitfalls that normally plague
transitioning economies such as those in the former soviet union
18.1 Trends in National Saving
- Chinese saving rates were high under the planned economy and remained high after reforms.
-Under the planned economy SOEs did nearly all the saving. Household savings were very low.
-After reforms household savings increased dramatically. Reasons for this are listed below
1. Income Growth Accelerated.
2. Working-age households had less security in old age (Only one child now).
3. Household investment opportunities exploded.
-As a result of the increasing importance of savings in GDP, the banking system, through its lending
decisions, increasingly held the key to macroeconomic stability.
18.2 The Fiscal System and Fiscal Reform
- Before 1978 the government raised revenue from SOE profits; there was no real tax policy.
-The most important Fiscal Reforms came in 1994 when the government made the tax structure very
similar to the West implementing a VAT on manufactured goods. (75% to Federal and 25% Provincial)
18.2.1 Revising Fiscal Erosion
-After 1994, budgetary revenues increased dramatically and went towards the civilian economy.
18.2.2 Broadening the Tax Base: Horizontal Equity
Horizontal Equity= The theory stating that people in the same income bracket should be treated the
same way. It’s a basic measure of whether tax burdens are fairly distributed.
-The VAT helped broaden the base and lower the complexity (sorry for changing it Alex. :P)
18.2.3 Restructuring Central-Local Relations
-After 1994 Central government collections, as a share of GDP more than doubled while local collections
dropped by half.
-Today, 20% of central government collections are transferred to local governments.
18.3 The Fiscal System Today
-While the central government got itself in shape, the fiscal system in the countryside is still a mess.
18.3.1 Intergovernmental Fiscal Relationships: Principles
-China faces problems with its large intergovernmental finance and the technical capacity and
administrative capabilities. -China’s expenditures are surprisingly decentralized with the local governments spending the most.
18.3.2 Inadequacy of Local Government Revenue in Rural Areas
- Unfortunately the rural governments don’t have access to the same type of tax incomes as other areas
since only the central government