Managing the Middle-Income Transition
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Managing the Middle-Income Transition

Challenges Facing the People’s Republic of China

Edited by Juhzon Zhuang, Paul Vandenberg and Yiping Huang

The growth model of the People’s Republic of China has been based on high investments, exports, low-cost advantage, and government interventions. This model has successfully transformed the country from a low-income to an upper middle-income economy. However, the model has generated contradictions that could undermine future growth. Making the transition to high income requires greater reliance on efficiency and productivity improvement, innovation, and market competition. This book examines the challenges faced by the People’s Republic of China in sustaining robust growth, and policy options for making a successful transition to a high-income economy to avoid getting caught in the middle-income trap.
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Chapter 10: Public finance and fiscal sustainability

Kang Jia and Junmin Liu


Three decades of reform and robust development have put the People’s Republic of China (PRC) on a solid fiscal footing. This was ably demonstrated in 2008 with an unprecedented package of CNY4 trillion in fiscal spending and tax breaks to forestall the effects of the global financial crisis. By 2011, the national budget deficit was just 1.1 percent of gross domestic product (GDP), while national debt to GDP was 15.2 percent;1 low levels now rare among developed countries. Fiscal reform began early in the 1980s in the PRC. Just two years after the country launched momentous economic reform, the government decided that the centralized fiscal system with local governments turning over all revenues to higher governments and state-owned enterprises (SOEs) turning over all profits to their corresponding fiscal departments was not compatible with the development of a market economy. The government began a series of reforms, starting with the fiscal contracting framework in 1980 that authorized local governments to collect tax on their own. It shifted to a tax-sharing system in 1994 and to systematic reforms of public expenditure management in 2000 under the so-called public finance framework. Despite considerable progress, the government needs to continue with reforms to the fiscal system, which are by no means complete. The fiscal system is an important pillar of state governance, and assessing the country’s fiscal health requires close attention to contingent liabilities.

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