Social Sciences in China (Chinese Edition)

No.3, 2021

China’s Inclusive Public Fiscal System: A Study Based on Non-normative Fiscal Revenue

(Abstract)

Lü Wei and Wang Weitong

China’s achievement of miraculous economic growth is a theoretical proposition that calls for an explanation. The key to understanding the logic of China’s economic reform is a rational explanation of the logical paradox between non-normative local finance and the incentive compatibility of central and local governments. Based on the fact that autonomous local financial resources have long been dependent on non-normative fiscal revenue, this paper constructs an inclusive public financial system analysis framework from the dual perspectives of central and local governments. This analytical framework offers an explanation of the long-standing implicit fiscal decentralization contract with non-normative fiscal revenue as the carrier in the reform process, and a description of the central-local interaction process and institutional space within the behavioral motivation of central finance tolerance and local finance autonomy. It demonstrates the logical consistency between non-normative fiscal revenue, central and local incentive compatibility, economic growth and market-oriented reform. Under the inclusive public financial system, non-normative fiscal revenue is endogenous to the process of China’s industrialization and urbanization. It not only offsets the maladjustment between local authority, expenditure responsibility and financial resources in the formal budget system, but also realizes incentive compatibility between local behavior and the goal of economic growth. The inclusive public financial system, which takes into account both local dynamism and central control, is an important institutional logic enabling China to reach the dual goals of economic growth and market-oriented reform.