Social Sciences in China (Chinese Edition)

No. 7, 2021

Fiscal and Financial Decentralization and Macroeconomic Governance

(Abstract)

He Dexu and Miao Wenlong

Macroeconomic governance is an important component of the national governance system. Perfecting the macroeconomic governance system is a key measure for resolving major economic problems in the new era. The level of coordination and the effect on economic regulation of fiscal and monetary policy, the main means of macroeconomic governance, changes according to the institutional arrangements for fiscal and financial decentralization. Our analysis shows that, to some extent, several factors affects the allocative efficiency of fiscal and financial resources, the prevention and management of fiscal and financial risks, and the coordination of fiscal and monetary policy, thus influencing the effectiveness of macroeconomic governance. They include: the mismatch between decentralization of fiscal revenue and decentralization of fiscal expenditure; the existence of explicit financial centralization and implicit financial decentralization; and the inconsistence of financial decentralization between government levels and that between government and the market. The central and local governments therefore need to clarify their major responsibilities. An increase in local governments’ proportion of fiscal revenue should be accompanied by a reduction in their proportion of local expenditure, and governments should make explicit the policy orientation of fiscal and monetary issues and delimit relief standards while advancing appropriate financial decentralization. Further, we should bring into play the function of local governments in pursuing high quality economic development and controlling for major risks. These are inevitable choices if we are to establish a reasonable and effective system of macroeconomic governance.