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Essential Fiscal & Tax Reforms and the Transformation of Local Governments

Oct 31-2025   



*This article is based on the keynote speech delivered by Li Lixing, Peking University Boya Young Fellow, Professor of Economics at PKU NSD, Director of the China Centre for Public Finance, and Young Changjiang Scholar (China Ministry of Education).

 

Characteristics & Key Challenges of China's Fiscal and Tax System

A comprehensive analysis shows that China’s fiscal and tax system currently presents three primary characteristics:1. Fiscal revenue growth has stagnated. 2. Insufficient tax revenue has forced local governments to rely on debt financing, leading to a rise in government debt ratios. 3. Structural imbalances persist.

 

Challenges Facing Public Services

China has undergone a historic phase of large-scale urban-rural migration, with substantial numbers of people moving frequently across regions. This trend has exerted significant pressure on the country’s fragmented, locality-based public service system.

1. Challenge from Population Mobility

It remains difficult to provide public services to non-local and non-registered residents, as local governments lack incentives to serve migrant populations. To address this issue, the government has introduced a range of measures, including cross-regional subsidies through fiscal transfers, the gradual relaxation of the household registration system, efforts to narrow the gap between urban and rural public services, and further expansion of social security coverage.

2. Challenge from Flexible Employment

The traditional public service model, which centers on formal employment, is being disrupted. An increasing number of workers no longer depend on fixed employers, and their diversified income sources have made the existing model—whereby social security contributions are collected and services are delivered through employer-based channels—unsustainable. This has resulted in reduced social security coverage.

 

Prospects for Fiscal & Tax Reform During the 15th Five-Year Plan Period

The fiscal and tax sectors are confronting multiple challenges. To address these, the government must shift its focus from prioritizing economic development to delivering public services. At the same time, public service delivery models need to adapt to the challenges posed by population mobility and flexible employment. The current fiscal and tax system reforms thus require deeper structural adjustments during the 15th Five-Year Plan period.

 

Strengthen national tax collection and administration capabilities to maintain a reasonable tax-to-GDP ratio.

 

Expand the tax base—including the base for personal income tax—while keeping tax rates at appropriate levels, and raise citizens’ awareness of tax compliance obligations.

 

Refine the central government’s responsibilities, with the coordination of social security as the core focus. Within the central-local relationship, fiscal and administrative powers should be adjusted in a scientific manner, and the expenditure obligations corresponding to the central government’s responsibilities should be clearly defined. Financing for social insurance should be supplemented through a combination of taxation, sovereign wealth funds, and state-owned capital.

 

Moderately expand government debt scales by increasing the government deficit ratio and issuing more government bonds. This will help establish a well-developed government bond yield curve and promote the development of financial markets.

 

Coordinate fiscal and tax system reforms with structural reforms in other areas, such as the land and property rights systems and household registration reforms.

 

Essential Fiscal & Tax Reforms and the Transformation of Local Governments

Oct 31-2025   



*This article is based on the keynote speech delivered by Li Lixing, Peking University Boya Young Fellow, Professor of Economics at PKU NSD, Director of the China Centre for Public Finance, and Young Changjiang Scholar (China Ministry of Education).

 

Characteristics & Key Challenges of China's Fiscal and Tax System

A comprehensive analysis shows that China’s fiscal and tax system currently presents three primary characteristics:1. Fiscal revenue growth has stagnated. 2. Insufficient tax revenue has forced local governments to rely on debt financing, leading to a rise in government debt ratios. 3. Structural imbalances persist.

 

Challenges Facing Public Services

China has undergone a historic phase of large-scale urban-rural migration, with substantial numbers of people moving frequently across regions. This trend has exerted significant pressure on the country’s fragmented, locality-based public service system.

1. Challenge from Population Mobility

It remains difficult to provide public services to non-local and non-registered residents, as local governments lack incentives to serve migrant populations. To address this issue, the government has introduced a range of measures, including cross-regional subsidies through fiscal transfers, the gradual relaxation of the household registration system, efforts to narrow the gap between urban and rural public services, and further expansion of social security coverage.

2. Challenge from Flexible Employment

The traditional public service model, which centers on formal employment, is being disrupted. An increasing number of workers no longer depend on fixed employers, and their diversified income sources have made the existing model—whereby social security contributions are collected and services are delivered through employer-based channels—unsustainable. This has resulted in reduced social security coverage.

 

Prospects for Fiscal & Tax Reform During the 15th Five-Year Plan Period

The fiscal and tax sectors are confronting multiple challenges. To address these, the government must shift its focus from prioritizing economic development to delivering public services. At the same time, public service delivery models need to adapt to the challenges posed by population mobility and flexible employment. The current fiscal and tax system reforms thus require deeper structural adjustments during the 15th Five-Year Plan period.

 

Strengthen national tax collection and administration capabilities to maintain a reasonable tax-to-GDP ratio.

 

Expand the tax base—including the base for personal income tax—while keeping tax rates at appropriate levels, and raise citizens’ awareness of tax compliance obligations.

 

Refine the central government’s responsibilities, with the coordination of social security as the core focus. Within the central-local relationship, fiscal and administrative powers should be adjusted in a scientific manner, and the expenditure obligations corresponding to the central government’s responsibilities should be clearly defined. Financing for social insurance should be supplemented through a combination of taxation, sovereign wealth funds, and state-owned capital.

 

Moderately expand government debt scales by increasing the government deficit ratio and issuing more government bonds. This will help establish a well-developed government bond yield curve and promote the development of financial markets.

 

Coordinate fiscal and tax system reforms with structural reforms in other areas, such as the land and property rights systems and household registration reforms.