China's Politburo approved reform plans in three major areas on June 30, with the biggest impact likely to be a planned overhaul of the fiscal system.
As we know, China is currently facing the major task of transforming its economic growth model. The key for the transformation is the role of government evolving from an investment-oriented approach to a service-oriented system. The key for the transformation of the role of government is fiscal reform.
China's old economic growth model was to use government power to mobilize funds to invest in infrastructure and provide important products and services. In the early stage of urbanization, the model was extremely efficient in building infrastructure, improving basic living standards, and reducing poverty. It was very effective in mobilizing China's land, resources and labor in order to utilize developed countries' techniques and to provide standardized products and services.
In the later stages of urbanization, however, the old model suffers from lack of competitiveness and is unsustainable.
Only a free market, rather than a government-led market, can stimulate creativity, meet a variety of consumption needs, and reduce waste. The role of government is not to participate in market competition, but to provide a fair environment for the free market, such as the protection of property rights and the construction of fair legal system. This means China needs to transform the role of government from investment oriented to service oriented.
The best way to transform the role of government is to redefine its way of collecting and spending money. Public finance is therefore about the role of the government in the economy.
We may conclude that fiscal reform is the key for China's economic success and the main goal of fiscal reform is to transform the role of government from an investment-oriented approach to a modern fiscal system, specifically a service-oriented government.
According to the plan, the fiscal reform will focus on budget control, tax reform and changing the expenditure share between central and local government.
The plan goes to the core of the modern financial system, but the specifics have not yet been determined.
The budget system is the foundation of the entire fiscal system and also the core of fiscal reform. The main problem with China's government budget is its lack of transparency and professional supervision.