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The Evolving Structure of Public Finance

when the mao era passed, China faced serious challenges in public finance. The government had run a budget deficit for three consecutive years toward the end of the Cultural Revolution (1966-1976). After a brief interval of balanced budgets during 1977-1978—achieved largely through cutting back on some essential expenditures (Jia Kang and Zhao Quanhou 2008, 51) and booking unrealized revenues (Zuo Chuntai and Song Xinzhong 1988, 426-427), a budget deficit of unprecedented magnitude appeared in 1979. It totaled 17.1 billion yuan, which was equivalent to 15.2% of the current-year budget revenue (CSY1994, 69), and ushered in a three-decade-long trend of fiscal shortfalls. To cope with the growing budgetary imbalances, the Ministry of Finance began to experiment with measures to restructure the rigid and highly centralized fiscal system in 1977, when political regime transition was still underway. What followed was a process of fiscal decentralization that fully unfolded in 1980 and had profound implications for intragovernmental relations as well as economic institutional change.

A pivotal component in this process was a fiscal contract system that ran through 1993. It reduced centralized control over local public finance by redefining the boundaries of the rights and responsibilities of local governments. In concurrence with it were three coevolving phenomena in the fiscal system: the decline and elimination of the role of (public) enterprise profit remittance in revenue generation, the expansion of revenue sources under various “regional property rights” regimes, and the growth of off-budget funds. These developments, coupled with a new focus of political performance assessment on economic development, changed the incentives and constraints faced by local political actors. Their responses nevertheless varied, as will be discussed in the following chapters. Such variations led to different local policy environments for domestic private business and foreign capital in the first decade and half of economic reforms. They also generated and compounded a host of problems, pressures, and challenges that drove the central leadership to undertake a major restructuring of the fiscal system in 1994 and, before long, to adopt sweeping measures of ownership restructuring.

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