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Economic Observer reporter Du Tao

Recently, some local audit departments have made public the audit work reports on the implementation of local budgets and other fiscal revenues and expenditures in 2023 (hereinafter referred to as "audit reports"), which mentioned that some local governments have prominent problems of inflated revenues and idle operations. For example, the Sichuan Provincial Audit Report stated that some regions paid targeted donations to the finances at the same level, inflating fiscal revenues by 41.5122 million yuan; the Qinghai Provincial Audit Report pointed out that in 2023, the provincial finances will recover 20 million yuan of funds that have been allocated in previous years and transfer them to the general public budget, inflating the financial resources of that year.

A person working in the financial audit section of a local audit department said that during the audit process, it was found that there was a large gap between fiscal revenue and actual financial resources, and the source of this gap was inflated revenue. "For some revenue and expenditure items, the audit department can see at a glance from the account book that the revenue is inflated through idle operations. For example, a certain fiscal revenue is 100 yuan, and 90 yuan is returned to the enterprise. When auditing the implementation of the fiscal budget every year, one of the contents is to audit idle operations. This situation happens every year, but it is rarely disclosed to the public."

A local audit office official believes that the fact that so many local audit offices have intensively disclosed the problem of inflated and idle local finances must be because the National Audit Office has paid attention to such problems. In the past, idle local finances also often occurred, but when the fiscal revenue situation was good, the idle ratio was low. Now that the fiscal revenue and expenditure pressure has increased, the idle ratio has also increased.

In the view of Wang Zhenyu, dean of the Institute of Local Finance at Liaoning University, local fiscal idleness is a "commonplace" problem. It was more common at the county level more than ten years ago, and some "water" was squeezed out later. The current phenomenon of inflated and idle local finances has reappeared. The reasons are very complicated. It involves factors in the economic field and is closely related to the fiscal system, people's livelihood and other fields. The fundamental solution lies in continuously promoting high-quality economic development, appropriately expanding the fiscal pie, and rationalizing the fiscal relations between governments. At the same time, strictly follow the principle of "expenditure based on revenue" to ensure the scientific nature and enforceability of the budget.

Why is it false?

A district finance director from an eastern province recounted the moment when “fiscal inflation” occurred.

In the office of the district party secretary, the finance director reported on the region's actual fiscal revenue and expenditure, the expected revenue and expenditure of parallel counties and districts, the rankings of each county and district, and a plan on "how much fiscal revenue may need to be increased if the fiscal assessment indicators are to be further improved."

After the district party secretary agreed to implement this "inflated plan", the finance director went to the district mayor's office to make the same report. After obtaining the district mayor's approval, the finance director returned to his office to summon the deputy director in charge and conveyed the decision of his superior. The deputy director in charge of revenue began to use various methods to "inflate" fiscal revenue to meet the requirements of all parties.

Audit reports from many places mentioned the inflated and idle fiscal revenues in 2023. The audit report of the Inner Mongolia Autonomous Region stated that four leagues and cities collected funds that did not belong to non-tax revenues or collected them first and then returned them, inflating non-tax revenues by 2.8649 million yuan; the audit report of Guangdong Province stated that three cities and three counties increased fiscal revenues by 17.101 billion yuan through state-owned enterprises purchasing state-owned assets, affecting the authenticity and sustainability of fiscal revenues; the audit report of Hebei Province pointed out that one city and seven counties inflated fiscal revenues by 2.495 billion yuan through false disposal of public welfare assets, overpayment of state-owned capital operating income or fines and confiscations.

In an article published in 2024 titled "Auditing the problem of "falsely inflated fiscal revenue" should focus on "emptiness" and "transfer"," Zhu Fei, from the National Audit Office's Chongqing Special Commissioner's Office, mentioned that under the influence of the economic downturn, some regions have suffered serious fiscal revenue shortfalls. In order to make up for the fiscal deficit and avoid fiscal deficits, they often create money out of thin air and pay various non-fiscal funds into the state treasury outside the established fiscal revenue range, falsely inflating fiscal revenue and maintaining a balance between revenue and expenditure.

In the opinion of the finance director of a district in the above-mentioned eastern province, the motivation for local governments to inflate their revenues comes from three aspects: pressure from superior indicator assessments, ranking pressure on local governments themselves, and pressure on local governments to repay their debts.

The above-mentioned finance director told Economic Observer that when the superior unit sets the budget target at the beginning of the year, it usually requires an increase compared with the previous year. But in fact, this year's tax revenue has declined, and some tax sources have fallen by more than 40%. In order to maintain expenditures and achieve the budget target at the beginning of the year, some "technical means" have to be used, such as idling some fiscal revenue.

Local governments also need to maintain their fiscal revenue rankings. The above-mentioned finance director said that the superior unit will assess the fiscal revenue of the region every quarter, and the focus of the assessment has changed from fiscal performance and treasury fund guarantee capabilities to fiscal revenue growth and tax share. "It's okay to be last once in a while, but it can't be last every quarter," he said.

In addition, the real need for local governments to inflate fiscal revenue is to reduce local debt ratio or debt ratio.

Since 2019, the Ministry of Finance has implemented a local government debt risk rating system, using the debt ratio as the assessment standard to divide different regions into four levels of "red, orange, yellow, and green". That is: red (debt ratio ≥ 300%), orange (200≤debt ratio <300%), yellow (120≤debt ratio <200%), and green (debt ratio <120%). The debt ratio indicator reflects the ability of local governments to use current fiscal revenue to meet debt repayment needs, and is divided into general debt ratio and special debt ratio. The risk warning lines for general debt ratio and special debt ratio are both 100%.

The above-mentioned finance director believes that if the denominator of local fiscal revenue is not increased, the debt ratio will easily fall into the red zone. In this range, government investment, debt and other aspects will be restricted, and then "no work can be done."

How to idle

Li Jialing from the Audit Bureau of Dazu District, Chongqing mentioned in the article "Audit Analysis of Falsely Inflated Fiscal Revenues from Asset Transactions between State-owned Enterprises - Taking the Fiscal Audit of W District as an Example" that there are various means of falsely inflating fiscal revenues, and the common methods are: false collection and circulation, paying education fees and other fees illegally, pre-collecting in advance, charging fees under self-made names, and delayed refunding. The false collection and circulation methods involve tax revenue and non-tax revenue. Among tax revenues, local governments enjoy exclusive taxes such as land value-added tax, property tax, and urban land use tax, and funds are easy to circulate. Fee items with a relatively high proportion of non-tax revenues, such as land transfer fees, allocated land revenue, paid use of state-owned resource assets, state-owned asset disposal revenue, and state-owned capital operation revenue, are the main items for falsely inflating fiscal revenues.

In the above article, Zhu Fei mentioned that the treasury guarantee level in some regions has long been lower than the reasonable range stipulated by the Ministry of Finance. Therefore, they raise fiscal funds by borrowing from state-owned enterprises or paying the business income of public institutions into the treasury to create the illusion that the treasury is full; some regions directly pay special bond funds to the treasury to balance the general public budget, and the false increase of fiscal revenue and the illegal use of bond funds coexist; some regions use simple and crude means, and when they are short of money at the end of the year, they directly levy fees on enterprises, force fundraising, or illegally levy "excessive taxes", impose random fines and fees, etc., which not only falsifies fiscal revenue but also damages the business environment, seriously affecting the government's credibility and normal economic order.

In the view of the above-mentioned finance director, fiscal idleness also needs a reasonable name, so that it looks real to "outsiders", the events are real, the projects are real, but the funds have not yet formed real available financial resources. "For example, selling state-owned resource assets to state-owned enterprises at the same level may be suspected of 'taking money from the left pocket to the right pocket', but the process is compliant."

A finance official from a county in East China revealed to reporters that the area mainly achieved its revenue growth target through land use tax and property tax. The specific operation method is: find a company that is about to go bankrupt and owes taxes, most of which are local state-owned enterprises. The financial department provides funds to the company in various ways, and the company uses this money to go to the tax department to pay the previously overdue land use tax and property tax. The reason for choosing land use tax and property tax is that these two taxes are local taxes and the income belongs entirely to local income. Generally, land use tax and property tax are paid on a quarterly basis. Normally operating companies will not pay in advance, but companies that are close to bankruptcy or bankrupt can make up for the debts they owed in previous years. These companies have become a "channel" for fiscal idleness.

Data released by the Ministry of Finance showed that the national property tax in the first half of 2024 was 233.7 billion yuan, a year-on-year increase of 20.1%; the urban land use tax was 129.8 billion yuan, a year-on-year increase of 11%.

The above-mentioned county finance personnel said that local finance can also use special bonds to inflate revenue. Because many of the users of special bonds are local urban investment and state-owned enterprises, after the special bonds are allocated, part of the funds are used for project construction, and the remaining funds are returned to the local finance through the state-owned capital income.

Why is it so difficult to change?

The situation of inflated and idle fiscal revenue has existed for many years. Wang Zhenyu said that the inflated and idle fiscal revenue of local governments is a commonplace problem. It was more common at the county level more than ten years ago, but some of the "water" was squeezed out later. The fiscal revenue was "inflated" by collecting small taxes first and returning them later, and selling state-owned assets multiple times. In some places, the proportion of "inflated" was as high as 20%-30%. This seriously distorted view of political achievements has also attracted great attention at the national level. Since then, some regions have solidified local revenue by "squeezing out water" and have achieved certain results, and the quality of local fiscal revenue has been improved in stages.

In recent years, the phenomenon of local fiscal idleness has "risen". Wang Zhenyu analyzed the reasons behind it. On the one hand, the three consecutive years of the COVID-19 pandemic, large-scale tax and fee cuts, and the cliff-like decline in real estate have exacerbated the contradiction between local fiscal revenue and expenditure. Local governments generally face a more severe liquidity shortage, and ensuring the growth of local fiscal revenue is also an objective need; on the other hand, the fiscal revenue growth target adopted by local people's congresses at all levels at the beginning of the year has a strong legal nature, and the fiscal revenue planning tasks decomposed downward through the administrative level have in fact become "hard" indicators for the annual assessment of the superiors, with a "veto power", which is an important reason for the current local fiscal idleness. In other words, the higher-level government is concerned about the fiscal summary "numbers" and their "growth".

Article 55 of the Budget Law of the People's Republic of China stipulates that governments at all levels shall not issue revenue targets to budget revenue collection departments and units.

Wang Zhenyu said that the reason why the inflated and idle fiscal revenue is difficult to change is that some regions actually follow the "expenditure-based revenue" budgeting approach. A large number of strong and rigid fiscal expenditure responsibilities force local governments to "inflate" their revenue when compiling budgets at the beginning of the year, otherwise the budget will be difficult to balance.