Wang Zhanyang: Build sound public finance system

China's huge administrative expense shows the government's distribution system is far from reasonable. This makes China a prosperous country but with a large population that lives in poor conditions. The basic reason why some people say China is a "rich country with many impoverished people" is the government's failure to establish a sound public finance system.

China's income distribution system has changed over the years. The country's economic prosperity is a tremendous achievement, but it has also led to some undesirable developments. On the positive side, the general level of people's income has increased and their livelihood has improved. But on the negative side, the inequitable income distribution system has worsened. China's latest Gini coefficient is 0.47, which shows the income gap between the rich and the poor has widened further. The government should take this as a warning signal to change the country's income distribution pattern.

The root of the imbalanced income distribution problem lies in our political system, which is characterized by the over-centralization of power. The public cannot take part either in democratic supervision or in the process of making policies for the government's financial revenue and expenditure. Instead, "special interest groups" exercise great influence on the policymaking process. And since "insiders" make most of the policies they lack essential institutional guarantee.

Without a sound public finance system, China is indeed transforming into a "rich country with a huge number of poor people". Only by setting up a sound public finance system, which has four basic characteristics, can the government stop this process.

First, revenue collected from the public should be used to improve people's livelihood. Besides, the main source of government revenue should not be its citizens. The Chinese government is the highest tax collector in the world. In 2008, its total revenue was about 12.5 trillion yuan ($1.84 trillion), which is almost equal to the disposable income of the country's urban and rural residents. Such a ratio is considerably high compared with other countries.

In accordance with international standards, the government's overall revenue should be cut by at least 50 percent. To do that, the government has to return 6.25 trillion yuan to the public.

The government's fiscal budget for education, medical care, social security, employment and culture added up to 1.9665 trillion in 2008, which was only 31.4 percent of its total expenditure. If we subtract the off-budget expenditure on people's livelihood, (the ratio of revenue within and outside the budget is 1:1) the percentage will drop to 20. This ratio in countries that have reached development levels equal to that of China is generally above 50 percent; in developed countries it is as high as 60-70 percent.

This shows the Chinese government's expenditure on people's livelihood is far from enough, and should be raised to at least 50 percent. Based on the government's finance revenue and budgetary expenditure in 2008, the government should return another 1.25 trillion yuan to the public to improve their livelihood.

If the figure is added to 6.25 trillion yuan - over-collected from the people - the government has to return 7.5 trillion yuan to the public, which will increase people's real income by about 60 percent. If the government does that, it can effectively solve the problem of people's poor livelihood and inadequate consumer demand in the domestic market.

Second, a sound public finance system can be set up only with the active help of the public. The aim should be to build "sunny finance". The essence of "sunny finance" is lawful financing, scientific financing and democratic financing, which are inevitable requirements of public finance. China has already gained lots of valuable experiences in the construction of "sunny finance", so it should not be a very difficult task to achieve.

Only openness can ensure that public finance is used to improve people's livelihood. Hence, the authorities should intensify the promotion of "sunny finance" in the coming years. In other words, the government should make most of its revenue and budgetary and non-budgetary expenditure public as soon as possible.

Third, democracy is crucial to a sound public finance system. The National People's Congress should have the power to decide State revenue and expenditure, which should form the core of public finance system. The authorities should take the onus of implementing the policies and hand over the charge of supervision to some independent organizations.

This is the only way the authorities can set up a public finance system that offers sound institutional guarantee. Considering China's incomplete political reform, the government should include participative democracy in its to-do list, meaning it should encourage people's democratic participation in and supervision of the income distribution system reform. Or else, some people could manipulate the reform to suit the purpose of select groups and thus aggravate the unfair distribution pattern.

Last but not the least, government revenue and expenditure should be in strict accordance with the law, and law-breakers should be punished. Loopholes in the judicial system give rise to corruption and unfair distribution in the public finance system. Therefore, China's public finance system should be strictly guided by law.

The author is director of political science teaching and research sector at the Central Institute of Socialism. The article first appeared in the People's Forum magazine.