Efficiency of Public Finance in China
By Antonio Graceffo
Shanghai Jiaotong University, China MBA
PhD Candidate, Shanghai University of Sport
Contact:
[email protected]
Prepared for the course: Understanding Public Financial Management SOAS, University of London
Table of contents
1.
Introduction
1
2.
Efficient Use of Public Money
2
3.
The Need for Social Welfare Programs
4.
Corruption
5.
Conclusion
6.
Bibliography
7.
About the Author
Introduction
This essay will define efficient and effective management of public money, consider how the Chinese government spends its budget, examine the level of poverty and income disparity in the country, consider the effects of corruption on public spending, and demonstrate that there are gaps in the efficiency of the utilization of public monies.
2. Efficient Use of Public Money
The efficient use of government money can be defined as obtaining the most value for the money spent (EU Public Admin n.d.). Additionally the efficient spending of public money should result in the greatest quantity of benefits to the citizenry. The China government budget for 2015 was $258 billion (Hua et al. 2015). And approximately 13% of China's GDP is government spending (Worldbank.org 2015). To put this number in perspective, US government spending accounts for roughly 33% of US GDP (Usgovernmentspending.com 2016). China's government budget comes from a combination of sources, including income tax, corporate taxes and fees paid to the government. Income taxes are one of the most common transfers from ordinary citizens to their government and the one which concerns most people. China has a graduated personal income tax rate which ranges from 3-45%. (Hoffman 2015). The US has a much lower maximum income tax rate, with US rates ranging from 10-28% (Efile.com). To see how efficiently this money is spent it will be necessary to examine what the money was spent on.
China spends 2.1% of GDP on defense and 4% of GDP on education (McCarthy 2015 and China Daily, 2012). The US by contrast spends 3.5% on defense and 5.2% on education (World Bank 2015). On healthcare, the Chinese government spends 2.9% of GDP while the US spends 8.1% (World Bank).
From the above data, it can be seen that tax rates in China are higher than those in the US, with many government services being lower. Furthermore, an extremely worrying area of Chinese government spending is on local government debt. The Chinese government's public debt is now more than 41% of GDP (Tradingeconomics, 2016). Much of this public debt comes from the central government bailing out local governments and repurchasing local government debt. In 2015, China central government allocated $499.7 billion to complete a debt swap, buying up the debts of local governments (Reuters 2015).
The Need for Social Welfare
Economists use the Gini coefficient as a measure of wealth disparity in a country. The US, with a Gini coefficient of 4.1, has one of the largest income gaps in the developed world (Worldbank.org, 2015). And yet, China's Gini coefficient is even higher, at 4.6. The UN warns that a Gini coefficient of 4.0 signals a risk of political instability in a country (Statistica 2015). At the end of 2013, 82.49 million Chinese were still mired in rural poverty, living on less than $1 per day (The Economist 2014 and Wong 2014). The wealth disparity between rural and urban China is dramatic, as incomes in rural areas can be one quarter of what they are in the cities (Fu 2015). Ironically, the rural areas are the areas where residents have the least access to government services.
With such a significant percentage of the population living in poverty the need for social welfare programs is obvious, and yet, China only spends 12-14% of GDP on social welfare programs. This low spending means that not all citizens are covered. As recently as 1998, 90% of rural dwellers were not covered by national health insurance. (Huang 2011). Today, while more than 90% of the population is covered, this figure is somewhat misleading, as coverage will be tied to the location where a person is legally registered. As a result, China's 200 million migrant workers, who come largely from the rural areas, are not covered by insurance in the cities where they work. (Gan 2013 and WHO 2008).). For those who are covered, the services and out of pocket costs vary dramatically across regions (Gan 2013). Many of China's residents must pay in excess of 50% of medical costs themselves (Huang 2011). The quality of healthcare offered to insured individuals, particularly in rural areas, was extremely poor, with the better treatment options only being available if fees were paid out of pocket. Studies have actually found that in some rural areas the out of pocket expense of those covered by insurance exceeded those of patients paying cash directly for services (Hsu 2014). These cash payments are what actually keeps the hospitals in operation. Only 7–8% of public hospital income comes from government funding. The rest is paid by patients. (WHO 2008).
In 2010, the China Law Blog identified healthcare and education as the two best industries to invest in China (Harrison 2010). Healthcare and education are growing businesses because either government healthcare and education are perceived as poor quality or because they are unavailable.
Chinese families generally spend 30% of their income on their children's education, including primary school, secondary school, and tertiary education (Nylander 2014). While financing the children's education is difficult, families with incomes as small as $25 a month may be ineligible for government tuition assistance (Bradsher 2013).
The quality of state education is inconsistent, with impoverished rural areas having access to the lowest quality education. Rural schools are not guaranteed of being able to attract or to keep teachers because of the low wages paid. This results in some rural schools having as few as one or two teachers. Further exacerbating the problem, government supported primary education is available in cities, but in rural areas parents must pay their children's tuition fees themselves (Fu 2015).
Other social welfare programs such as unemployment insurance are also inadequate. Less than 30% of unemployed people are covered and the benefit only replaces 17% of the average salary, whereas US unemployment payments can equal 40% (Gan 2013).
Government sponsored retirement plans are another area of deficiency. Government employees pay 8% of their salary into their retirement program, while private sector employees pay up to 28%. (Lockett 2015). In the US, employees pay only a maximum of 7.65% of their salary to social security, a program which includes retirement and other benefits (Efile.com 2015) The US government allocates 28% of GDP to social security payments (Heritage.org 2015). In spite of the tremendous burden these contributions place on workers, China's government retirement program is running a deficit of around US$484 billion (Lockett 2015).
Corruption
Corruption is a major inefficiency in the spending of public money. When an entrance ramp on China's $300 million Yangmingtan bridge collapsed, killing three, citizens blamed corruption. Between 2011 and 2012 eight other bridges collapsed, all amid allegations of corruption (Langfitt 2012). In 2009 an apartment building collapsed shortly after completion. Corruption is extremely common in China but is particularly prevalent in the construction and infrastructure sectors (Paskal 2012). A Huffington post article reported that according to Jay Hoenig, former Chair of the American Chamber of Commerce in Shanghai: "70% of projects are not completed on time, 73% are over budget and up to 20% of capital cost is wasted due to fraud, theft and negligence. One senior Chinese official even stated that 40% of China's construction projects are "out of control" with regard to health, safety and corruption" (Paskal 2012).
Transparency International ranks China the 89th most corrupt country of 168 countries evaluated (Transparency International 2015). Much of China's corruption stems from non-productive loans being granted by state owned banks to state owned enterprises (Huang 2015). This is public money which could have been used to fund public programs such as education, healthcare, and retirements.
Conclusion
Efficient use of government money should result in the citizens of a country receiving the best possible government services for each dollar spent. The China central government has one of the largest budgets in the world, suggesting that China should be able to provide adequate services to its citizens. In spite of China's relative wealth, however, the income disparity in China, as measured by Gini coefficient is beyond warning levels established by the UN. In excess of 80 million Chinese live on less than $1 per day. These are people who could benefit from government social welfare programs but existing programs are inadequate or unavailable in the rural areas where most of the poor live. Corruption is rife in the public sector with public infrastructure projects running over budget and public money being misappropriated by local governments, resulting in the central government having to use public money to repurchase the debt of the local governments.
From the findings above, it can be inferred that there are is significant evidence of inefficiency in Chinese government spending.
Bibliography
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About the Author
Brooklyn Monk, Antonio Graceffo is a lecturer at Shanghai University. He is also a PhD candidate at Shanghai University of Sport, writing his dissertation, in Chinese, with expected graduation in June of 2016. He is expected to graduate his China MBA, from Shanghai Jiaotong University, in January, 2016.
Linkedin
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