Summary of Key Points
Recent discussions about local fiscal self-sufficiency rates below 100% have drawn attention. The Ministry of Finance has responded, stating that this is the norm due to the fact that local expenditures rely not only on their own revenues but also on supplementary funds from central government transfers. This phenomenon is directly related to China's tax-sharing fiscal system, where local revenues account for a smaller proportion while expenditures account for a larger one. In recent years, factors such as slower economic growth and a sluggish real estate market have led to a decline in local self-sufficiency rates, increasing fiscal pressure. The central government has already introduced several policies and plans to advance reforms, including the consumption tax reform and the legislation of local additional taxes, in order to enhance local financial autonomy and alleviate revenue-expenditure imbalances.
1. A Fiscal Self-Sufficiency Rate Below 100% Is Normal; It Doesn’t Mean Local Governments Don’t Have Money to Spend
Many people might panic upon learning that all provinces have a self-sufficiency rate below 100% and wonder if local governments are overspending. However, there’s no need to worry.
- Definition of Self-Sufficiency Rate: Simply put, it refers to the proportion of local revenue (general public budget income) that can cover local expenditures (general public budget expenditure). For example, a self-sufficiency rate of 70% means that only 70% of the money earned is enough to cover local expenses, with the remaining 30% coming from other sources.
- Where Do Local Expenditures Come From? In addition to local revenues, expenditures also include central government transfers (equivalent to subsidies), funds leftover from previous years, and money allocated from other budgets. Therefore, a self-sufficiency rate below 100% is normal. After all, local governments are responsible for 85% of the country’s public expenditures (such as education, healthcare, and infrastructure), yet they only collect 56% of the taxes, so the shortfall naturally has to be made up by the central government.
- The Ministry of Finance’s Position: As long as central government transfers are provided in a timely manner, local governments can achieve fiscal balance and there’s no need to worry about not having enough money to spend.
2. Why Is the Local Self-Sufficiency Rate Low? The Root Cause Lies in the Tax-Sharing Fiscal System
China’s current tax-sharing system results in a situation where local governments have less revenue and more expenditures:
- Revenue Side: A portion of the taxes collected locally must be turned over to the central government (for example, the central government takes 50% of VAT and 60% of corporate income tax). By 2025, central government revenues are expected to account for 44% of the national total, while local governments will account for 56%.
- Expenditure Side: Local governments have to handle a larger portion of public expenditures—85% of the country’s public spending is funded by them (such as road construction, school maintenance, and welfare programs). The central government distributes most of its revenues through transfers to local governments to help cover these expenses, ensuring that less developed areas can also provide basic public services (for example, Tibet has a self-sufficiency rate of less than 20% and relies mainly on central transfers).
- The Situation at the Grassroots Level: The lower the level of government (cities and counties), the lower the self-sufficiency rate. In 2024, the average self-sufficiency rate at the county level was only 38%, with some counties having a rate as low as 1% (relying entirely on higher-level subsidies). However, there are also economically strong counties (such as a district in Nanjing) with a self-sufficiency rate of 252% (meaning they earn more than they spend).
3. Declining Self-Sufficiency Rates in Recent Years Have Increased Local Fiscal Pressure
The national local self-sufficiency rate dropped from 55% in 2015 to 50% in 2025, a decrease of 5 percentage points. There are three main reasons for this:
1. Slow Economic Growth: Enterprises are making less money, resulting in lower tax revenues.
2. Sluggish Real Estate Market: Local government revenue from land sales has significantly decreased, as many local governments relied on these funds to cover their expenditures.
3. Tax Cuts and Fee Reductions: To reduce the burden on enterprises, the government has collected fewer taxes, but rigid expenditures such as social welfare and debt interest have continued to rise. With less revenue and the same level of expenses, self-sufficiency rates have declined.
As a result, local finances are in a tight balance—money is just enough to cover basic needs, and in some cases (especially in less developed areas), it’s difficult to even pay salaries.
4. How to Solve the Problem? Central and Local Governments Are Working Together to Increase Revenue and Reduce Expenditures
To alleviate local pressure, both the central and local governments are taking steps to increase revenue and reduce expenditures:
1. Policies Already Introduced to Increase Revenue:
- Reversal of Tax Incentives: Some VAT incentives have been eliminated, and tax collection for high-income groups has become stricter (these taxes are shared between the central and local governments, allowing local governments to receive a larger share).
- Adjustment of Vehicle and Boat Taxes: Starting next year, energy-efficient vehicles and certain new energy vehicles will be subject to full vehicle and boat tax payments (which are local taxes, thus directly increasing local revenues).
2. Future Reform Directions:
- Consumption Tax Reform: Currently, the consumption tax is a central government tax, but in the future, some tax items (such as tobacco, alcohol, and cosmetics) may have their collection shifted to the retail level, allowing local governments to receive a larger share of the revenue.
- Legislation of Local Additional Taxes: The Urban Maintenance and Construction Tax and Education Surcharge will be merged into a “local additional tax,” giving local governments the power to set their own tax rates. This is expected to generate approximately 1 trillion yuan in revenue and become a major source of local taxation.
- Optimization of Transfer Payments: The central government will distribute transfer payments more concentratedly to less developed areas, reducing scattered special subsidies and allowing local governments to use the funds more flexibly.
3. Measures to Reduce Expenditures:
- Cutting Unnecessary Expenses: Local governments are being encouraged to eliminate unnecessary meetings and training programs and implement a “zero-based budget” approach (re-evaluating each expense rather than simply increasing the previous year’s budget).
- The Central Government Taking on More Responsibilities: By issuing more national debt, the central government will take over some responsibilities that were previously borne by local governments (such as major infrastructure projects), thereby reducing local expenditure pressures.
5. Conclusion: A Low Self-Sufficiency Rate Is Not a Problem; The Key Is to Ensure There’s Enough Money to Spend
A local fiscal self-sufficiency rate below 100% is a normal consequence of the current system. As long as central government transfers are provided and local governments make efforts to increase revenue and reduce expenditures, fiscal balance can be achieved. The current issue is the increased pressure in recent years, which is why the central government has introduced a series of reforms. The ultimate goal is to ensure that local governments have sufficient funds to carry out their duties while avoiding debt risks and maintaining healthy fiscal operations. Ordinary people don’t need to worry too much; these reforms are all aimed at ensuring social welfare and economic stability.