China Plans Fiscal Overhaul to Fix Crisis in Local Government Finance

Sluggish economic recovery and property slump may force revision to revenue sharing

In the wake of China’s slow post-pandemic economic recovery and local governments’ shrinking revenue from land sales amid a prolonged real estate slump, the country is launching an overhaul of its fiscal system to redefine central-local financial relations.

The reform push, outlined at the Communist Party’s Third Plenary Session in July, calls for a series of tax and budgetary changes to be completed by 2029. Beijing aims to expand local governments’ financial autonomy, adjust tax-sharing mechanisms and increase the central government’s spending share. The changes build on past efforts, including the landmark 1994 tax overhaul that strengthened central control. But current economic conditions are far more challenging, with local governments burdened by excessive spending obligations and dwindling income streams. Despite growing central transfer payments—now exceeding Beijing’s own fiscal revenue—local governments have little discretion over these funds, exacerbating financial stress. Some regions have even struggled to meet basic expenses like civil servant salaries.

Experts said the urgency for reform is widely acknowledged, but the path forward is unclear. The biggest challenge is how to balance central oversight with local financial independence. Questions remain over whether to raise taxes, redistribute revenue or shift more spending responsibilities to Beijing. Adjustments to the tax-sharing system, particularly for value-added and consumption taxes, are also under debate.