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Nudging China Toward Governance Reform

Applying the Rule of Law to the Budget Could Make Government Less Omnipotent

Three recent items of news deserve attention. First, revisions to the budget law were passed late last month. Second, in a speech this month marking the 60th anniversary of the founding of the National People's Congress, Party General Secretary Xi Jinping called for "governance in accordance with the constitution" and pledged to build a government based on rule of law. Third, at a recent Summer Davos session, Premier Li Keqiang again stressed China would stick to the growth strategy of eschewing stimulus in favor of reform.

The three appear unrelated, but are in fact part of China's drive to modernize its governance. And the budget changes can herald a breakthrough in overall reform.

A country's fiscal policy is a pillar of its governance. China's budget law was passed 20 years ago, and the amendments were 10 years in the making. The revised law is now double the size of the old one, with changes in some 82 areas, many of which are worth highlighting.

Analysts and experts have largely focused on the areas that attracted public attention, such as the rules allowing local governments to sell bonds. But an overview of the revisions makes clear that the guiding principles behind the specific changes are no less important.

Perhaps the most significant achievement of the revised law is that it complied with the framework set out by the Third Plenum's reform blueprint. First, it spells out that all government revenues and spending must be accounted for, under one budget.

Second, the law has strengthened oversight by the legislatures at all levels. For example, budget plans and reports that have been approved by the relevant People's Congress or its Standing Committee must be publicized within 20 days, with greater attention paid to the arrangements for fund transfers, the execution of the budget, government debt, and other issues of concern. This is in line with the Third Plenum's call for a rules-based and open system.

Indeed, there is a fundamental shift in thinking. Under the new law, budgeting is no longer a government's private affair, but is subject to rules and regulations that hold the government to account.

For example, the first article of the law requires governments to keep to rules on income and spending, with all items put on the books and subject to supervision. Legislators have also been given a more direct role in supervising budget management, the extent of revenue collection and spending, budget approvals and adjustments, and so on. Furthermore, chapter nine of the law allows civic and legal groups to join the legislators in scrutinizing the budget.

A country's fiscal management directly affects the interests of its citizens. As Xi pointed out in the speech this month, China must not present only the image of a country ruled by the people while the reality is otherwise. This applies to the budget law.

And while discussing Chinese reform at the Davos meeting, Li stressed that change must start with the government itself. He said China must continue to allow power to devolve where possible, deepen tax reform, and push to improve fiscal management.

With continuing social development and changes to its demographics, China's fiscal management must move toward one that is people-oriented and democratic.

The budget law amendments hold the key to building a government based on rule of law and the country's economic transformation. Under the old development model, the government behaves like it is omnipotent, with extensive powers that reach into every corner of our social and economic life. This kind of behavior is abetted by unconstrained fiscal management.

By submitting government budgeting under rule of law, China moves closer to overall governance reform.

The enactment of the revised law is just the first step. Given that the drafting of the law took a whole 10 years before it was passed, we can expect another major battle during its implementation, with interest groups seeking to protect their own.

In an article published a day after the law passed, Finance Minister Lou Jiwei said the next step of the reform was to fine-tune fund transfers, government payments, government debt management, budget reporting, and so on.

At the end of the day, the effectiveness of the new law has everything to do with the success of reforms as a whole. For example, only the central and provincial governments implement a differentiated tax structure. Precisely because the roles and responsibilities of each level of governments have yet to be sorted out, implementing the budget law would be a challenge in some areas.

To succeed, the government must be clear in its understanding, skillful in its execution, and be able to seize the right timing for change. And it must not back down in the face of opposition.