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Pilot Project of "Surplus tax" Help Control "Budget Flush"

Pilot Project of "Surplus tax" Help Control "Budget Flush"   
 (Gan Li, Tan Jijun)

On December 14, data of Ministry of Finance shows that China's accumulative general public budget expenditure in the past 11 months of 2015 is RMB 15.0 trillion, accounting for only 87.6% of the total budget. However, the national general public budget expenditure in December is about RMB 2.1 trillion and the fiscal expenditure to be completed in this month is about 2 times of that in other months, which means that the "budget flush" phenomenon may occur in some places. The authors believe that the most effective systematic arrangement to reduce the year-end "budget flush" is to levy the "surplus tax" under the precondition of allowing the budget surpluses to roll into the next year.

Year- end "Budget flush" is a long-standing phenomenon not only in the government departments but also in the public institutions and other institutions relying on the financial appropriation. It may be caused by the following reasons. First, as the total amount of the annual funds is uncertain and cannot be supplemented, the institutions will reduce their spending at the beginning of the year, so as to ensure there are sufficient funds for their operation throughout the year (especially at the end of the year). Second, what's more important is that current budgeting method is mainly based on the "base number plus the increases", i.e., the annual budget of the next year is established on the base of the total expenditure in this year and increased according to a certain ratio. If the budget in current year is not totally spent, the base of the budgetary resources in the next year may be affected, thus directly resulting in the reduction of budget in the future.

The above-mentioned two reasons, together with the regulation that "all unused funds at the end of the year must be turned in", ultimately lead to the phenomenon of "budget flush" by some public institutions at the end of the year.

"Budget flush" at the end of the year is not a unique phenomenon for China, but also commonly seen in the world. For example, according to the findings of a joint research by Harvard University and the University of Chicago two years ago, the procurement expenditure of American government in the last week of the financial year is 4.9 times of the previous average weekly expenditure. Internationally, countries’ main systematic arrangement to control the "budget flush" is to allow the surpluses of the current year or all the previous years to be moved into the funds of the next year ("retention carry-over "). Some developed countries, such as France, Janpan, UK, U.S. and Sweden, even allow some funds of the coming financial year to be advanced.

With reference to the international practices, it may cause excessive surpluses if governments merely rely on "retention carry-over". Therefore, while allowing the budget surplus to enter into the next year, we necessarily need to limit the total amount of funds to be carried over into the next year and making relevant policies for supervision and restriction. To reduce the waste during the budgeting process, we can require the departments to "pay taxes" for the fund surplus based on a certain ratio and allow the rest to roll into the budget for the coming year.

More importantly, the Ministry of Finance should issue relevant regulations to ensure that the amount of the funds carried over into the next fiscal year will not affect the base of budget to be applied for the next year, thus encouraging financial departments at all levels to reduce unnecessary expenditures. Besides, it also helps to control the total amount of the balance of funds to turn in some of it, thus preventing the departments from slashing the expenditures in current year to prepare for the squander in the next year. It can be seen that this system can not only make good use of the "budget flush", but also reduce the waste brought by "budget flush".

However, the difficulty in implementing the system is how to determine the "taxation" ratio for the budgetary surpluses. A rational tax rate will maximize the expenditure efficiency and minimize the waste. The authors suggest that some representative departments can be selected as the pilot departments to determine the tax rate for the balance of funds. After repeatedly evaluating the policy and dynamically correcting the value of the tax rate, we can ultimately obtain an optimal tax rate and then promote it throughout China. (The authors are the director and deputy director of the Survey and Research Center for China Household Finance of Southwestern University of Finance and Economics respectively)


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