Dichotomy of govt & people's income

By Chen Zhiwu (China Daily)
Updated: 2010-04-27 13:22
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This year's Government Work Report shows China's GDP reached 33.5 trillion yuan ($4.9 trillion) in 2009, up 8.7 percent from 2008. The fiscal (budget) revenue topped 6.85 trillion yuan, up 11.7 percent. And the urban per capita disposable income was 17,170 yuan, an increase of 9.8 percent, while the rural per capita net income was 5,153 yuan, up 8.3 percent.

China's 2009 fiscal revenue of 6.85 trillion yuan was equal to the year's total disposable income of 400 million urban residents. It was equal to the entire net income of 1.33 billion farmers, too. The budget revenue, however, does not include the 1.5 trillion yuan income from land transfer, let alone the profits of the innumerable State-owned enterprises (SOEs) and the income accrued from selling State-owned assets (SOAs).

The country's fiscal revenue in 2008 was equivalent to the income of 390 million urban residents or the net income of 1.29 billion farmers that year. In contrast, the revenue in 2002 was equal to the income of 250 million urban residents or 760 million farmers, and the 1996 revenue was equal to the income of 150 million urban residents, or 380 million farmers.

From the statistics, we see that since 1995, the basic distribution layout of national income between the government and civilians has not changed. Instead, it has continued to increase for the government - even during 2008 and 2009 when the economy suffered because of the global financial crisis. The growth rate of fiscal revenue has been higher than the GDP and residents' income growth, which is inconsistent with the 17th Congress of the Communist Party of China's objective to adjust the income distribution structure.

So, why has China's fiscal revenue kept soaring despite the impact of the global financial crisis?

First, the government's control over SOAs and land is responsible for the lower private share of the national income. The difficulty China faces in boosting domestic demand is related with State ownership of enterprises and assets and the role the government plays in the economy. In a society where the majority of the property (including land) is owned by the State - irrespective of how much profit SOEs make or how much land prices appreciate - ordinary people cannot share the income from assets because most of it goes to the government.

Second, the income level of Chinese people is low - relatively lower than their counterparts in other countries. But the tax rate is not. Because of the lack of a sound social security network, unemployment insurance, social welfare projects, and inadequate expenditure on healthcare and education most Chinese have to save money for emergencies and are thus left with little money to spend.

Third, Tsinghua University professor Qin Hui has said that China's rapid development during the past three decades has benefited from its "advantage in low human rights". That workers rights and interests will be infringed upon if labor unions or other self-organized institutions cannot help them get their due sounds like a reasonable argument.

Fourth, China's tax collection and fiscal expenditure are not examined by the National People's Congress (NPC), and that plays a role in keeping people's income low. To solve these problems and transform China's growth pattern, we have no choice but to carry out fundamental institutional reform: Promote democracy, implement tax reduction and tax reimbursement policies, and break the monopoly of SOEs.

For that, the government's fiscal budget should be first supervised. Neither the NPC nor the Chinese People's Political Consultative Conference has been able to curb the government's power to impose taxes and or reduce the fiscal budget. Effective supervision could prevent excessive government funds from becoming "hardware" investment, and guide more government spending toward programs such as medical care, social security and basic education in order to improve people's lives.

Second, public hearings and media discussions should be held before adding new taxes or raising existing tax rates. If the government's power to impose taxes is not curbed, people's income growth cannot synchronize with GDP growth, and the government's share in the national income will continue to increase.

Related readings:
Dichotomy of govt & people's income Full Text: Report on the Work of the Government
Dichotomy of govt & people's income Government work report
Dichotomy of govt & people's income Highlights of Wen's government work report
Dichotomy of govt & people's income Key figures in government work report by Premier Wen

Third, SOAs should be truly "shared by all the people". State-owned land and other resources and SOEs' assets make the assets owned by governments at various levels nearly three-fourths of the total social wealth. For the vast majority, who cannot share the gains brought about by the appreciation of SOAs and profits of the SOEs, wages are the only source of income. And the growth rate of wages has always been lower than that of the GDP.

Finally, unless the appreciation of SOAs and the profits made from them is included in the consumption budget of ordinary people, there will not be enough wealth to promote China's private consumption. This is why despite the decade-long call to increase domestic demand and transform the economic growth pattern the proportion of private consumption in GDP has declined instead of rising.

How can the economic growth pattern change in a society in which the people are poor even if the state is rich?

The author is a professor of economics at Yale University.