The road to public finance reform

Four months ago, the Third Plenum of the 18th Central Committee of the Communist Party of China adopted the decisions on China's reforms in the new stage of its socio economic development. Such vision was endorsed by the National People's Congress earlier this month. I was impressed at the comprehensiveness and clarity of the envisaged reforms.

One of the key directions of the reforms is to assign a "decisive role "to the market in the allocation of resources. On this point, I would like to emphasize that a greater role of the market does not mean that the role of the government will be weakened. On the contrary, a well-functioning market relies on the capacity of the government to ensure social fairness, provide public services, enforce regulations, and address market failures including externalities.

For this reason, public finance reforms are particularly important to ensure that the government can fulfill its responsibilities effectively with adequate provision of financial resources. Given China's changing socioeconomic context, its public finance reforms have to take into consideration factors such as the country's transition to innovation-driven growth which will require more investments in human capital. Rapid aging of Chinese population with reducing share of working population in the total, demands strengthening of social safety nets. Financing these efforts will require adjustments in the tax system to enhance revenue. The tax revenue in China is only 22 percent of GDP as compared to 34 percent in OECD countries.