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Improve Fiscal and Tax Systems and Policies and Promote Transformation of Economic Growth Mode


By Lu Zhongyuan, Development Research Center of the State Council

Research Report No. 010, 2007

I. Key Areas for Changing the Mode of Growth in the New Development Period

The first 20 years of this century will experience a new period for China's development, during which the country is comprehensively building a well-off society. In accordance with the two strategic plans for implementing the scientific approach to development and for building a harmonious society, China's development in this period should place greater emphasis on the humanistic character and the requirement of social harmony, on the overall coordination of development, on the sustainability and continuity of development, and on the systematic guarantee for scientific development. Transforming the extensive mode of economic growth is a crucial link for implementing the scientific approach to development, for innovating the mode of development and for enhancing the quality of development.

The 11th Five-Year Plan sets out a basic requirement for innovating the mode of development. It is a 24-Chinese-character principle, namely relying on scientific development, emphasizing independent innovation, improving systems and mechanisms, and promoting social harmony. In addition, the plan also defines clear targets for improving the quality of development and transforming the mode of growth in the next five years. On the basis of improved structure, enhanced efficiency and reduced consumption, the GDP will grow by 7.5% annually on average and the per capita GDP will double the 2000 level by 2010. The efficiency of resource utilization will be visibly higher, energy consumption for unit GDP will be about 20% lower than at the end of the 10th Five-Year Plan, water consumption for unit industrial added value will be 30% lower, ecological degradation will be basically contained, and excessive farmland reduction will be effectively controlled. These targets are highly specific and also quite difficult to achieve. For example, the target for unit GDP energy conservation means that the rate of energy conservation must reach about 4.4% annually on average during the 11th Five-Year Plan. This target is slightly higher than the 4.1% annual energy conservation rate during the 1980~2004 period. In particular, the fact that the rate of energy conservation has decreased in recent years has made this target even more difficult to achieve.

To speed up transforming its mode of economic growth in the next five years, China should place emphasis on energy conservation, consumption reduction, pollution reduction, efficiency enhancement and safety in production. At the same time, the country should vigorously upgrade the technological level of its industries and improve and upgrade its industrial structure. Only by emphasizing efforts in these areas can China constantly increase the technological contents and improve the quality of its economic growth and transform as soon as possible economic growth mode characterized by high input, high consumption, high emission, low output, low efficiency, insecurity and unsustainability. Fundamentally, if China is to accelerate transforming economic growth mode, it urgently needs to take independent technological innovation as a powerful driving force and a basic foundation, and needs to continue market-oriented reforms and allow the market to play basic roles in allocating resources. This will provide a reliable systematic guarantee for raising the efficiency of resource usage and allocation. It is an important experience the country has drawn from the process of transforming economic growth mode over the past 10 years.

As early as in the 9th Five-Year Plan, China decided to transform its extensive mode of economic growth to an intensive one. The decision was then made to address the problems such as overheated investment, low investment efficiency and serious low-level expansion. It emphasized building the nation through science and education and enhancing labor quality. The intensive mode of economic growth emphasizes quality and efficiency. But the decision failed to come up with substantial measures and to clearly define the priority areas. In the 10th Five-Year Plan, China decided to conduct a strategic economic restructuring, increase the contribution of scientific advancement and structural optimization to economic growth, and pay greater attention to resource and environmental issues. Over the past 10 years, the country has made a measure of achievements in changing economic growth mode, with the intensity of energy consumption and pollutant emission being somewhat reduced. But compared with the level of developed countries and even with the world's average level, China still lags far behind. Its extensive mode of economic growth has not been fundamentally changed. The contradiction between fast economic growth and weak resource and environmental tolerance has become increasingly prominent. Some resource and environmental indicators have become slightly worse. In the 11th Five-Year Plan, China will place even greater emphasis on conserving energy and other resources and enhancing the efficiency of resource utilization, on carrying out independent innovation and increasing the technological content of economic growth, on protecting the ecological environment and developing the recycle economy, on taking a new approach to industrialization and promoting the optimization and upgrading of the industrial structure, and on intensifying reforms in more difficult areas and forming systems and mechanisms to foster the change in economic growth mode. We may say that for now and for a considerable time to come, the priority areas to speed up transforming economic growth mode will be more clearly identified and the policy measures to this end will be constantly improved.

II. Fiscal and Tax Tools Are Vitally Important to Transforming Economic Growth Mode

In implementing the scientific approach to development, accelerating the transformation of economic growth mode and making development in various fields more comprehensive, coordinated and sustainable, the efforts to reform the fiscal and tax systems and improve the fiscal and tax policies have become more and more important.

The existing tax-sharing fiscal system and tax system focusing on income tax have become important components of the new socialist market economy. The "construction-oriented finance" prevalent in the period of planned economy is being transformed into the public finance under the market economy. This has provided necessary conditions for the governments at all levels to strengthen their public service function and weaken their general economic construction function. But this transformation is yet to be completed. At present, the ongoing reform of the fiscal and tax systems are still incomplete. There still exist some system factors that lead to direct government intervention in the economy, which is unfavorable for changing government functions or for transforming economic growth mode. One, the public finance system is not sound and the transformation of the old construction-oriented finance is not as effective as expected. Government spending on general economic construction still oversteps its bounds too often, and the spending designed to make up the "functional absence" in the public service sector remains insufficient, whose proportion has even been lowered. During the 1998~2005 period, the share of fiscal expenditure on science and technology, education and healthcare, dropped from 20.2% to 17.6%.


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