In today's world, environment has become a major issue closely related to the future of all countries and peoples in the world. Protecting the environment and our planet has become the unsinkable responsibility for all human beings. Environmental audit as one of the modern means of environmental management is put up against the seriousness of current environmental problems. In China, the introduction of environmental audit is of great significance in the efficient and effective use of natural resources and reasonable allocation of various key production elements. Environmental audit also plays an important role in accelerating the readjustment of industrial structure and in achieving a sustainable development of the economy. This article explores from a theoretical perspective and explains from a practical perspective the importance of environmental audit in China.
To ensure the healthy, stable and sustainable development of the economy, a favorable environment is necessary. Protecting the environment and achieving sustainable development of the economic and resource environment is a basic state policy of China as well as the due social obligation of all enterprises. As a part of the government function, the SAI has the responsibility to effectively monitor, evaluate and certify relevant enterprises or projects on how much pollution they have made to the environment and how the pollution treated. The SAI shall also ensure the soundness and effectiveness of the environmental management system through auditing relevant government departments in terms of their fulfillment of environmental obligations.
The legal status of audit institutions in carrying out environmental audit has been clearly stipulated in both the Constitution of the People's Republic of China and the Audit Law of the People's Republic of China. For example, Article I of the Audit Law stipulates that one of the major aims of auditing is to "safeguard the financial and economic order, promote the building of a clean government and ensure the healthy development of the national economy". The SAI, as an important part of the macro-control system and a high-level monitoring organ, plays an irreplaceable role in developing the economy and protecting the environment by conducting environmental audit, which satisfies one of the basic requirements of government auditing.
External diseconomy refers to the negative influences arising from some enterprises or individuals, but falling on other enterprises or individuals who receive no compensation from the former who controlled the influences. For example, the waste gas discharged by a factory has polluted the environment of the area nearby; the residents bore the harmful effects to their health but received no compensation from the polluting factory. There are two ways to change this unreasonable situation, i.e. government actions and market means. Where no mature market system is available, people can only rely on the government actions to get rid of the negative influences of the external diseconomy. Government actions fall into two major groups- administrative control and economic stimulation. The former is realized through promulgation of relevant laws and government regulations/standards governing the means and quantity limit of the diseconomy the producer is allowed to produce. Economic stimulation, on the other hand, includes these measures such as imposing charges on actions affecting the environment negatively and granting financial subsidies. As China still does not have a mature market economy and is still experiencing the transition from planned to free market economy, government actions, including government auditing, play an important role in the economic development. The effective implementation of the environmental protection measures, to a large extent, needs the support of environmental audit whose major role is monitoring the responsibilities of environmental control. Through the control of the environmental audit, the negative effects could be reduced to a minimum level, and the effectiveness of the audited bodies and that of the society could be promoted higher.
From a macro perspective, for a long time, some countries have been one-sidedly pursuing for GDP increase by making economic development their priority and have caused disastrous results. If we deduct the cost of environmental protection and environmental damage from the GDP of the same period, the GDP these countries achieve might become too insignificant. As a trend of development, the model of achieving temporary economic increase at the great expense of polluting the environment and damaging human health will gradually be eliminated in the world. From a micro perspective, as enterprises only take into account these artificial costs and tend to ignore these resource costs and environmental costs when calculating the costs of their products. The false increase of profits at the expense of using the environment free of charge is not conducive to the long-term development of enterprises. Therefore, conducting environmental audit extensively can impel us to take full consideration of the cost of social ecological resources and calculate accurately the net national product and the cost of production of enterprises.
The theory of sustainable development is rather new, emerged with the extensive discussion about the environment and development in the world since the 1980s. In the evolution of the theory, the following agreements have been reached despite the various explanations available by different research organizations and scholars. First, it is stressed that human economic actions should be in harmony with the natural development rather than achieving development through exhausting natural resources and polluting the environment with over-exploited technologies and investments. Secondly, it should be emphasized that while developing and consuming, people should make themselves and the future generations have equal opportunities, and should not make the future generations suffer from the damaged environment resulting from the drop of the environmental quality. Thus, sustainable development is a development model based on the modification of the traditional economic development model and is an inevitable choice by the history. In 1992, China, in response to the call made by the World Conference on Environment and Development, put up 10 policies with achieving sustainable development as the prerequisite, taking a major step in the transition from traditional environment development model to the strategy of sustainable development. Thereafter, on the basis of its practical situation as a developing country with a large population, China worked out the general strategy, countermeasures and action plan of sustainable development, with relevant departments and local governments also made their action plans for sustainable development following the central government. Thus, sustainable development is practiced in China's economic development. Environmental audit was first introduced at this time, to adapt to the new economic increase model, and to evaluate and certify the government and relevant organizations in their fulfillment of the responsibilities of environmental management.
At the time being, it is gratifying to see more and more people in China have realized the importance of environmental protection and environmental auditing, thanks to the great efforts of the government in promoting environment awareness among the public. As the supreme audit institutions in China, CNAO is fully aware of the obligations it should assume and has devoted increasing efforts in protecting the environment through environmental auditing. Within the CNAO, a special Environmental Audit Department has been established and Chinese environmental auditors are working hard to fulfill their role in achieving the harmony between human being and the environment. It could be predicted that the role of environmental audit will become even bigger in the development of the national economy with more and more successful environmental audits.
In recent years, internal audit organizations in China have started to get involved in risk management regarding it as an important aspect of internal audit. This practice has become universal in the international circle of internal audit, so much so that in its 1999 definition of internal audit the Institute of Internal Auditors (IIA) regarded effectiveness of evaluating and improving risk management and control as an essential part of internal audit.
1.1. Risk, Risk Elements, Risk Accidents and Losses
Risk refers to the uncertainty that exists in certain context and within prescribed period of time, leads to expenses, losses and damages and can be known and controlled. Risk is objective, universal, inevitable, recognizable and controllable. In its process of formation, risk involves risk elements, risk accidents and risk losses.
Risk elements refer to elements that arouse or increase the occurrence of risk or influence the severity of risk. There are three types of risk elements.
Physical elements. These are direct conditions increasing the occurrence of risk or influence the severity of risk.
Ethic elements. These are elements that deliberately cause risk or extend risk losses due to personal dishonesty or malicious intentions.
Psychological elements. These are elements that lead to increase of risk or severity of risk losses due to subjective negligence or fault.
Risk accidents are accidents directly or indirectly leading to losses in risk management. Therefore, such accidents are called media of losses.
Losses refer to non-deliberate, non-planned and non-predicted reduction of economic value, usually measured in monetary terms. Losses can be direct or indirect. Direct losses are substantial losses while indirect losses include losses in terms of extra expenses, revenue losses and liability losses. Losses in terms of extra expenses refer to expenses incurred for necessary repair or relocation. Revenue losses refer to reduction in profits due to damage of facilities and consequent failure to produce goods. Liability losses refer to liability of compensation arising from errors or accidents that cause physical injuries or infringement on property.
For relationship between risk elements, risk accidents and risk losses, both H.W.HEINRICH and W. HADDON believe that risk elements lead to risk accidents while risk accidents give rise to losses. However, H.W.HEINRICH emphasizes that the successive fall of the three aspects is caused by human errors. W. HADDON holds that losses arise because the pressure born by the organization is larger than its capacity, i.e., physical elements play an essential element.
1.2. Risk and Risk Management
Risk management is a special management function and a management science that is developed in combination with previous experience and contemporary scientific achievements for the purpose of pursuing safety and happiness. As for the concept of risk management, JAMES C. CRISTY of the USA believes that risk management refers to all efforts exerted by enterprises or organizations to control contingent losses and preserve revenue generation ability and assets. C. ARTHUR WILLIAMS JR. and RICHARD M HEINS are of the opinion that risk management is a management method that adopts risk assessment, measurement and control to minimize risk losses at the lowest cost. CHEN JIAGUI of P. R. China thinks that risk management is a scientific management method by which enterprises identify, measure and analyze potential contingency or losses, carry out effective control and handle risk economically and reasonably for the purpose of bringing forth maximum safety assurance. From the above definitions of risk management, we can draw the following conclusion:
Risk management is a systematic process which covers risk identification, measurement and control;
Risk management is aimed at controlling and reducing losses, and promoting economic benefits or social effectiveness of relevant units or individuals;
Risk management is a method of management.
Internal audit concerns itself with risk management for the following major reasons.
2.1. Increasing Risks Faced by Enterprises
In recent years, with social and economic development, especially with the furtherance of economic globalization, the operating context of enterprises has become increasingly complex while their operating risks have increased enormously. The arrival of knowledge economy worsens risks faced by enterprises. Therefore, reduction of risks faced by enterprises is critical to the realization of corporate goals and thereby of critical concern to enterprise management. Internal audit aims at increasing corporate value and improving corporate operation. Internal auditors are management consultants to their enterprises. It follows naturally that internal audit departments and internal auditors have a role to play in risk management.
2.2. Internal Audit's Longing for Development
Internal audit departments are always looking for new areas that are important to enterprises in order to play a more important role in their enterprises. The unprecedented emphasis placed on risk by enterprise management has provided an excellent opportunity for the development of internal audit. The participation of internal audit in risk management will enable internal audit to update and increase its role in the enterprise. For this reason, IIA has exerted relentless efforts to promote such participation and included risk management in the definition of internal audit as an essential component.
2.3. Ability of Internal Audit to Play a Unique Role in Risk Management
Internal audit can play three roles in risk management.
(I) Internal audit can manage risk from an objective and overall perspective
Risk is infectious, non-symmetrical and easy to pass on in enterprises. In another word, risk caused by one particular department or consequences arising from negligent risk management by such a department will pass on to other departments ultimately leading to a difficult situation for the whole enterprise. For this reason, some departments will incur the risk of unethical transfer as risk is at least not borne individually by the originating department. For instance, in order to save purchasing cost, the purchasing department tends to ignore the review of material specifications, types and quality, or deliberately buy defective goods. Such hidden risk will be reflected in the workshops or sales department, leading to ultimate enormous losses to the enterprise. Therefore, the understanding, prevention and control of risk should be considered from an overall perspective.
Internal audit organizations do not participate in specific business activities, thereby independent of business management departments. For this reason, internal audit is capable of recognizing risk from an overall and objective perspective and putting forward suggestive measures for risk control.
(II) Internal audit can control and instruct enterprise risk strategies
An internal audit department is in-between enterprise directorate, general director and various functional departments. Therefore, internal auditors are capable of acting as coordinator of long-term enterprise risk strategies and decision-making. Through coordination of long-term plans and short-term realization, internal auditors can adjust, control and instruct enterprise risk management strategies.
(III) Suggestions put forward by internal audit are more likely to arouse attention
Although some enterprises have their own risk management departments, they are a functional department reporting to the general manager without much independence. While producing opinions, such departments are under pressure of the management authorities. For instance, even if the risk management department finds that a certain investment project is too risky for implementation after project evaluation, the general manager will still promote its implementation in order to inflate his own performance record. Thus the risk management department is restricted in its function. With its independence from the management authorities, internal audit can directly report its opinion of risk assessment to the directorate, thus increasing attention from the management authorities.
2.4. Influence of External Audit
In recent years, CPAs have been extending their scope of business continuously. Risk assessment is a major component of their newly added assurance service. However, this will not influence internal audit, because internal audit departments and internal auditors enjoy advantages beyond the CPAs. For example, internal audit departments and internal auditors have a better understanding of enterprise risks, and have a more acute sense of responsibility towards the prevention of enterprise risk and realization of enterprise goals. Compared with external audit, internal audit is more qualified to do this job.
Risk management conducted by ordinary risk management departments and that by internal audit departments are both inter-related and different. Both are aimed at reducing enterprise risk. However, the two differ in their roles in risk management.
Risk management carried out by internal audit departments is a re-monitoring process on the basis of risk management conducted by other departments. Such risk management process covers three aspects:
3.1. To assess sufficiency of risk identification
Risk identification refers to the process of judging, classifying and certifying the nature of existing and potential risks. In other words, risk identification determines what risks are faced or will be faced by the enterprise. Internal auditors need to assess whether the identified risk is sufficient, i.e., whether major risks faced by the enterprise have all been identified, and to find what risks have not been located. Methods applied herein include decision-making analysis, feasibility analysis, statistical forecast analysis, input-output analysis, flow-chart analysis, asset-liability analysis, cause-effect analysis, loss list analysis, insurance investigation and expert investigation.
3.2. To assess appropriateness of risk measurement
Risk measurement refers to the ultimate estimation of risk, discovery of major risk sources and evaluation of potential risk influence through the combination of qualitative and quantitative measures in order to produce relevant and effective counter measures. Internal audit departments and internal auditors should re-inspect the results of measuring existing risks so as to determine whether such measurement is appropriate and correct inappropriate estimates. Major methods include investigation, expert score rating, risk return (or adjustment of standard discount rate), risk equivalent, interpretative analysis, and Monte Carlo simulation.
3.3. To assess sufficiency of risk prevention measures and put forward measures for improvement
Risk prevention measures are measures adopted for reducing identified and measured risks. They are also referred to as selection of risk management means. Internal audit departments and their auditors should review risk prevention measures adopted by relevant departments to see whether such measures are sufficient and appropriate. Where such measures are inadequate, internal audit departments and internal auditors should put forward improvement suggestions in order to reinforce risk management and reduce risk losses. Applicable methods include risk avoidance, loss control, separation of risky units, risk transfer by non-insurance means (including transfer risk sources, conclusion of accountability exemption agreements, and utilization of accountability transfer clauses in contracts), and insurance.
In conclusion, it is inevitable for internal audit to get involved in risk management due to its operating environment and its own characteristics. In risk management, internal audit departments mainly re-supervise risk management that is completed by other relevant departments. However, this does not mean that internal audit departments can in no way become a direct manager of risk. Where necessary, such departments can directly carry out risk management. The participation of internal audit in risk management is brand new issue requiring lot of exploration and discussion.
1.1. Basis for Establishing China's Inter-Government Transfer Payment System
Theoretically, the inter-government transfer payment system in China was established for three major reasons, i.e., the requirements of local governments in fulfilling their duties and responsibilities, the public pursuit of equality and the demand for relatively balanced economic development.
1.1.1. The Requirements of Local Governments in Fulfilling Their Duties
As an extension of the central government, local governments in China not only carry out policies and orders issued by the central government to maintain national integrity and uniformity but also need to make their own decisions according to their local situations (including residents' preferences) to minimize errors of central policies. Where local governments are faced with insufficient financial resources in their attempts to solve certain problems, it is necessary for the central government to provide the former with subsidies, thereby giving rise to local demands for central financial resources.
1.1.2. The Public Pursuit of Equality
In the modern society, it is people's basic rights to pursue equality. By establishing fair competition rules, the government can produce equal opportunities of competition and ensure equality of the competing process. By taxation and transfer payment, the government can match people's efforts with their income, control income disparity to an acceptable extent and produce relatively fair results. However, due to disparity of economic development caused by differences in local resources and features, local governments differ greatly in their financial resources. Therefore, only when local financial resources are coordinated and balanced can residents of various localities obtain similar public service.
1.1.3. The Demand for Relatively Balanced Economic Development
Relatively balanced development of a national economy is not only the requirements of economic development itself but also the basis assurance for existence of that particular nation. To achieve such balanced economic development, it is necessary to transfer some resources from the better-off regions to the poverty-stricken regions. Such transfer should be carried out in an orderly manner under central control.
1.2. Goals for Establishing the Inter-Government Transfer Payment System
The inter-government transfer payment system has its ultimate and immediate goals.
1.2.1. The Ultimate Goal of the Inter-Government Transfer Payment System is to Help Realize Social Equality
Social equality is two-fold in implication.
1.2.2. The Immediate Goal of the Inter-Government Transfer Payment System is to Realize Relatively Balanced Economic Development
Relatively balanced economic development is the requirements of equality and efficiency. From the perspective of efficiency, balanced development of the economy will, on the one hand, reduce ineffective movement of resources and costs of transactions. On the other hand, such balanced development will promote competition between backward and developed regions, consequently improve the overall efficiency of market allocation of resources and facilitate the acceleration of economic development and increase of overall economic volume. From the perspective of equality, balanced development of the economy is a prerequisite for realizing social equality. Empirical experiences have shown that it is impossible for realize social equality in a country where abnormal disparity exists in regional development. Only when the economy has reached balanced development can the backward regions obtain the strength to provide the fundamental public services for their residents, can the central government carry out readjustment between the backward and advanced regions and realize social equality.
The realization of the double goals of social equality and balanced economic development demands the equalization of public finance capacities at various levels. Only by equalizing public finance capacities can the central government ensure the following
2.1. Analysis of China's Current Inter-Government Transfer Payment
The study of China's inter-government transfer payment system is indispensable from China's public finance system. The latter is the basis of the former. In China, the public finance system has undergone the evolution of four forms:
Uniform receipt and uniform payment
Hierarchical management under uniform leadership
Hierarchical contractual responsibility
Split taxation
The current inter-government transfer payment system in China is based on the split taxation system that commenced in 1994.
2.1.1. Division of Duties Between China's Central and Local Governments and Their Respective Scopes of Expenditures
In China, the central government is responsible for national defense, foreign affairs, adjustment of the national economic structure, coordination of regional development and macroscopic readjustment and control. Local governments are responsible for local matters closely related to their residents. According to such division of duties, the scope of public expenditure at the central level covers the following:
Capital construction investment under uniform central leadership;
Technological renovation and experimental manufacturing of new products by enterprises directly subordinated to the central government;
Geological exploration;
Agricultural subsidies arranged by central public finance;
National defense;
Armed police force;
Foreign affairs and international assistance;
Administrative expenses at the central level;
Domestic and international debt-service expenses born by the central government;
Expenses of the police force, the procuratorate and the courts born by the central public finance;
Central expenses incurred in areas of culture, education, public health and science.
Local expenditures cover the following aspects:
Locally-financed investment in capital construction projects;
Technological renovation and experimental manufacturing of new products by local enterprises
Agricultural subsidies arranged by local finance;
Urban maintenance and construction;
Some expenses of the armed police force;
Administrative expenses at the local level;
Expenses of the police force, the procuratorate and the courts born by local public finance;
Local expenses incurred in areas of culture, education, public health and science.
Price subsidies;
Other expenses
2.1.2. Division of Receipts between Central and Local Governments
According to the classification of taxation after the reform of tax reform, China has defined three types of taxation.
Central taxation: all taxes necessary for maintaining national interests and implementing macroscopic readjustment and control;
Local taxation: all taxes closely related to various localities and their economic development and suitable to be levied and managed at local levels;
Common taxation shared by the central and local governments: major taxes directly related to economic development.
Fixed central revenues include the following:
Fixed local revenues include the following:
Tax revenues shared by the central and local government cover the following:
2.1.3. Implementation Forms of China's Inter-Government Transfer Payment
Current intern-government transfer payment in China mainly is implemented in four forms.
(I) Balanced appropriation from central to local public finance.
This is an ordinary form of transfer payment computed and distributed by the use of relevant formulas. The specific process is as follows:
(II) Tax refund.
To protect local vested interests, amounts of tax refund are verified according to the 1993 amounts local public finance paid up to central public finance (Excise tax + 25% VAT Z
Revenue from central appropriation). For each 1% increase of revenues from excise tax and VAT after 1994, tax refund from the central to the local public finance will increase by 0.03% on the previous year base. Where after 1994, revenues paid up from local to central public finance fail to reach the 1993 base amount, the central government will refund the real amount to local governments.
(III) Special subsidies
Subsidies from the central to local public finance provided for in the original system shall be carried forward unchanged. While special appropriations from the central to local governments are maintained, overall amounts in this concern will not be increased.
(IV) Formula-computed subsidies
Since 1995, the central public finance has implemented the transitional transfer payment method by taking certain proportions out of the annual increase of central revenue, selecting some objective and policy elements and adopting normative measures. This is the first time for China to estimate local revenue generating capacity and expenditure demand according to formulas based on objective variables. This method helps determine transfer payment from central to local public finance symbolizing an important progress in the standardization of China's inter-government transfer payment system.
2.1.4. Determining Amounts of China's Current Inter-Government Transfer Payment
In China's present inter-government transfer payment, 4/5 belongs to unconditional appropriation with only 1/5 being conditional. Among the unconditional appropriation, 80% is tax refund from the central to local public finance. Therefore, to determine amounts of inter-government transfer payment mainly means determination of such tax refund.
2.2. Achievements of the Current Inter-Government Transfer Payment System
China's inter-government transfer payment system established after the 1994 split-taxation reform is a big step forward towards a transfer payment system under the public finance context.
2.3. Problems Existing in the Current Inter-Government Transfer Payment System
Because to a large extent the present transfer payment system is an extension of the distribution layout of the previous system with considerable attention paid to care of the existing interests, the system is deficient in some aspects unable to satisfy requirements of public finance.
An effective transfer payment system should help departments of public finance at various levels fulfill their functions and realize their balance between revenues and expenditures (both horizontal and vertical) and encourage governments at various levels to increase revenues and cut down expenditures. Meanwhile, the transfer payment system should be stable and transparent. Because of these, a transfer payment system adapted to the modern public finance system should reflect the following principles.
3.1. The Principle of Integrating Equality with Efficiency.
This is the fundamental principle of establishing a transfer payment system. Equality is used in terms of both horizontal and vertical balances for all residents in all regions. The transfer payment system should ensure balance between revenues and expenditures for governments at all levels so that all regions will have equal financial resources to provide public services. Efficiency implies that the establishment of the transfer payment should not impede effective operation of the market economy but make up market deficiencies to promote local economic development and maximize welfare benefits of all residents.
3.2. The Principle of Integrating Scientific Methods with Transparency
A transfer payment system under public finance should first of all cater to features of public finance and facilitate the governments' fulfillment of their duties. The system should also be objective by adopting measures such as formula computation. Secondly, the system should cater to its national characteristics. This requires that the transfer payment system should conform to national characteristics in its structure, size and operating means. Meanwhile, such a system should be reasonable and operable with the whole process from establishment to operation being open, transparent and easily monitored.
3.3. The Principle of Standardization and Legalization
Standardization is the internal requirement of all systems. Because China's previous transfer payments were disorderly and over-influenced by deliberate elements, it is necessary to standardize the transfer payment system legally both in form and in contents to enable normal operation of the system and ensure efficiency and effectiveness of the operation.
According to current international experience, there are two basic models of inter-government transfer payment: vertical transfer payment from top to bottom and overlapping model (both horizontal and vertical) transfer payment.
Under the vertical model, the higher-level governments will first gather financial resources from various localities and then distribute some of the gathered revenues to different localities according to the latter's status of public revenues and expenditures and the requirements of implementing macroscopic and readjustment policies. This model is easy to operate and is mainly imposed by higher-level governments. It is conducive for implementation of the state's macroscopic and readjustment policies. However, with sufficient central financial resources as its prerequisite for smooth operation, this model is often handicapped by low transparency, poor stability and randomness.
In the overlapping model, however, the central government uses uniform legislation to conduct vertical transfer payment directly and organizes direct transfer payment among different localities. Therefore, this model is conducive to solving insufficient financial resources in economically backward regions and promoting simultaneous development of both backward and advanced regions.
Although both models have their own respective advantages, the overlapping model suits China better. Only when central public revenue occupies an absolute advantage in the national public revenue can the vertical transfer payment model ensure that central public finance has adequate financial resources to balance regional financial disparity after the realization of vertical balance between central and local public finance. In France, Japan and Australia, the vertical model is adopted under the context that central public revenue takes up about 70% of national public revenue. China, however, is lagging far behind this figure. The overlapping model, in comparison, can effectively relieve the conflict between the limited central public revenue and the need to promote horizontal balance of financial resources. Through horizontal transfer payment among regions, certain proportions of public revenues in better-off regions are taken out to subsidize poverty-stricken areas, thereby relieving pressure on central public finance. Meanwhile, this model facilitates efficient and accurate appropriation and clearing of funds and enjoys easy operation and high transparency. The central government focuses on solving issues related to vertical misbalance. Through special subsidies and other special means, funds can be invested in projects that can better reflect intentions of the central government, strengthen macroscopic readjustment and control, and maintain authority of the central government.
According to the principles of inter-government transfer payment under the modern public finance system, the establishment of an effective transfer payment system should enable all regions to provide similar public services on the basis of improving efficiency of public revenues and expenditures. Therefore, the core of the transfer payment system is "what method and what formula should be used in allocating equalized appropriations to local governments". Both theoretical analysis and practical experience has proved that the establishment of a standard transfer payment system depends on formula-computed equalized transfer payment. We usually refer to it as transition from "base-amount method" to "factor-analysis method".
However, due to the misbalance of economic development in China, regions differ in their levels of public service which are difficult to be equalized within a short period. Therefore, the transfer payment system should be designed to generate basic criteria for public finance equalization of different periods according to different political, social and economic conditions of the times. At present, the establishment of a formula-computed equalization transfer payment is still subject to the following constraints.
For the above reasons, China has difficulty in establishing a standard transfer payment system in the near future. The wiser way is to do it step by step with different goals set up for different periods towards the ultimate goal of social equality. The more recent aim is to ensure that backward regions will reach the minimum criteria of public service first and then gradually extend its scope of equalization and social security level.
To be more specific, China needs to handle the following issues.
5.1. To Establish a Formula-computed Equalization Transfer Payment System by Taking out a Proportion of Revenue Increase from Central Public Finance, Making Transfer Payment to Non-developed Regions through Formula Computation, Gradually Coordinating the Layout of Regional Interest Distribution and Expanding the Size and Scope of Formula-computed Subsidies.
Special attention should be paid to the appropriateness of time when vested local interests should be adjusted correspondingly so as to break the fixed local interest relationship through various system reforms. Due to the difficulty of adjusting interests once and forever, the central and provincial governments can negotiate an agenda for such adjustment. Some part of tax revenue can be appropriated for transfer payment with amounts increased at different stages so that vested interests of provinces and municipalities can be adjusted to comply with requirements of overall national economic development.
5.2. To Carry out Planned and Step-by-step Adjustment of the Transfer Payment Implementation Forms Preserved from the Original System and Establish a New Transfer Payment Model that Caters to China's National Characteristics and Requirements of China's Market Economy.
5.3. To Further Clarify Division of Administrative Duties between the Central and Local Governments and among Local Governments.
Division of administrative duties is the basis for establishing a standard transfer payment system. The present public finance system is clear in major division of duties between the central and local governments. However, some division is not thorough while administrative duties of local governments overlap in many areas. With the difficulty of defining scopes of expenditures, governments often dispute over trifles. Moreover, division of administrative duties among local governments need to be further clarified and standardized. In this respect, we need draw upon advanced international practices.
5.4. To Reinforce the Work of Selecting Detailed Factors for the Transfer Payment System
Although the factor analysis method has been introduced into China's ordinary transfer payment system, the selected factors have the following problems.
5.5. To Improve Infrastructure of the Transfer Payment System
At present, because it is impossible to obtain some indicators, others are chosen as substitutes. Some statistical indicators are unreal due to administrative intervention. All these are no good for establishing a standard transfer payment system. Therefore, departments of public finance should make efforts to set up government information statistics network by collecting and recording fundamental data related to transfer payment. Thus the transfer payment system can be constructed on a more scientific and reliable basis.
5.6. To Improve Other Work Supplementary to the Transfer Payment System
In addition to the above work, it is also necessary to carry out the following work:
(I) Further improvement of local taxation system.
At present, business tax is the major tax for local public finance with other taxes collected at a piecemeal manner. It is necessary to further improve other sources of local tax revenues such as real estate tax and urban construction tax so that local governments can have stable sources of income and provide a solid basis for higher-level governments to do coordination.
(II) Accelerating "reform of fees into taxes" and reform of extra-budgetary fund management.
Due to the existence of large extra-budgetary funds, the term of "financial resources" differ greatly in implication in different regions, posing difficulty for the central government in determining regional financial strength and establishing a standard transfer payment system. Therefore, it is imperative to standardize the management of extra-budgetary funds and produce a more accurate and fair understanding of the concept "Financial Resources".