The central government has, for the first time, proposed addressing local fiscal difficulties.

The issue of local fiscal difficulties has received high attention from decision-makers.

Recently, the Central Economic Work Conference was held in Beijing, where economic tasks for 2026 were outlined. In particular, regarding the continued implementation of a more proactive fiscal policy next year, the conference emphasized the importance of addressing local fiscal difficulties and firmly safeguarding the bottom-line “three guarantees” at the grassroots level. The conference also called for “improving and perfecting the local tax system.”

A reporter from First Finance reviewed the content of all Central Economic Work Conferences held since 2000 and found that this was the first time at any such conference that the central authorities had emphasized “placing great importance on addressing local fiscal difficulties.”

Wang Zhenyu, Director of the Institute of Local Finance at Liaoning University, told First Finance that the central government has, for the first time, emphasized the need to “attach great importance to addressing the financial difficulties faced by local governments.” This underscores the high level of national attention being paid to resolving this issue. In recent years, the contradiction between local government revenues and expenditures has become particularly acute—especially at the grassroots level—where liquidity shortages have become especially pronounced. As a result, many local governments are effectively operating in an emergency fiscal state, which to varying degrees is hindering their ability to fulfill their respective duties. To address this problem comprehensively and effectively, the immediate priority is to inject liquidity into local governments to help them overcome their current predicament.

Growing financial difficulties at the grassroots level are drawing attention.

Currently, local government fiscal expenditures generally exceed their own revenue, necessitating the use of central government transfer payments to local governments and debt financing to bridge the revenue-expenditure gap. According to data from the Ministry of Finance, in the first 10 months of this year, local governments’ general public budget revenue at the local level totaled approximately 10.5 trillion yuan, representing a year-on-year increase of 2.1%. Local governments’ general public budget expenditures amounted to roughly 19.1 trillion yuan, up 1.2% over the same period last year. Meanwhile, local government funds budget revenue at the local level reached 3.1 trillion yuan, down 3.3% year-on-year, while local government funds budget expenditures totaled about 7.2 trillion yuan, up 7.3% year-on-year.

Luo Zhiheng, chief economist at Yuekai Securities, told First Finance that the current financial difficulties faced by some local governments are mainly reflected in the stark imbalance between revenues and expenditures. On the revenue side, adjustments in the real estate sector have led to a significant increase in the fiscal gap, while on the expenditure side, spending on the “three guarantees” (i.e., guaranteeing basic livelihoods, wages, and operational continuity) accounts for a high proportion, leaving relatively little fiscal funds available for overall coordination.

Due to the real estate market adjustments in recent years, local governments have seen a significant decline in both real estate-related tax revenues and land sale revenues. For example, according to data from the Ministry of Finance, in 2024, local governments’ revenue from the transfer of state-owned land use rights totaled approximately 4.8 trillion yuan, a drop of about 45% from the peak of 8.7 trillion yuan in 2021—almost halving the figure. Moreover, through the first ten months of 2025, this revenue continued to decline (-7.4%). At the same time, coupled with increased rigid expenditures aimed at addressing local debt risks and ensuring people’s livelihoods, the fiscal revenue-expenditure gap at the local level has been steadily widening.

A local finance official in the eastern region told First Finance that, since the beginning of this year, fiscal pressures have continued to mount due to factors such as weaker-than-expected tax revenue growth and a significant decline in land-sale revenues. With fiscal funds becoming increasingly tight, grassroots-level “three guarantees” (ensuring basic livelihoods, public services, and social security) are facing difficulties, and in some townships and even at the district level, there have even been instances of delayed wage payments.

A local finance official in the western region told First Finance that local governments are now facing a dilemma: whether to prioritize maintaining basic operations or fostering development. In the past, funding for major infrastructure projects at the district level was shared among the central government, provincial (or directly-administered city) authorities, and local governments, each bearing a portion of the costs. Although local tax revenues were initially limited, the real estate market had performed relatively well in previous years, allowing local governments to ultimately offset infrastructure spending through land-sale revenues and other sources. However, in recent years, the property market has slumped, leading to a sharp decline in land-sale revenues. At the same time, tax revenues have struggled to grow, leaving local governments with insufficient funds to invest in major projects and putting them under increasing developmental pressure.

“Attaching great importance to addressing local fiscal difficulties and firmly safeguarding the bottom line of the ‘three guarantees’ at the grassroots level requires focusing on local governments as the core actors. Restoring local governments’ capacity and enthusiasm for economic development is an urgent priority for resolving current economic challenges. The ability of local governments to drive economic growth is a key force behind the stable operation of China’s economy; in turn, by stimulating the initiative of enterprises and residents, local governments can help shift business and household behavior from defensive postures toward expansion,” said Luo Zhiheng.

Yuan Haixia, Director of the Zhongcheng International Research Institute, told First Finance that the mismatch between fiscal powers and responsibilities at the local government level persists. Currently, nearly 50% of districts and counties have a fiscal self-sufficiency rate below 30%. Even when including central government transfer payments as part of broad-based local revenue, these revenues still fall short of covering expenditures—by 2024, the coverage rate had reached only 86%. The fundamental issue of the mismatch between local governments’ fiscal powers and responsibilities remains unresolved.

Reforms to the consumption tax and other measures are being accelerated.

In fact, last year the Third Plenary Session of the 20th Central Committee of the Party already drew attention to the issue of local fiscal difficulties. The session adopted the “Decision of the CPC Central Committee on Further Deepening Comprehensive Reform and Promoting Chinese-style Modernization” (hereinafter referred to as the “Decision”), which specifically outlined measures to address this issue by deepening fiscal and tax reforms.

Han Wenxiu, the deputy director in charge of daily operations at the Central Financial and Economic Affairs Office, once explained the "Decision" by stating that, in response to financial difficulties faced by local governments and grassroots finances, it is necessary to improve the fiscal relationship between the central and local governments, increase local governments’ autonomous fiscal capacity, expand local tax sources, enhance the alignment between local financial resources and their corresponding powers, appropriately strengthen central government responsibilities, raise the proportion of central government expenditures, and strictly prohibit local governments from being illegally required to provide matching funds.

Meanwhile, the aforementioned Central Economic Work Conference, when outlining next year’s economic tasks, proposed strengthening the local tax system.

Last year, when interpreting the content on deepening fiscal and tax reforms outlined in the aforementioned “Decision,” Han Wenshou stated that there are three key priorities for improving the local tax system: advancing the shift of the consumption tax collection stage to a later point in the supply chain and steadily transferring it to local governments; refining the value-added tax credit refund policy and strengthening the deduction chain; studying the consolidation of the urban maintenance and construction tax, the education surcharge, and the local education surcharge into a single local additional tax, and granting local authorities the power to set specific applicable tax rates within a certain range; and perfecting the real estate tax system.

This year, the Government Work Report of the State Council explicitly calls for accelerating the shift of the collection stage of consumption tax for certain items to later stages and transferring this responsibility to local governments, thereby enhancing local governments' fiscal autonomy. Currently, consumption tax is a central tax, with annual revenues of approximately 1.6 trillion yuan going entirely to the central government's treasury. The State Council now hopes to shift the collection stage of some consumption tax items from the production end to the wholesale and retail ends, and allocate the incremental revenue generated from these shifts to local governments. In doing so, consumption tax—a traditionally central tax—will be transformed into a shared tax between the central and local governments, significantly boosting local government revenues.

According to a public announcement by the Ministry of Finance in November, the ministry is accelerating efforts to shift the collection stage of consumption tax for certain items to local governments and delegate authority to them, taking into account factors such as the division of central and local revenues and differences in tax administration capabilities. However, as of now, this reform has not yet been implemented.

According to publicly available data, the current revenue from the Urban Maintenance and Construction Tax, the Education Surcharge, and the Local Education Surcharge—collectively referred to as “one tax and two fees”—totals approximately 1 trillion yuan. Previously, the central government proposed merging these “one tax and two fees” into a single local additional tax, which is also a measure aimed at enhancing local governments’ financial autonomy.

In addition, the Decision also proposes optimizing the sharing ratio for shared taxes. Currently, the three major taxes—value-added tax, corporate income tax, and individual income tax—are all shared between the central and local governments. Experts anticipate that in the future, the proportion of shared-tax revenue allocated to local governments may be appropriately increased, thereby enhancing local governments’ fiscal autonomy.

Yuan Haixia stated that the recent Central Economic Work Conference proposed “improving the local tax system.” She suggested appropriately increasing the local share of shared taxes, advancing the shift of consumption tax collection to the local level, and exploring the establishment of a comprehensive fiscal and tax incentive mechanism while moderately delegating tax authority. In terms of non-tax revenues, it is also necessary to strengthen revenue collection and management, and explore ways to revitalize, preserve, and enhance the value of state-owned assets, thereby helping local governments develop more stable and sustainable revenue sources. By addressing both tax and non-tax revenue streams, we can bolster local financial capacity.

Wang Zhenyu believes that establishing a sound local tax system is a medium- to long-term institutional arrangement for addressing local fiscal difficulties. While it may not yield immediate results in the short term, the pressing priority remains to effectively inject liquidity, grant local grassroots authorities—under certain conditions—a “franchise” to consolidate special funds from higher-level governments, carefully manage the timing of certain “contractionary” policies, and ensure consistency and synergy across various departmental policies. We must abandon departmental interests and rigid adherence to established rules, truly implement cross-cycle and counter-cyclical macroeconomic regulation, and accelerate the transition of local finances from an emergency-oriented approach to a more normalized, adaptive state.

Financial officials from the aforementioned eastern regions suggest stepping up policy support for the real estate sector to quickly reverse the abnormal downward trend in the property market and thereby help related industries emerge from their current slump. The central and provincial governments could consider further increasing transfer payments to local governments and reducing funding requirements for newly introduced policies at the grassroots level. Additionally, they should further encourage childbirth and expand consumption.

Luo Zhiheng believes that the fiscal revenue shortfall in local governments caused by the ongoing adjustments in the real estate sector in recent years should be addressed by increasing central government transfer payments or raising local debt ceilings, thereby restoring local governments’ capacity and motivation to develop their economies. Only by further increasing the quota for new debt can we plug the fiscal gap resulting from the deepening downturn in the real estate market. As a result, local governments’ ability and willingness to drive economic development will be better restored, enabling them to implement central macroeconomic regulation policies more effectively and avoid the situation of enterprises “paying off old debts only to accumulate new ones.” This, in turn, will genuinely improve the business environment.

The recent Central Economic Work Conference proposed maintaining an appropriate level of fiscal deficit, total debt, and overall spending. Experts interviewed by First Finance generally believe that next year’s total new government debt will exceed this year’s approximately 13 trillion yuan, and is expected to reach around 15 trillion yuan.

In addition to moderately increasing local debt revenue, in recent years some provincial governments have also devolved fiscal resources downward, alleviating the financial revenue and expenditure contradictions at the grassroots level and boosting local development momentum.

For example, Guangdong—the country’s leading fiscal province—will allocate a larger share of the incremental revenue from its four major taxes (value-added tax, corporate income tax, individual income tax, and land value-added tax)—which this year exceeds 700 billion yuan—to cities and counties. Specifically, the proportion of “four-tax” revenue shared by the eastern, western, and northern regions of Guangdong, as well as by the 57 counties, has been increased from the previous 50% to 90%.

To address fiscal challenges, localities are strengthening revenue collection by boosting the utilization of existing assets and resources and enforcing tax collection in accordance with the law. They are also continuing to practice austerity measures, deepening reforms in zero-based budgeting to cut unnecessary expenditures, optimize the structure of fiscal spending, and enhance the efficiency of fiscal fund utilization.

In addition, in recent years, the central government has also alleviated pressure on local fiscal expenditures by appropriately strengthening central authority and increasing the proportion of central fiscal spending.

Luo Zhiheng suggested that in the future, responsibilities and expenditure obligations related to social security, public safety, environmental protection, food and drug administration, and cross-regional infrastructure development should be gradually transferred upward to the central and provincial governments, thereby reducing the expenditure burden on local governments and alleviating their financial pressures.