Local government finances remained generally stable during the first half of this year. However, several grassroots financial officials have privately noted that the gap between fiscal revenue and expenditure is still quite wide. As of August 6, a review of data shows that, with the exception of Guangdong, 30 provinces have publicly disclosed their fiscal revenue and expenditure figures for the first half of the year. While revenues in Jiangxi, Liaoning, and Guangxi declined, all other regions saw growth in their local general public budget revenues. Tibet (around 37%) and Xinjiang (10%) achieved double-digit growth, though most provinces posted only modest increases. On the expenditure side, 12 of the 30 provinces reported a decrease in spending, and 24 provinces saw expenditure growth lag behind revenue growth.

Luo Zhiheng, Chief Economist at Yuekai Securities, stated that the first half of the year showed a pattern where revenue performed better than expected, but expenditure needs further stimulus. The central government has accelerated the disbursement of transfer payments to local governments, providing a solid foundation for stable fiscal operations and the implementation of growth and welfare policies. However, the underperformance of the real estate market has led to lower-than-expected land transfer fee income, and combined with rigid expenditure obligations and debt reduction pressures, local fiscal conditions remain in a relatively tense transitional phase.

Tax revenue slightly improves, but fiscal pressure persists

In recent years, local government revenue growth has been sluggish due to the economic downturn and falling property prices. However, the first half of this year saw a slight improvement. Ma Hongbing, Deputy Director of the Treasury Department at the Ministry of Finance, noted at a recent press conference that a key feature of the first half was widespread revenue growth across regions. National local general public budget revenue reached 6.88 trillion yuan, up 2.7% year-on-year, an acceleration of 0.6 percentage points from the first quarter. Of the 31 provinces, 28 reported revenue growth, three more than in the first quarter. Although Guangdong has not yet released its data, the total national figure and the sum of the 30 provinces' data allow for a reverse calculation, estimating Guangdong's first-half general public budget revenue at approximately 742.18 billion yuan, a year-on-year increase of about 2.8%.

In terms of revenue scale, the top seven provinces—Guangdong, Jiangsu, Zhejiang, Shanghai, Shandong, Beijing, and Sichuan—remained unchanged from the previous year. Looking at growth rates among the 30 provinces, only Jiangxi (-7.2%), Liaoning (-0.6%), and Guangxi (-0.6%) saw declines. The majority of provinces experienced low growth in the 0-3% range, while Tibet and Xinjiang stood out with high growth rates. Why is this the case?

Luo Zhiheng analyzed that Tibet's fiscal revenue growth has consistently ranked first nationally in recent years, with the first half of this year reaching nearly 37%. This is primarily due to strong central government policy support, including the construction of the Yalong River hydropower station and the concentrated release of benefits from policies promoting agriculture, animal husbandry, medicine, and clean energy industries. Active efforts to revitalize various asset resources have also driven revenue growth.

Wang Zhenyu, President of the Liaoning University Local Finance Research Institute, told reporters that Tibet's revenue growth is partly influenced by its small revenue base (roughly 20.9 billion yuan in the first half). The revenue declines in Liaoning, Guangxi, and Jiangxi are linked to a high base of comparison from the same period last year. Luo Zhiheng believes that Xinjiang's local general public budget revenue has also grown rapidly, with an average annual growth rate of 10.5% from 2023 to 2025, and a 10% increase in the first half of this year, ranking second nationally. This is attributed to improved profitability in key industries, which boosted tax revenue. For instance, from January to May, Xinjiang's industrial enterprises above a designated size achieved total profits of 94.047 billion yuan, a year-on-year increase of 73.5%, outpacing the national average by 54.7 percentage points. Simultaneously, active efforts to revitalize state-owned assets have led to rapid growth in non-tax revenue.

Overall, the better-than-expected growth in local general public budget revenue in the first half is mainly due to better-than-expected tax revenue growth, which is linked to stable economic performance, rising prices, a vibrant stock market, and strong foreign trade. For example, data from Jiangsu Province shows that its general public budget revenue reached 594.1 billion yuan, up 1.8%, with tax revenue of 454.5 billion yuan, up 3.4%. Zhejiang Province reported general public budget revenue of 555.124 billion yuan, up 0.5%, with tax revenue of 445.233 billion yuan, up 3.5%. "The first-half revenue growth is a recovery-type growth, with an increased share of tax revenue in general public budget, indicating an improvement in revenue quality," Wang Zhenyu said.

One eastern grassroots finance bureau chief told reporters that local tax revenue growth was acceptable, but the significant decline in government fund income, primarily from land sales, put immense pressure on fiscal operations. A western financial official noted that while fiscal revenue and expenditure were manageable, the debt burden was heavy, leading to high repayment pressure. A central region finance bureau chief said local finances remained difficult. Luo Zhiheng noted that the 2.7% year-on-year growth in local general public budget revenue was 0.3 percentage points higher than the initial budget target of 2.4%, slightly exceeding expectations. The main pressure on local fiscal revenue now comes from the second budget, particularly land transfer fees. In the first half, local government fund budget revenue fell by 25.6% year-on-year, with state-owned land use rights transfer fees dropping by 31.5%. When combining the two budgets—general public budget and government fund budget—total local fiscal revenue decreased by 3.1% year-on-year.

This has led some regions to acknowledge the challenges. For instance, the Fujian Provincial Department of Finance, in its report on budget execution, mentioned that revenue growth remains fragile due to the continued decline in land transfer fees and reduced tax contributions from traditional industries. Rigid expenditures in areas like domestic demand promotion, employment stabilization, and public welfare are not decreasing, and the contradiction between revenue and expenditure is pronounced in some areas, leading to a tight fiscal balance. The Anhui Provincial Department of Finance similarly noted that the fiscal balance remains tight, with rigid expenditure growth across various sectors making budget balancing more difficult. The real estate market impact has exacerbated the contradiction between revenue and expenditure in some cities and counties, putting significant pressure on basic "three guarantees" (wages, operations, and public services).

Most provinces see weak expenditure growth

Looking at the growth rates of general public budget expenditure among the 30 provinces in the first half, 12 provinces saw a decline, and most of the remaining provinces had growth rates below 3%. Shanghai had the highest expenditure growth at 10.7%. Wang Zhenyu said that overall, local fiscal expenditure growth lagging behind revenue growth could be explained by insufficient treasury fund security levels at certain local levels, as well as the implementation of tighter fiscal management and reductions in unnecessary spending. He cautioned against unnecessary "number games" and called for a rational analysis of fiscal revenue and expenditure growth.

Luo Zhiheng stated that national local general public budget expenditure was 12.21 trillion yuan in the first half, a year-on-year increase of only 0.6%, lagging behind the initial budget growth rate of 4.0%. The budget execution progress was 48.0%, slightly behind the time schedule. In the second half, as major national projects and the "six networks" planning are implemented, local fiscal expenditure growth is expected to pick up, providing stronger support for stabilizing growth and improving livelihoods. The Central Economic Work Conference at the end of last year highlighted the importance of addressing local fiscal difficulties. The central government's deployment of reforms to increase local autonomous fiscal capacity is progressing steadily.

Luo Zhiheng emphasized that solving local fiscal difficulties relies on both local efforts and central government support. For local governments, the short-term approach involves intensifying asset revitalization efforts, supported by a series of institutional measures including asset inventory, repair of asset title defects, exemption from liability for asset disposal, and state-owned capital assessment incentive mechanisms. Without such institutional support, asset revitalization risks becoming a simplistic and unsustainable process of asset sales. In the long term, local governments should promote the transformation of local government financing vehicles (LGFVs) and reshape the tax base, actively identifying and developing competitive industries suited to their local conditions, and creating a favorable business environment rather than relying on subsidies and tax incentives to attract industries.

For the central government, Luo Zhiheng suggested increasing transfer payments to local governments in the short term, particularly raising the proportion of equalization transfer payments, to enhance the scale and discretion of funds available to local governments. While increasing transfer payments is not a sustainable long-term solution, it is necessary in the short term to help local governments navigate the critical period of real estate adjustment, debt reduction pressures, and the transformation of the economic growth model. In the medium to long term, he argued that the central government needs to promote fiscal system reform, shift some spending responsibilities and authority upward to reduce the burden on local governments, and prevent them from becoming "unlimited liability" governments. Additionally, tax system reform should continue to build a tax system suitable for the artificial intelligence era, addressing issues of distribution polarization and weak demand, stabilizing the macro tax burden, expanding consumption tax to high-pollution and high-energy-consumption industries, raising environmental protection tax and resource tax rates, and studying the introduction of inheritance and gift taxes. Furthermore, promoting reforms in public utility pricing to avoid the pressure of continuous large-scale inefficient fiscal subsidies, shifting from implicit to explicit subsidies, is also crucial.

Wang Zhenyu believes that for some regions, relying solely on their own efforts to solve fiscal difficulties has limited potential, requiring more intervention at the central level. Addressing local fiscal difficulties is a medium to long-term task. Short-term emergency policies can only provide temporary relief. Long-term strategies include expanding the economic and fiscal "pie," increasing local autonomous fiscal capacity, improving the fiscal transfer payment system, and ensuring the provision of public services through institutional mechanisms.