Research On Transaction Cost, Budget-state And Budget Management System Reform In China

In August 31,2014, the revised "Budget Law of the People’s Republic of China" was approved by the NPC Standing Committee with the rule "establish and improve a comprehensive specified, open and transparent budget system" written into the general provisions. This goal is consistent with the essence of budget-state whose characteristics are "centralization and unification of the budget" and "budget supervision", namely the requirement of "high certainty" and "symmetric information" of the public budgeting process. However, from the expenditure related aspects, there are a lot of uncertainty, information asymmetry and asset specificity related to the process of budget power allocation, allocation of budget funds and budget environment in the current budget management system in China. The transaction cost budgeting theory argues that these attributes of budgetary transactions will evoke the opportunistic behavior of the actors and reduce the information needed of actors with bounded rationality, which will in turn exacerbate the uncertainty, information asymmetry and asset specificity problems. By changing the attributes of the budgetary transactions, which will affect the behavior of actors, the budget transaction cost can be reduced, a modern budget system can be established and the way to the budget-state can be realized.There are a lot of uncertainty and opportunism in the process of budget power allocation. The vertical budget power allocation is reflected in the spending power and transfer payment system. The unclear duties and responsibilities of the governments render the local governments in great uncertainty with their expenditure. The fiscal pressure and the discretionary power of the special transfer payment in the transfer payment system will evoke the opportunism such as the "run into money" behavior of the spending department, which will not only affect the fairness and efficiency of the allocation of budget funds, but also increase the budgeting transaction cost. By specifying the external boundary, internal structure and the responsibility sharing mechanism of the governments and expending sector, regulating the intergovernmental transfer payment system, namely achieving transparent through general transfer with "factor method" and reforming the special transfer payment system by regulation and cleansing, the uncertainty will be reduced and the information will be transparent, which will reduce the transaction cost of the vertical budget power allocation process. The horizontal allocation of the budget power is among the budget actors. The opportunism evoked by the information asymmetry among the actors will leads to higher budget transaction cost and lower budget efficiency. In order to reduce the "legislative drift" and "bureaucratic drift" in the budgeting process, meaning lower the budgeting transaction cost by reducing the opportunism of the actors, it is advisable to harden the budget constraints by making an expenditure limit, strengthening the audit and evaluation of expenditure project; to reform the financial department by separating the preparation, execution and supervision of the budgeting process and strengthening the internal control of the financial department; to reform the budget auditing mechanism of the people’s Congress by reforming the electoral system of people’s Congress, strengthening the NPC Budget approval authority, increasing the itemized audit power of the people’s Congress, constructing the professional team and promoting the ability of the people’s Congress.The uncertainty and opportunism in the process of the allocation of budget funds will also bring high transaction costs. This can be solved partly by the standardization of the budget power. However, the lack of the allocation rule of the budget is also a cause of the uncertainty. The opportunism resulted by bargain and discretionary power can be reduced, thus leading to less transaction cost by setting minimum standards and highest limits of the funds and allocation principles for all expenditure departments. Take the cultural department as an example, in theory, the optimal amount of the culture related expenditure should accounts for 2.04% of the total government expenditure, which is deducted from the Douglas production function. In practice, the optimal amount of expenditure can be determined on the basis of fiscal targets. The minimum standards and the maximum limit of culture related expenditure can be calculated by considering the approach of "national wide equalization" and "intra-regional equalization" of the public culture services. In addition to clear standards for expenditure culture department budget, a project evaluation system from the advanced countries should also be introduced to reducing the uncertainty caused by opportunism.The uncertainty caused by the political and economic environment and asset specificity will also bring the budget efficiency loss. The introduction of medium-term expenditure framework, caneffectively deal with the uncertain economic environment, promote the more effective implementation of the annual budget, reduce the political uncertainty, prevent the deviation of the budget process from the policy process, solve the asset specificity problem of the multi-year project and promote the budget performance. It can be deducted from the practice of OECD countries and some developing countries employing the MTF that, China should adopt the progressive way in introducing the MTF at present because of its economic and financial development restrictions. Because of the undeveloped information system, it is urgent for China to improve the economic and social statistical information system and prediction system, laying the foundation for the medium term expenditure framework. With the promoting of information system, China can then try to use a top-down budgeting process, establish a convergence mechanism between the annual budget and medium-term expenditure framework, optimize the budget organization supporting system and strengthen the external participation. The uncertainty caused by the environment and asset specificity can be reduced through the improvement of medium term expenditure framework.By reducing the uncertainty, information asymmetry and asset specificity in the process of budget power allocation, allocation of budget funds and the environment, which aims at improve the rational judgment of the actors and reduce their opportunism behavior, the budget transaction cost can be reduced and a modern budget system can be established, heling the transition of China from a tax-state to a budget-state. Empirical studies have shown that, keeping the optimum budget funds scale will improve the efficiency of expenditure. On the other hand, adopting the MTF helps to promote a balanced budget and effectively reduce the size of a country’s debt.