The head of the finance department in a certain industrial county in the east often struggles with fund allocation every month. Although in the eyes of outsiders, the GDP, industrial electricity consumption, and industrial added value of this county town have maintained a considerable growth rate, the person in charge found that despite impressive statistical data, effective fiscal revenue still cannot be formed, and the fiscal revenue and expenditure gap continues to widen.

Even if there is an increase in fiscal revenue, it does not necessarily mean a significant increase in available financial resources. After calculating the interest payments on special bonds, institutional settlements, and historical debts, the actual available funds at this level are not abundant.

Even with limited available financial resources, it often encounters various unexpected factors.

Recently, a state-owned enterprise in the area where the person in charge is located reported risks to the main leaders, requesting financial support on the grounds of "fund rupture" and "project suspension". The main leaders, for stability reasons, directly instructed the finance department to solve the problem. In the current situation of "too many pots and too few lids", if state-owned enterprises spend another part of the funds, the gap in other areas will immediately be revealed. The state-owned enterprises themselves lack the ability to generate blood and require continuous financial support to maintain their operations, further weakening their fiscal sustainability, "said the person in charge.

In the absence of incremental funds, the above-mentioned person in charge can only respond by scheduling funds, coordinating borrowing, or adding new financing. The problem is that the financial resources held by the Director of the Finance Bureau are limited. If they are used to relieve state-owned enterprises, it means that the dispatchable funds for government rigid expenditures (wages, pensions, and livelihood security) will also be correspondingly reduced. This kind of operation of 'robbing the east wall to make up for the west wall' is essentially transforming the operational risks of state-owned enterprises into financial risks for the government.

In the past, urban investment and state-owned enterprises provided financing to local governments, but now the finance department has to pay for the aftermath of local state-owned enterprises.

However, in the opinion of the person in charge, although the growth of some industrial sectors may not provide sufficient financial support for the time being, it still provides space for further fiscal balance in the long run.

The person in charge believes that under the current financial management system, county and municipal finances lack autonomy in policy formulation, and face tremendous pressure in revenue and expenditure due to top-down requirements for expanding standards and various assessments and accountability. He hopes that the new round of fiscal and taxation system reform can be implemented as soon as possible to address various issues such as income distribution among governments at all levels, financial power, and the transformation of local urban investment and state-owned enterprises.

Tax ledger of an industrial county

There are several industrial clusters in this industrial county that support economic development and tax revenue growth. Among various taxes in China, value-added tax is the main source of tax revenue, and industrial enterprises are also major taxpayers of value-added tax. This is also one of the reasons why various regions attach great importance to attracting investment for large-scale industrial projects.

Due to industrial support, the fiscal revenue situation of this county is still acceptable. Before the epidemic, the county's tax revenue (after sharing) was about 4 billion yuan per year, accounting for about 78% of the general public budget revenue. After the epidemic, tax revenue has been declining year by year, with less than 3 billion yuan last year and a decrease of about 1 billion yuan in five years. The proportion of tax revenue to general public budget revenue has dropped to about 60%.

In general, the higher the proportion of tax revenue, the higher the quality of fiscal revenue.

Although tax revenue has decreased, various indicators reflecting economic activity in the local area have not decreased. The person in charge found that the industrial output value and electricity consumption data are still growing, but due to factors such as tax reduction and fee reduction, and some enterprises enjoying tax incentives for "large-scale demolition and small-scale", the local retained tax revenue has shrunk, coupled with the misalignment of the assessment mechanism, and the space for grassroots financial mobilization is extremely limited.

For example, he found that some local large-scale enterprises would split up, that is, larger enterprises would be split into small and micro enterprises, in order to enjoy tax incentives for small and micro enterprises.

The issue of splitting mentioned by the person in charge is a common problem in many regions, especially in industrial strong counties. A tax expert has determined that a county with a relatively developed industry may lose around 100 million yuan in tax revenue annually due to the separation.

In recent years, the tax department has also continued to crack down on companies that split up and fraudulently enjoy preferential policies. In February 2026, tax authorities in Lhasa, Xizang, Yangzhou, Jiangsu, Tongling, Anhui, Jiayuguan, Gansu and other places exposed four cases of tax evasion that were investigated and dealt with according to law by means of falsely listing R&D expenses, concealing income from personal account collection, splitting income, falsely listing costs and other means to defraud tax preferences.

In the first half of 2026, multiple industrial indicators in China will rebound, especially the excellent performance of the export economy. However, in some regions, due to various reasons, the recovery of industry has not fully formed support for fiscal revenue.

On the one hand, the drag effect of land is still significant. According to data from the Ministry of Finance, from January to May 2026, the revenue from the transfer of state-owned land use rights was 804.8 billion yuan, a year-on-year decrease of 28.7%, and has been declining for several consecutive years.

On the other hand, in some regions, traditional data such as electricity consumption cannot fully reflect the true state of industry. According to research conducted by relevant personnel, in order to maintain electricity consumption data and make the local economy appear "healthy and benign", some regions will find ways to increase the electricity consumption of certain specific industries to maintain total electricity consumption.

According to government officials in industrial towns, there has been a significant increase in industrial output and electricity consumption in their respective regions, but there has been no significant increase in tax revenue from the corporate sector. Instead, there has been a significant increase in personal income tax from the capital market.

The pressure of "three guarantees" under aging population

With the acceleration of aging population, the expenditure pressure of the "three guarantees" in this industrial county is increasing.

The monthly contribution of pension insurance for employed personnel in the local government and public institutions is about 40 million yuan, which can only cover a small portion of retired personnel's pension. The finance department needs an additional subsidy of 60 million yuan per month, and the cumulative subsidy amount for the whole year needs to exceed 700 million yuan to ensure the full payment of pension. In addition, the basic pension insurance for urban and rural residents in the area also requires a monthly financial subsidy of about 40 million yuan and an annual subsidy of about 500 million yuan. Only for these two items, the annual fiscal expenditure has exceeded 1.1 billion yuan.

China's pension insurance adopts an intergenerational support model. The current monthly pension insurance collection income is insufficient to cover the current pension payment expenses, coupled with the increasing fiscal subsidy standards year by year and the continuous expansion of subsidy scale, which continues to increase the burden of local fiscal expenditures.

The high cost of non staff employment is also one of the pressures. Non staff personnel, including temporary hired personnel such as auxiliary police, have a monthly expenditure of about 30 million yuan and an annual expenditure of nearly 400 million yuan. If the salaries and five insurances and one fund of these temporary employees are combined with those of current public officials, the annual related expenditures have exceeded 2.5 billion yuan.

In addition, the expenditure on livelihood security is huge and continues to grow. According to the person in charge mentioned above, special livelihood expenditures such as subsistence allowances, five guarantees, subsidies for families who have lost their only child, and subsidies for disabled persons only require a monthly amount ranging from 100 million to 150 million yuan, totaling 1 billion yuan for the whole year.

With the continuous deepening of population aging, although the individual subsidy standards for universal livelihood policies such as the elderly allowance are not high, relying on the huge elderly population base, the annual scale of this expenditure alone reaches tens of millions of yuan.

The person in charge admitted that under the continuous tight balance of county-level finance, some of the increased expenditure policies introduced by higher authorities lack corresponding transfer payment support, further amplifying the pressure on grassroots income and expenditure. Taking the talent subsidy policy as an example, the current policy includes skilled workers and vocational school graduates in the subsidy scope, with the intention of expanding the coverage of talent introduction. However, the relevant subsidies need to be supported by county-level finance, directly increasing the burden on local governments. The authority to formulate such policies is concentrated at the provincial and municipal levels, and counties do not have the autonomy to adjust and optimize them.

He said that talent subsidies are not an isolated case, and most of the special expenditure requirements issued by higher-level functional departments have not been accompanied by special support funds, which continue to squeeze grassroots fiscal space and intensify fiscal expenditure pressure.

Debt Ratio Dilemma

In the first half of 2026, many regions reported cases of local governments or state-owned enterprises inflating their revenue. The regulatory authorities have further strengthened their management of the quality of fiscal revenue.

On June 23, the "Audit Report of the State Council on the Implementation of the Central Budget and Other Financial Revenue and Expenditure for the Year 2025" mentioned that auditing the tax and customs departments' tax collection and management, import and export supervision, etc., found that there were negative tendencies such as excessive tax and fee collection and inflated fiscal revenue.

The above-mentioned person in charge also felt this regulatory pressure. In their view, inflated income will conceal the true financial situation of the local government, affect macro policy formulation, and should be strictly regulated. However, the complex causes behind inflated income should also be recognized, and policy correction should address both the symptoms and the root causes.

The person in charge stated that the so-called "false revenue idling" is not the subjective intention of the financial department, and false revenue cannot bring actual financial resources. It is often a "technical means" that is forced to be adopted to avoid the debt rate entering the red alert and ensure the basic operation of the local government.

The local government debt ratio is a core indicator for measuring the risk of local government debt, defined as the ratio of local government debt balance to comprehensive financial resources. The Ministry of Finance has classified local debt risk levels into four levels: red (debt ratio ≥ 300%), orange (200% ≤ debt ratio<300%), yellow (120% ≤ debt ratio<200%), and green (debt ratio<120%).

Among them, if entering the red zone, local governments will be subject to certain restrictions in economic development and investment and financing. Therefore, in order to avoid red alerts, some places will increase general public budget revenue or government fund budget revenue through methods such as state-owned enterprise circulation and idling, in order to enlarge the denominator.

The above-mentioned person in charge said that due to the huge impact of this indicator, the debt ratio assessment indicator often becomes a focus of attention for higher-level departments. In the implementation of the annual revenue forecast, even if the revenue decreases by 5%, it is difficult for the higher-level departments to accept the "provincial pressure on cities" and "city pressure on counties". If the superior department does not adjust the assessment data, the grassroots will be caught in a dilemma of "not falsely collecting and being punished, and falsely collecting and being punished".

Therefore, in the opinion of the person in charge, the crux of the inflated income lies in the serious disconnect between the superior assessment baton (debt ratio, mandatory requirements for positive income growth, implicit debt accountability) and the true fiscal capacity of the county, and the lack of willingness to correct the situation in the indicator setting department.

In the current context of strong regulation, local governments are also facing a dilemma between income and debt ratios. If the water in fiscal revenue is squeezed out, the real debt ratio may trigger a red alert, with the result that local leaders cannot be promoted, the amount of local government bonds will be significantly reduced, and bank credit will also tighten. If we continue to inflate revenue and maintain the debt ratio indicator, we may face accountability from regulatory authorities.

A government investment and financing expert who has long studied the issue of debt ratio believes that the current evolution of local government debt risk presents the characteristics of "numerator inflation" and "denominator dehydration". Molecular inflation "refers to the heavy pressure of debt repayment and interest payment that squeezes out a large amount of fiscal funds that should be used for livelihood security and industrial support, not only dragging down the supply of public services, but also suppressing the vitality of the real economy, leading to a shrinking tax base and weak fiscal revenue growth. Under the insufficient financial resources, in order to maintain operation and avoid default, local governments have to continue borrowing to repay old debts, resulting in a continuous expansion of debt balance (numerator) and further exacerbating debt repayment pressure.

The denominator dehydration "refers to the situation where, with stricter regulation, the previously inflated fiscal revenue (i.e. the denominator of the debt ratio) through methods such as" idling "and false collection is being forcibly squeezed out of water. Dehydration of the denominator "makes the statistical caliber return to reality, but it can also lead to a reduction in the denominator in the debt ratio calculation formula, thereby pushing up the debt ratio.

The researcher said that under such pressure, once a certain area's debt ratio exceeds the red warning line, conventional financing channels will be cut off. To cope with maturing debts, local governments may be forced to turn to non-standard, high interest and other "drinking poison to quench thirst" financing methods, which will further consume limited fiscal funds and form a deadlock of "the more expensive the financing, the tighter the finance, and the higher the risk".

The Economic Observer found in an interview that some local governments borrow high interest bridge funds for land auctions in order to increase the denominator and expand government fund revenue.

The researcher suggests that at the current stage, the focus of debt risk monitoring should shift moderately from "debt ratio" to "interest payment pressure". Specifically, the focus should be on the proportion of interest payment scale to general public budget revenue, as a leading indicator to determine whether local finance is sustainable.

On the other hand, the assessment of debt ratio should also shift from a single static indicator to a diversified and dynamic evaluation system.

In terms of dynamism, the researcher suggests introducing a "dynamic adjustment mechanism". The current "red orange yellow green" four level warning line has remained rigid since its establishment, failing to fully consider the differences in economic cycles and development stages. He suggested dynamically adjusting the debt ratio warning line based on the macroeconomic development stage, regional functional positioning, and recovery process to avoid misjudgment and unnecessary administrative intervention caused by a one size fits all approach.

In terms of diversification, the researcher suggests redefining the meaning of the "numerator" and "denominator" of debt ratio. The current algorithms have a certain degree of "asymmetry". In practical regulation, the molecular end (debt balance) often covers broad debt, including both statutory government debt and interest bearing debt (implicit debt) of urban investment platforms; The denominator (comprehensive financial resources) is still limited to traditional categories such as general public budgets and government fund budgets, and fails to cover the operating income of local state-owned capital. This' wide numerator, narrow denominator 'algorithm to some extent overestimates China's debt risk level.

The above researchers suggest including elements that can reflect the true debt paying ability of local governments in the denominator: firstly, the revenue from state-owned capital operation budget, which reflects the ability of local state-owned assets (equity, asset disposal, etc.) to realize and distribute dividends; The second is the operating cash flow of commercial entities such as urban investment platforms, which reflects their market-oriented "hematopoietic" ability, rather than simply viewing it as a government debt burden.

The researcher believes that through the above adjustments, the debt ratio indicator can more accurately reflect the comprehensive debt bearing capacity and asset support level of local governments, thereby formulating fiscal policies that are more in line with the actual situation and avoiding excessive tightening or misjudgment risks caused by distorted indicators.