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Employing the Modern Monetary Theory (MMT), this paper examines the current Chinese fiscal system and highlights its three characteristics. First, fiscal revenues are centralized at the central government while expenditures are decentralized at the local governments; second, fiscal spending focuses on public investment but is insufficient in providing social safety net and public services; and third, indirect tax accounts for a great majority of tax revenues, leading to limited progressivity of the tax system. These limitations have constrained the effectiveness of China's fiscal policies and generated many perverse impacts. With the understanding that the central government has the monetary sovereignty and does not face financing constrained and that taxes are not to raise revenues for fiscal spending but to serve other purposes, the paper calls for fiscal reforms that realign fiscal resources and spending responsibilities between the central and local governments, increase fiscal spending on social security and public services, as well as broaden personal income tax to improve the distributive effect of taxation. [ABSTRACT FROM AUTHOR]

Against the background of deepening public finance reforms in China, this paper applies the time-varying parameter techniques to investigate the underlying structural variation in the systematic part of fiscal policy. Although the degree of activism of systematic fiscal policy to inflation is estimated to remain in a mostly stable regime, the findings reveal a trend towards a less systematic and predictable policy behaviour to output stabilization over the past few years. The dynamic relationship implies that the counter-cyclical policy capacity has been attenuated, and systematic fiscal policy becomes less effective at restraining uncertainties about the functioning of the economy. [ABSTRACT FROM AUTHOR]

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