New urbanization must put an end to the land finance model
New land expropriation methods must comply with three major principles: first, conformity with pre-determined public interest objectives; second, due process; third, adequate compensation. Land finance depends on rolling land development. Only rolling land development built on the foundation of rights protection is the right path.
Where exactly is the “new” in new urbanization? On this question, opinions vary widely. But the requirement is clear: new urbanization must be “new,” different from past urbanization. As for where the “new” lies, it needs to be interpreted from the latest central documents. And different people will offer different interpretations. For example, from the Decision of the Third Plenary Session of the 18th Central Committee, we can first read “give farmers more property rights” and “the market plays a decisive role in resource allocation.” From the Decision of the Fourth Plenary Session of the 18th Central Committee, we can first read “rule of law.”
These key decision-making messages are all very important. For example, from “give farmers more property rights” the following interpretations can be drawn: first, many property rights that belong to farmers have not yet been given to farmers; second, more property rights will be returned to farmers; third, at the current stage not all property rights are being returned to farmers.
Whether it is central public finance or local public finance, both require “expenditure determines revenue.” This is very different from what we usually assume, namely “revenue determines expenditure.” The reason why “expenditure determines revenue” must be achieved is actually quite simple. The government obtaining fiscal revenue is itself not the goal. Fiscal revenue needs to be spent, in accordance with the provisions on the government's powers, on carrying out the government's powers in accordance with the law. And one improper practice of China's government finance departments at all levels since 1994 lies in continuously extracting fiscal revenue and treating such extraction as a matter of course. They emphasize only taxpayers' obligations while ignoring taxpayers' rights.
From the perspective of building a local public finance system, this requires the establishment of a new type of land finance and the exit of the old type of land finance. The new type of land finance implies a new type of land expropriation method, and the new type of land expropriation method implies putting an end to land finance. Apart from transferring the state-owned land it holds, the government should end its role as a market participant in the land market. At that point, the government mainly transfers existing state-owned land, or obtains tax revenue from the process of buying, selling and transferring land with other economic entities. This kind of behavior is exactly the same as the government's behavior in other economic fields. In this situation, there is actually no so-called “land finance.”
New land expropriation methods must comply with three major principles: first, conformity with pre-determined public interest objectives; second, due process; third, adequate compensation. This means the government cannot, through monopoly means, expropriate farmers' land at below fair market prices. The United States, the United Kingdom and Germany all act in this way, which has both protected everyone's property rights and did not prevent them from becoming a club of wealthy nations. The ancients said: “A gentleman loves wealth and acquires it in the proper way.” Land finance depends on rolling land development. Only rolling land development built on the foundation of rights protection is the right path.
The Qiu He incident is one of the most interesting cases of raising the level of local infrastructure, changing the city's image and expanding local fiscal capacity. Qiu He rose all the way from Party Secretary of Suqian City to Deputy Secretary of the Yunnan Provincial Party Committee, and the trump card he relied on was his vigorous and resolute “serving the people” approach as a “benevolent government.” Qiu He's governing style in municipal construction was to go all out and push forward fast, and to demolish on a large scale and demolish fast. The superficial material achievements of this style were astonishing. To describe it as “the old look changed for a new one” would not be an exaggeration at all. But this kind of “serving the people” is in fact necessarily serving only the majority, while the interests of the minority are sacrificed. For example, the interests of relocated households. During Qiu He's tenure as Party Secretary of Kunming City, he demanded that the Second Ring Road reconstruction and expansion be completed within one year, leaving no time to consult with relocated households. This system is called “fragmented authoritarianism.” It may be relatively efficient in getting some things done, but in the absence of constraints on power, once harm is caused, its extent is also great.
However, for local governments, the temptation of land finance, currently built on the foundation of a generally low-compensation land expropriation approach, is enormous. According to statistics from the Ministry of Finance, in 2014 national land transfer revenue reached nearly 4.3 trillion yuan, and national land transfer expenditure was 4.1 trillion yuan, of which: land transfer revenue used for land expropriation and relocation compensation, preliminary development of land transfers, subsidies to farmers whose land was expropriated and other cost-based expenditures was 33952.37 billion yuan, and land transfer proceeds were 8987.93 billion yuan. Of these land transfer proceeds for that year, 7258.61 billion yuan was actually used for non-cost expenditures such as urban construction, agriculture and rural areas, and government-subsidized housing projects. All these expenditure links controlled by the government are themselves where enormous interests lie, not to mention the real estate appreciation, investment projects, new tax and fee revenue and so on brought by rolling land development, all of which bring benefits to local finance and to individual local officials. In this situation, if land finance is to be ended, the central and local governments need to make enormous determinations!