From October 15 to 22 2023, a six-member delegation from the Budgetary Affairs Commission (BAC) of the Standing Committee of the National People’s Congress visited Germany and Portugal. The topic of the delegation trip was the management of public debt at the subnational level.
On China’s interest in the subject: The growth model of the People’s Republic of China has been relying heavily on investments by local governments, which help meet the ambitious growth targets set by the central government. However, as Beijing imposes borrowing limits on local governments, they have been falling back on so-called “local government financing vehicles” (LGFVs) that do not appear in official budgets. As a result, while China’s debt-to-GDP ratio officially stood below the OECD average at 51% in 2022, the International Monetary Fund estimates that LGFVs hold around 66 trillion RMB or roughly 50% of GDP in additional debt. Due to the challenges posed by the COVID-19 pandemic, local governments are now faced with a triple challenge of increased spending to stimulate the economy, a decline in revenue due to the real estate crisis, and a record number of maturing municipal bonds. The recent release of a guideline by the Communist Party titled “Strengthening the Review and Oversight of Public Debt by Local People’s Congress” shows that Beijing is very much aware of these challenges.
Against this backdrop, the Budgetary Affairs Commission, which typically plays a leading role in drafting financial and budgetary legislation, has been tasked with proposing enhancements to the legal framework for public debt management. In this process, BAC also draws from international experiences, and is particularly interested in Germany as an example of a fiscally strong federal state and Portugal, which has made significant progress in reducing public debt in the wake of the Eurozone Crisis. To promote understanding of respective legislation in both countries as well as of the division of competencies across different levels of government with respect to handling public debt and fiscal emergencies, the Sino-German Legal Cooperation Program of GIZ organized a week-long study trip to Germany and Portugal on behalf of the Federal Ministry for Economic Cooperation and Development (BMZ). The delegation consisted of six technical and executive staff from the Budgetary Affairs Commission, including Mr. HE Chengjun, the head of BAC’s budget and final account review department.
On their first stop in Munich, the delegation met with the co-chairs of the Committee on State Budget and Financial Affairs of the Bavarian State Parliament, as well as with the city treasurer of Munich. During the discussion with Members of Parliament Josef Zellmeier and Claudia Köhler, the delegation gained insights into the budget planning of the Free State of Bavaria, which first provided the political initiative for the introduction of the “debt brake” about 20 years ago. The conversation also shed light on existing differences across the German political spectrum regarding the design of the debt brake. The subsequent visit to the “new town hall” marked the transition to the municipal level. The exchange with treasurer Christoph Frey and his team zoomed in on how the city of Munich has been dealing with the fiscal challenges posed by COVID-19. The visit concluded with a tour of the town hall, including a visit to the balcony, known worldwide for FC Bayern Munich’s victory celebrations.
The second stop of the delegation’s journey was Erfurt. In the capital of the Free State of Thuringia, the delegation was received by Members of Parliament Volker Emde and Jens Cotta. The working meeting in the state parliament focused on ongoing budgetary negotiations, for the purpose of which the minority government of the DIE LINKE (“the Left”) faction was in discussions with the SPD (Social Democrats) and Bündnis90/Die Grünen (the Green Party) factions. Since the delegation thus only met with opposition members, the discussion explored the avenues available to opposition parties to influence the budget in the democratic system of the Federal Republic of Germany among other things. The visit included a tour of the building, which had been used not only by the Nazis but also as a torture prison by the DDR government. This visit thus also offered the delegation an insight into commemorative culture in Germany. Following this, the delegation had the opportunity to visit the Thuringian Ministry of Finance, providing insights into the “steam room” of the budgetary planning. The discussion covered a wide range of topics, from fiscal challenges in the transition from socialist to market-oriented systems to details of trading state treasury allocations.
The third and final stop in Germany brought the delegation to the federal capital of Berlin. In the Federal Ministry of Finance (BMF), the delegation met with familiar faces, as the ministry had previously been conducting training courses for representatives of the Budgetary Affairs Committee for many years. The exchange focused on the role of the BMF in budget preparation and implementation, as well as on the functioning of the Stability Council to ensure fiscal discipline at both federal and state levels. Of particular interest to the delegation was the control of municipal debt in general and how to deal with short-term “cash credit” that had become a symbol of unsustainable municipal debt during the global financial and economic crisis. In the afternoon, the delegation visited the Berlin Senate Department for Finance, where they received firsthand experiences from the successful completion of a state-level restructuring process under guidance from the above-mentioned Stability Council. Since various provinces in China are also currently struggling with over-indebtedness, the ensuing exchange focused on key indicators to help identify exceptional fiscal emergencies.
After Berlin, the BAC delegation continued their journey to Portugal. In Lisbon, the delegation first met with members of the Budget Committee of the National Parliament. Here, they met with delegates from four political factions and inquired about how the country managed to significantly reduce its debt from over 130% of GDP in 2012 to under 105% in 2023 under challenging circumstances. The discussion then focused on the legal framework for borrowing at the subnational level, which had been tightened in the wake of the Eurozone crisis. In the afternoon, the delegation visited the Portuguese Debt Management Office (IGCP), established in 1997 in preparation for Portugal’s introduction of the Euro. The exchange was of special interest to BAC, as IGCP is since responsible for managing the treasury, public debt and financing of the central government in accordance with the EU’s debt framework.
The second day in Portugal took the delegation to the Portuguese central bank, where detailed information was provided on the composition of public debt, including a sectoral breakdown and insights into debtor structures. Of particular interest were firsthand insights into ongoing reform discussions currently discussed in China too, including the advantages and disadvantages of fiscal decentralization and the right balance between infrastructure investments to address transformative challenges on the one hand and fiscal prudence on the other. Finally, the challenges associated with managing public debt at the municipal level in Portugal were addressed firsthand during a visit to the Peninsula of Setúbal. Here, the mayor personally took time to discuss how the municipal government is working to restore the city’s financial sustainability in the medium term, after recording a high double-digit budget deficit in recent years.
We would like to express our warmest thanks to all individuals and organizations involved for their hospitality and professionalism.