Abstract: The 1994 fiscal reform brought in a new tax-sharing system that greatly changed the landscape of China's public finances and ushered in an era of "expansionary government fiscal policy". In order to effectively manage the huge revenue, the central government established the program system as a new budget management system that is based on departments as budget unit and program for funding.
Under the system, local governments incur three types of expenditure:earmark transfers, nongrant program funds from the superior government, and the program funds from the local government. The earmark transfers are an important piece of budgetary revenue at superior levels, and thus they should be treated as an integrated part of local government finance. These three types of expenditures have largely shaped the financial structure and governance mechanism of local governments. Typically,in practice, itemized departmental budgets at the beginning of fiscal year are rarely realized at the end. This problem has further encouraged program funding and has hastened off-table maneuvers in allocating money.
In essence, the program system is an attempt by the central government to improve and perfect the bureaucracy system. Its immediate goal is to "solidify" budgeting and ultimately to make the government more responsive to societal needs.Our study shows that in practice, tension rises between these two goals, suggesting that rationalization and professionalization of governance do not necessarily improve government responsiveness to public needs, in fact, the reverse is also quite possible.

Key words: budgeting system, program expenditure, program system, rationalization