The growth in local government revenues is undeniably slowing in China. Even in the wealthier regions like Beijing, Shanghai, Zhejiang and Guangdong, revenue growth rates have slid to less than 10 percent year on year from 20 to 30 percent.

In the first seven months of this year, total revenues grew by only 13.8 percent, slower than forecast. Worse, land sales – the main source of income for local governments – have dropped sharply. In the first half of this year, the land transfer fees collected in 300 cities fell 38 per cent from a year ago.

The central government is not doing any better, either. The Ministry of Finance says total tax revenues for the first half grew by less than 10 percent, representing a drop of nearly 20 percentage points year on year. The figures are even starker when compared with spending. In July, China's total fiscal revenue grew by 8.2 percent, while government expenditure increased by 37.1 percent.

In almost all major cities, growth in spending is outpacing the growth in revenues; in some cities, governments are already spending more than they are taking in. After years of unprecedented growth, how will China cope with lean times?

Believing the slowdown to be temporary, many local governments are less concerned with belt-tightening than with boosting income. Some have stepped up tax collection efforts, and are aggressively pressing for back payments and to close loopholes. Yet other officials try to raise income by rolling out new-fangled charges and unreasonable penalties. But these short-sighted measures cannot be sustained.

Government revenues are likely to continue to decline in the mid- to long-term – a consequence of the combined effect of China's economic structural problems, a cyclical downturn and persistently weak external demand. If China carries out bold reforms to restructure its economy, its outlook may well improve when the global economy picks up, and it can achieve its target of steady growth. Whatever the future holds, however, the days of exceptional growth in government revenues are over. China's economy has entered the stage of medium growth.

Though still relatively well-off, the government cannot expand as it has in recent years, at rates of between 20 and 30 percent. Tighter fiscal policies must be the new norm. More importantly, officials must consider how they can carry out their duty to overhaul the structure of government under these conditions.

China's ratio of government spending to GDP is already catching up with those of developed countries'. Officials must watch that it does not balloon. Their first priority is to rein in spending. Guangdong, Zhejiang and several other provinces have proposed budget cuts; other local governments should do the same. Controlling expenses – especially the notorious "three public consumptions" of official receptions, vehicles and trips abroad, and the construction of grand office buildings and halls – is essential.