Price stability to be given higher priority

PUBLISHED : Tuesday, 08 March, 2011, 12:00am
UPDATED : Tuesday, 08 March, 2011, 12:00am

Finance Minister Xie Xuren says the government will maintain a proactive fiscal policy this year while making price stability a 'more prominent' priority.

Speaking at a news briefing during the annual session of the National People's Congress, Xie said Beijing would continue to boost domestic consumption this year as part of efforts to shift the economy away from its heavy reliance on exports and government-led investment.

A proactive fiscal policy means a high rate of government spending. But unlike in previous years, when it spent heavily on infrastructure projects, Xie said Beijing would spend two-thirds of this year's central government budget on improving people's livelihoods.

The funds would be used to boost education, health care, social security and job creation. Money would also be used to improve agriculture, water conservation, transport and environmental protection.

Xie said his ministry would also put more effort into supporting production and supply of people's daily necessities to curb inflation.

According to the ministry's budget plan, presented to the NPC on Saturday, the country's total revenue this year will be 9.122 trillion yuan (HK$10.8 trillion) and expenditure will total 10.022 trillion yuan, resulting in a deficit of 900 billion yuan.

Ting Lu, an economist with Bank of America-Merrill Lynch, said this year's deficit would be cut to about 2 per cent of gross domestic product, down from 2.8 per cent last year. Expenditure is predicted to grow by 11.9 per cent, compared with actual growth last year of 17.4 per cent.

'However, the planned 11.9 per cent growth in fiscal spending is not realistic given Beijing's ambitious programmes such as 10 million social housing units,' Lu said. He expected the actual fiscal deficit to remain at around 2.5 per cent this year.

In a research note, JPMorgan Chase Bank said the proactive fiscal policy would support domestic demand growth. 'The overall fiscal policy stance remains growth-friendly, or proactive,' it said.

Hao Hong, a researcher with China International Capital Corporation, said the expansionary fiscal budget would help stock markets in Shanghai and Hong Kong. 'The 2011 budget will continue to be expansionary and ... bodes well for China's continuing restructuring of its consumption-based economy and the stock markets,' Hong said.

Xie said the State Council reached an in-principle agreement on income tax reform proposals but details would only be disclosed later.

The council said last week that it planned to raise the minimum threshold for personal income tax and adjust income tax brackets aimed at lowering the burden on lower- and middle-income earners and boosting private consumption.

CICC chief economist Dr Peng Wensheng said: 'Overall, a higher threshold for income tax payments will increase the spending power of low-income groups more than high-income groups, as the former are significantly larger.'

Xie said the global economic recovery remained fragile and faced uncertainties. He also said tax rebates would help the export sector.

The government will also gradually expand a trial resources tax of 5 per cent in the western areas to other regions.

Xie said economic conditions would be considered when promoting the wider use of the resources tax because the latter can affect consumer prices.