Opinion | China needs bold reform to counter slowdown in fiscal revenue growth

The days of belt-tightening are finally here. China's latest fiscal data shows that, in the first quarter of this year, public revenue grew by only 6.9 per cent, down 7.8 percentage points from a year earlier. In March, central government revenue even fell by 5.2 per cent year on year, a dip after five months of growth. By contrast, China's public expenditure increased by 12.1 per cent in the first quarter. The growth in spending is outstripping the rise in revenue.

These figures are to be expected, as China's economy is slowing after years of growth at breakneck speed.

Since reforms began, the government has from time to time seen its revenue growth slacken, most notably after China joined the World Trade Organisation. But this time it's different. China faces a turning point and no one should hope to wait out the hard times. Instead, the relevant government departments should take the opportunity to increase budget transparency and accelerate fiscal and tax reforms.

Policymakers understand that the days of robust revenue growth are behind us, while public spending cannot be easily cut. How should the government respond? There are three things it must not do.

One, it must not levy improvised fees and charges on businesses and residents that amount to a tax hike. This was what happened last year: when local governments found their revenues declining, they imposed all kinds of unreasonable administrative charges and penalties in a misguided bid to raise revenue. This goes against the central government's call for tax restructuring to lighten the tax burden. Unfortunately, in reality, local officials may easily evade the call to cut taxes, but cannot so easily ignore the hard targets of revenue growth.

Two, the government must not ignore the danger of budget deficits. While a balanced budget is not a must, and it's acceptable for governments today to run a deficit as a way to buffer the economy against a downturn, such a tool should be used sparingly. China's fiscal deficit this year is projected to be 1.2 trillion yuan (HK$1.5 trillion), a near-doubling from last year's and a record high. In the five years from 2009, the deficit totalled 4.8 trillion yuan, several times the amount spent on tackling the Asian financial crisis. Though China's budget deficit remains below the OECD-recognised safe level of 3 per cent of gross domestic product, its rapid rise should be a cause of concern.

Three, the mass printing of money must stop. At the end of last year, China's M2 measure of money supply topped the world at 97.42 trillion yuan. Given government officials' outsized appetite for investment, particularly in the wake of Beijing's 4-trillion-yuan stimulus, this loose monetary policy will only promote the old model of inefficient growth that China now wants to avoid. It will also worsen inflation and aggravate a debt crisis.