China needs bold reform to counter slowdown in fiscal revenue growth

Hu Shuli says waiting out the lean times is not an option, and officials should seize the chance to cut public spending and overhaul the tax system

PUBLISHED : Thursday, 25 April, 2013, 12:00am
UPDATED : Thursday, 25 April, 2013, 3:03am

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.

What, then, should the government do? China's tax burden is already heavy, nearly comparable to that in developed economies. Since 2009, it has risen to above 35 per cent of income. Officials should stop trying to explain why the current tax level is reasonable, and do more to better manage people's wealth.

To improve its fiscal position, a government must either raise its income or cut its expenses. Today, China can try to cut unnecessary expenses, allocate funds more sensibly, and ensure they are efficiently used.

Beijing's pressing task is to cut its administrative expenses, which have ballooned in recent years because of an expansion of the government's role and function, and its complex bureaucratic structure.

On taking over, China's new leaders promised they would not: build more government offices; add to official headcount but cut it; increase the budget for official receptions, overseas trips and vehicle purchase, but cut it. These targets, though widely praised, must not remain targets only. The central government's budget for 2013 is indeed smaller than previous ones, but it has failed to meet public expectations. It must honour its promises.

The government must overhaul the fiscal and tax system to ease its financial pressures. It should make use of modern management know-how to ensure the effective use of fiscal capital. This also means it must open its books for public scrutiny to prevent abuse.

Further, with the wider application of the value-added tax, the powers and duties of different levels of government must be clearly defined. In the longer run, local governments should be able to draw up budgets and issue bonds legally and independently, under an open legal framework. The amended budget law could point the direction to further improvements.

Finance minister Lou Jiwei said recently that the government was studying how to take on the "huge task" of fiscal and tax reform. The job will no doubt be made more difficult as public expectations grow high in times of fiscal consolidation. But the government must seize the opportunities for change.

This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine.