China's financial markets may be facing a liquidity crunch, but the government has a pile of money sitting idle. Not for long, though, if Chinese leaders get their way.
The State Council pledged last week to make better use of the fiscal revenues, a move which, if successful, will not only help reinvigorate the economy but also provide a major fillip to reform.
China is under tremendous budget pressure. In the first five months of the year, central government revenues grew by only 0.1 per cent, 6.9 percentage points off its target for the year. The combined local and central government revenues for the same period similarly fell short, growing by 6.6 per cent.
Of course, budget problems are to be expected in the wake of a financial crisis. But, this time, with economic growth slowing, spending is also skyrocketing: hefty investments are needed for social security, low-income housing and environmental conservation, among others.
The Chinese government is by no means poor. Its fiscal revenue deposits in the central bank reached 3.23 trillion yuan (HK$4 trillion) by the end of May. This does not include the hundreds of billions it deposited with commercial banks.
The root cause of this ballooning stash is bureaucrats' self-serving mentality. Government departments regularly ask for much more money than they actually need. This is why, near the end of the budgetary year, we see officials spending money as hard and fast as they can. Even so, what's left over has accumulated into no small mountain.
It's common economic knowledge that the government does not create wealth. Instead, it takes a share of the people's wealth through taxes and fees. In a rule-based society, a sensible fiscal budget benefits all. But, in China, tax rates are almost as high as those in some developed economies, and money is ludicrously taken out of private hands, where it could be more productive, to gather dust in a bank vault.
This is a double loss - loss accrued to the person or company who has to give up the money, and the opportunity cost. That businesses are asked to pay hefty taxes as they agonise over a lack of capital feeds market jitters behind the liquidity crunch. This unhealthy relationship must end.
The government's resolve to act is commendable. Putting the tax revenues to better use will go a long way towards helping the economy achieve sustainable growth. Given the lacklustre pace of revenue growth so far, fiscal income must now grow at an average of 13.3 per cent for the rest of the year to meet the target. And this inevitably means aggressive tax collection, which will add to the already heavy burden of small and medium-sized enterprises and worsen unemployment. Thus, the government must make better use of its deposits, and push on with its plan to replace business tax with a value-added tax, so as to lower the overall tax burden and stimulate growth.
The government must set some targets. For example, it might target using 20 to 30 per cent of the 3.23 trillion yuan at its disposal to ease the current shortfall. Next, it could even reset the revenue growth target to zero. This would give businesses a much-needed breather and the economy the chance of an upgrade.
According to the State Council's own plans to promote stable growth, rebalance the economy and protect livelihoods, there is already plenty the extra money can do. But before the money can be used, the government must first thoroughly review local government finances. Money that is owed to taxpayers and companies should be paid as soon as possible, while any transfers that are distributed through the departments must also be paid on time.
The government must ready itself for battle. Departments that have no problem taking money will certainly put up a fight when asked to give it back, especially those offices controlled by entrenched interest groups and influential party committees.
Nevertheless, the government is right to seek to balance the rights and responsibilities of those in power. It will be a huge test of the leaders' ability to govern.
In this context, the State Council must be held to its pledge to review work plans and impose the necessary changes, strictly and in a timely fashion. The public and the media should act as a watchdog and monitor progress.
The existence of such a huge pool of unused revenue also points to poor budgeting and poor supervision, as well as problems in China's fiscal administration and decision-making model. Reforms in these areas have not been rolled out despite years in the planning. They should be on the agenda of the reform blueprint that is expected to be unveiled at the third meeting of the Communist Party's Central Committee later this year.
Any major reform can't be undertaken rashly. But, by showing its determination to put the budget revenues to better use, the government has given us hope that things will get better.
This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine. www.caixin.com