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China economy

China to set fiscal deficit to gross domestic product at 2.8 per cent

  • Finance Ministry said to have agreed proposed deficit target of GDP at December’s Central Economic Work Conference
  • The figure, which will be presented for approval at the National People’s Congress in March, compares with 2018’s target of 2.6 per cent
PUBLISHED : Wednesday, 09 January, 2019, 12:33pm
UPDATED : Wednesday, 09 January, 2019, 1:17pm

China’s Finance Ministry is set to propose a small increase in the targeted budget deficit for this year as officials seek to balance support for the economy with the need to keep control of debt levels.

The ministry agreed the proposed deficit target of 2.8 per cent of gross domestic product at its annual Central Economic Work Conference in December, two people familiar with the matter said.

The figure, which compares with 2018’s target of 2.6 per cent, will be presented for approval at the National People’s Congress, China’s legislature, in March, although the final number could still change.

While officials have pledged a proactive fiscal policy this year amid a slowdown in the economy that is being worsened by the trade war with the United States, the proposed deficit expansion is smaller than many economists had forecast.

At the same time, officials can use so-called special bonds, which do not affect the overall budget, to finance local government projects and spur infrastructure investment.

Expectations of aggressive fiscal policy and tax cuts in China may be misplaced, leaving monetary policy with a greater role in supporting the economy, according to Barclays.

“China’s fiscal space is constrained by legacy issues arising from the extraordinarily expansionary policy in the last downcycle, a deteriorating fiscal position, and elevated contingent liabilities, including future pension costs,” economists led by Hong Kong based Chang Jian wrote in a note.

Policymakers have been forced to expand the budget shortfall by the presence of higher priorities amid the growth deceleration.

Review of a turbulent 2018 for China’s economy

With further tax cuts expected in 2019 and higher spending, an increase in the deficit was all but inevitable.

The target is also only a guide to actual spending – the government has had higher outlays than the target since 2015.

The modest increase in the budget target speaks to the government’s need to keep tabs on debt levels, as it is constrained by the legacy of previous stimulus rounds.

At over 260 per cent of gross domestic product at the end of 2017, the nation’s total debt was more than four times what it was in 2008.