China tipped to cut fiscal deficit ratio as it tightens purse strings, goes for steady growth
Ratio figure due to be announced at National People’s Congress next week as the government unveils its budget plans for 2018
The central government will likely propose a lower-than-expected fiscal deficit ratio of 2.7 per cent in its budget report to the National People’s Congress next week, highlighting Beijing’s determination to prevent financial risks and cut debt, according to a senior Chinese finance expert.
A fiscal deficit is when a country spends more than it earns.
China was expected to cut the ratio between the fiscal deficit and gross domestic product to 2.7 per cent in 2018 from a budgeted 3 per cent in 2017, Zhu Qing, a professor of fiscal science at Renmin University in Beijing, told a forum.
Zhu, a senior researcher close to the government, did not reveal the source or basis for his forecast. Premier Li Keqiang solicited Zhu’s opinions on tax matters at a symposium in September.
A lower deficit ratio does not necessarily mean an immediate fall in government spending, given the continued growth in China’s economy. The country’s gross domestic product grew 6.9 per cent last year.
Zhu added on Thursday that China’s “real” deficit ratio, if other government borrowings not included in the budget were factored in, might rise in 2018. Special construction bonds, for instance, are included in the “government fund revenue budget” and are not calculated into the headline deficit ratio.
The Ministry of Finance is due to submit the 2018 budget plan, including the proposed fiscal deficit ratio, to the NPC for review and approval.
President Xi Jinping has made financial risk control a top priority for the coming years.
A smaller headline deficit ratio suggests that Beijing is seriously shifting towards measured rather than rapid growth and will not adopt big economic stimulus packages that could worsen the country’s debt problems.
Years of government stimulus and spending have piled up more than 16 trillion yuan (US$2.5 trillion) in local government debt and still unidentified contingent liabilities held by state firms, public-private partnership projects and other entities.
The level of debt – now 256 per cent of the national GDP – was a major factor in the decision by international rating agencies Moody’s and S&P to downgrade the country’s sovereign credit rating last year.
It also prompted the Chinese leadership to make financial risk control one of the top priorities over the next three years, with all financial regulators keeping tabs on the pace of deleveraging.
On the sidelines of the start of the annual session of top political advisory body on Saturday, Liu Shangxi, head of the ministry’s research institute, said the market would play a bigger role in new bond issuances this year.
“Whatever the quota is, the central authorities have made it clear that it will not help repay local debt,” Liu said.
He said transparency was key to tackling the mountain of local government debt, and the authorities should speed up accounting reforms because “it remains unknown how hidden liabilities are defined and calculated and what size they are”.
All Chinese provinces will now need more central government cash to help them fund public services, according to a report published by Renmin University’s school of finance on Tuesday.
The financial self-sufficiency ratio of 22 provinces is lower than 50 per cent, including a ratio of 11 per cent in Tibet, 16.1 per cent in Qinghai province, 24.7 per cent in Gansu and 26.8 per cent in Heilongjiang.
The government should push forward legislation to increase local taxes and give local governments some autonomy in deciding tax rates to provide a stable local revenue stream, the report suggested.
Meanwhile, the rate of central government taxes or central-local shared taxes should be lowered to ensure the overall tax burden remained unchanged, it added.
Beijing gave a breakdown last month of which areas the central or local governments were responsible for paying for and has just released government restructuring guidelines promising more delegated powers for local authorities.
Meanwhile, revenues from an environmental tax on polluters, which will be levied from April, will go to local coffers.
Bai Yanfeng, dean of the school of public finance at the Central University of Finance and Economics in Beijing, said spending on high-end consumption like entertainment should be targeted for more taxation because levies had been reduced as part of VAT reforms. The cash generated should be transferred to local authorities, Bai said.