Special Report:Global Financial Crisis
by Chinese media Writer Liu Jie
BEIJING, Feb. 26 (Chinese media) -- With government revenue shrinking amid an economic slowdown, China is likely to see the highest budget deficit in years in 2009 as it tries to do more with less, economists have warned.
China wants to stimulate its economy, the world's third-largest, by spending more on infrastructure and social programs that have an important bearing on people's lives.
The 2009 deficit "is set to be the highest in years, as revenue is likely to show a sharp drop, while the government will raise social spending to stimulate domestic demand and avoid an economic downturn," said Yang Zhiyong, a researcher with the Chinese Academy of Social Sciences, a government think tank.
Experts interviewed by Chinese media said the government should try to spend money efficiently to ensure that it has a tangible impact.
The draft budget will be submitted to the annual national legislative meeting, which opens March 5. China's fiscal year starts on Jan. 1.
Finance Minister Xie Xuren warned last month that 2009 would be "a very tough year" due to the possible mismatch between revenue and expenditure. Data released by the Ministry of Finance (MOF) showed that government revenue fell 17.1 percent from a year earlier to 613.16 billion yuan (90.17 billion U.S. dollars) in January.
"The sharp decline should not be surprising, since the revenue would certainly shrink as the economy slowed. The rapid revenue growth that China recorded in the past several years was temporary," said Bai Jingming, an economist with the MOF.
The Chinese economy slowed to 6.8 percent in the fourth quarter, the worst showing in nine years, as the global downturn sapped demand for Chinese exports, which comprise about 40 percent of gross domestic product (GDP).
Fiscal pressures would increase, said Bai, as the government would borrow and spend more to fund the growing need for investment.
Some 1.4 trillion yuan of treasury bonds is set to enter into market this year, a hefty increase from last year's 861.5 billion yuan, according to a report released by the National Association of Financial Market Institutional Investors, a Beijing-based non-profit banking organization on Feb. 3.
The country has a total debt of 5.5 trillion yuan by the end of last year, equivalent to 18.3 percent of GDP. It was well below the 60 percent alarm level set in the European Union (EU)'s "Stability and Growth Pact", which was adopted by the EU member states in 1997.
China's deficit hit a record 309.69 billion yuan in 2002, or 3.02 percent of GDP. At the time, the country had an active fiscal policy, which dated back to 1998 as part of its response to the Asian financial crisis.
Under the EU pact, governments may not run a budget deficit greater than 3 percent of GDP.
The red ink began to shrink in 2005, when a more prudent fiscal policy was adopted. The deficit was less than 0.4 percent last year.
Government revenue, even during years of strong growth, was not enough to fund all the public services the government offered.
"The steady rise in fiscal revenues before this year reflected the 1994 tax reforms, which redistributed revenues between the central and lower-level governments," said Yang.
Government revenue comprised only 10.27 percent of GDP in 1995.It rose to 20 percent last year, well below the international norm of 30 to 40 percent, he said.
"There are no other countries in the world like China that face such a huge task of providing public services to a population of 1.3 billion. It is no easy job to provide services with less than one trillion U.S. dollars a year," said Bai.
Per-capita government revenue in China was less than 10 percent that of developed countries, he said.
Nonetheless, late last year, the government announced massive tax cuts, along with a 4 trillion yuan stimulus plan for the economy. Those cuts, and the slowing economy, have had a dramatic impact on revenue.
MOF data showed tax revenue fell 16.7 percent to 563.9 billion yuan in January. Breaking down the total, corporate income tax fell 24.8 percent and car purchase taxes slid 21.2 percent. Export tax rebates jumped 25 percent, reflecting higher rebate rates to help exporters deal with falling foreign orders and mounting inventories.
Yang forecast challenging fiscal conditions in 2009, as a long-awaited value-added tax reform came into effect, saving companies 120 billion yuan this year.
"Hefty spending on social services, combined with the massive tax cuts, revealed the government's determination to give something back to the public. Officials understand that social spending is crucial to prop up domestic demand and shift the economy's dependence from exports to consumption," he said.
Bai agreed with that assessment. He said the government had changed its thinking. It would curb investment in heavy industries like steel and petrochemicals and enhance spending on health, education, social security and rural areas, which have a direct bearing on living standards.
Those ideas were definitely reflected in the 4-trillion yuan stimulus plan "where government investment in building airports and toll roads only took up a tiny part, and most of these projects would be financed by bank credit," said Bai.
In contrast, investment in agriculture and rural areas would definitely increase, as the infrastructure was insufficient for current or expected demand, said Jia Kang, an MOF economist.
Experts also urged the government to improve efficiency and tighten oversight to prevent any misuse of funds.
"Although we have enhanced efficiency after a series of reforms, there is still much room to improve, notably in the fight against corruption, vanity projects and redundant projects," said Zhu Qing, a finance professor at China Renmin University.
He said runaway increases in administrative expenses could no longer be tolerated. Such expenses "only took up 5.4 percent of fiscal revenue in 1980, but that jumped to 14 percent in 2006. If all the money was spent on improving people's lives, complaints would cease."
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