Can China Get Rid of High Fiscal Deficit?
On January 30, China’s Ministry of Finance released the data on the country’s fiscal revenue and expenditure for 2022. It shows that in the last year, the national general public budget revenue was RMB 20,370.3 billion, an increase of 0.6% over the previous year, and an increase of 9.1% after deducting the tax rebate factor. In the same year, the national general public budget expenditure was RMB 26.0609 billion, an increase of 6.1% over the previous year. The national government fund budget revenue was RMB 7787.9 billion, a decrease of 20.6% over the previous year. At the same time, the national government fund budget expenditure was RMB 11058.3 billion, a decrease of 2.5% over the previous year. In the context of last year’s economic downturn and large-scale tax cuts, it was not easy to maintain positive growth in general budget revenue throughout the year. However, on the whole, the gap between fiscal revenue and expenditure has widened. This, in turn, will have an impact on the implementation of fiscal policy in the new year. Under the fundamental policy idea of fiscal expansion to support economic development, fiscal sustainability needs to be considered.
While the overall fiscal revenue achieved positive growth in 2022, the general budget deficit for the year reached RMB 5.7 trillion due to the increase in fiscal expenditures. The resulting deficit ratio (the ratio of the fiscal deficit to the current year’s GDP) rose to 4.7%, not only higher than the 3.8% in 2021, but also much higher than the 2.8% deficit ratio established in early 2022. If the revenue and expenditure of government funds are included, the fiscal deficit in 2022 would reach RMB 8.96 trillion, which was 51% higher than that in 2021 and higher than the record of RMB 8.72 trillion set in 2020. Researchers at ANBOUND believe that the causes of the sharp increase in the fiscal deficit in 2022 are worthy of attention. Can China’s past fiscal fortunes be able to withstand being continuously “hollowed out”? This will have a considerable impact on the Chinese economy in 2023.
It appears that the increase in the COVID-19 measure expenditures, the downturn in the real estate market, and large-scale tax reductions are the three main reasons for the expansion of China’s fiscal revenue and expenditure last year. Among these, large-scale tax and fee reductions were an established arrangement of last year’s fiscal policy to support the development and survival of enterprises, and for it to be one of the reasons is to be expected. The national tax revenue was RMB 16,661.4 billion, a decrease of 3.5% from the previous year, and an increase of 6.6% after deducting the tax refund factors. Due to the impact of the novel coronavirus outbreaks, the economic downturn has affected business activities, which has discounted the effect of this policy. Simultaneously, due to the economic slowdown, social security and employment expenditures in the general budget increased by 8.1% over the previous year, reaching RMB 3,660.3 billion.
Due to the continuous outbreaks of COVID-19, large portions of resources were invested in the related control measures in China last year. Among the fiscal expenditures in 2022, health expenditures reached RMB 2,254.2 billion, an increase of 17.8% from RMB 1,920.5 billion in 2021. Data show that Guangdong’s pandemic expenditure in 2022 exceeded RMB 71 billion, almost equivalent to the total expenditure of the previous two years of RMB 76 billion, equivalent to more than 5% of the province’s general public budget revenue in 2022. The Beijing municipal government stated that nearly RMB 30 billion was spent on COVID-19 vaccines, testing, quarantine, and other related expenses last year, equivalent to more than 5% percent of the city’s general public budget revenue that year. Beijing’s budget deficit rose 55% last year to RMB 144 billion.
The deterioration of the real estate market in 2022 not only caused a sharp decline in related tax revenues but also significantly reduce government land transfer revenue, resulting in a sharp decline in government fund revenue within the budget. Among the taxes related to land and real estate, the deed tax was RMB 579.4 billion, a decrease of 22% over the previous year. On the other hand, the land value-added tax was RMB 634.9 billion, a decrease of 7.9% over the previous year. Property tax was RMB 359 billion, an increase of 9.5% over the previous year. The cultivated land occupation tax was RMB 125.7 billion, an increase of 18% over the previous year. Meanwhile, the urban land use tax was RMB 222.6 billion, an increase of 4.7% over the previous year. Among government fund revenues, land sales revenue was only RMB 6.69 trillion, a drop of 17.8% from the previous year and the lowest annual revenue since 2018. Some analysts pointed out that if the cost of land sales is deducted, the revenue of local governments from land sales last year was only RMB 312 billion, which was two-thirds less than that in 2021.
With a 3.5% decline in tax revenue, China’s national non-tax revenue in 2022 increased by 24.4%, making a major contribution to the general budget revenue growth from negative to positive. The person in charge of the Ministry of Finance pointed out that the central non-tax revenue increased by 96.5%, which was mainly driven by special factors such as specific state-owned financial institutions and franchised institutions turning over profits into the warehouse, and the rise in crude oil prices led to an increase in special income from oil special income funds. Excluding these factors, the central non-tax revenue achieved a growth of about 3%. Local non-tax revenue increased by 17.8%, mainly due to the local multi-channel revitalization of idle assets and increased revenue related to mineral resources, which drove up the growth of local non-tax revenue by 14.3 percentage points. It can be seen that the non-tax revenue is an act of expenditure of the central government to tap the fiscal potential of the local government. Although it made a major contribution to making up for last year’s fiscal gap, it also signifies that the fiscal potential in 2023 has been eroded, and the sustainability of the fiscal balance is facing increasingly severe conditions.
Judging from last year’s situation, the local fiscal revenue and expenditure pressure was greater. In 2022, the central general public budget revenue was RMB 9488.5 billion, an increase of 3.8% over the previous year. The local general public budget revenue was RMB 10881.8 billion, a decrease of 2.1% over the previous year. Among government fund revenues, the central government fund budget revenue was RMB 412.4 billion, an increase of 3% over the previous year. Local government fund budget revenue at the same level was RMB 7,375.5 billion, a decrease of 21.6% over the previous year. This makes local governments have to rely on central transfer payments and the issuance of local government bonds to solve the nearly RMB 14.7 trillion in revenue and expenditure gap at the same level.
In the new year, to promote the sustained recovery of the economy, it is expected that a proactive fiscal policy will be implemented this year. The country’s Ministry of Finance has repeatedly emphasized that the fiscal policy will increase its efficiency, and it is expected that this year’s fiscal deficit will expand. That being said, where the money will come from is still a major question. Generally speaking, the bulk of fiscal revenue is taxation, which mainly comes from business operations. However, tax revenue is the result of business improvement, and it must “lag behind” the demand for fiscal expenditures. At the same time, fiscal expenditures are on the rise substantially, which will also put a lot of pressure on the fiscal balance this year. Regardless it is the short term, the medium, or the long term, the pressure on fiscal revenue and expenditure will increase. With the property in 2022 being continuously eroded and the demand in 2023 still increasing, the space for a proactive fiscal policy this year is narrowed, and can only resort to debt expansion. The bond market will play an important role in 2023, not only providing financing for enterprises but also for the government, thereby indirectly relieving fiscal pressure.
However, the expansion of government debt has its limitation. In 2022, among fiscal expenditures, debt interest payments reached RMB 1,135.8 billion, an increase of 8.7% over the previous year. In the case of continuous accumulation of government debt, debt expansion also needs to consider the balance between short-term benefits and long-term burdens. According to the researchers at ANBOUND, the financial issue is essentially an economic issue. Only when the economy is stable and growing can the sustainability of fiscal revenue and expenditure be considered. Therefore, stabilizing the economy is fundamental to stabilizing finances.
From the data released by China’s Ministry of Finance, the gap between fiscal revenue and expenditure has widened last year. Not only did the country’s general budget deficit rate reach a high of 4.7%, but the general fiscal revenue and expenditure gap was RMB 8.96 trillion. This will have an impact on the implementation of fiscal policy in the new year. Under the basic policy idea of expanding fiscal expenditures to support economic development, it is even more necessary for China to rely on debt expansion to ease the pressure. This makes the balance between fiscal sustainability and economic development all the more important.
READ MORE ANALYSIS ABOUT THE REAL CHINA HERE: https://t.me/PublicPolicyThirdChannel