China will increase deficit-to-GDP ratio to 3 percent this year from 2.3 percent last year, and cut taxes across the board, Premier Li Keqiang said on March 5 at the annual parliamentary session.
China will pursue a more proactive fiscal policy, with government deficit for 2016 projected to be 2.18 trillion yuan ($335 billion), an increase of 560 billion yuan over last year.
Of the deficit, 1.4 trillion yuan will be carried by the central government, and the remaining 780 billion yuan will be carried by local governments, Premier Li said at the fourth session of the 12th National People’s Congress.
“The moderate increase in government deficit is projected primarily to cover tax and fee reductions for enterprises, a step that will further reduce their burdens,” Premier Li told almost 3,000 lawmakers at the Great Hall of the People in central Beijing.
His government work report included measures that would alleviate the financial burden on enterprises and individuals by over 500 billion yuan.
One of the measures is the replacement of the business tax with the value-added tax in all sectors, ensuring “the tax burdens on all industries are reduced.”
China has made supply-side reform an economic priority, and tax cuts to lower the cost of business are widely expected.
“In the process of supply-side reform, tax cuts are an inherent part,” Zhu Guangyao, vice minister of finance, said on March 5.
Many entrepreneurs have urged for slashing business costs, including Cao Dewang, a member of the Chinese People’s Political Consultative Conference (CPPCC) National Committee.
Cao said his company, Fuyao Glass, a leading international manufacturer of automotive and industrial glass, increased its investment in the United States to 750 million dollars last year, after a comparison of the tax rates and other costs between the United States and China.
The cuts followed earlier steps taken by the State Council, China’s cabinet, that reduced enterprises’ tax burdens and social security payments.
INCREASED DEFICIT “PRUDENT, WISE”
The 0.7 percentage point rise in the deficit-to-GDP ratio, based upon China’s gross domestic product, would provide the government about 470 billion yuan more to spend.
At 3 percent, China’s deficit-to-GDP ratio this year touched the warning line noted by the Maastricht Treaty in 1991, and the deficit increase came at a time of slowing fiscal revenue growth.
With the economy expanding at a 25-year low last year, fiscal revenue grew at its slowest pace since 1988.
But experts within and outside China agreed that, the government, with a sizable income and relatively low debt, could afford the deficit rise to facilitate structural reform.
Stephen Roger, senior fellow of Yale University’s Jackson Institute for Global Affairs, told Xinhua that China has ample fiscal space to increase its budget deficit in order to provide support to economic growth.
“It is both wise and prudent to minimize risks by taking out insurance in the form of proactive fiscal policy,” Roger said.
“There is fiscal space to stimulate consumption through greater public spending on health and education and tax cuts,” David Dollar, a senior fellow with the Brookings Institute, told Xinhua.
And the Maastricht Treaty’s 3-percent warning line is not always fitting, said Jia Kang, a well-known Chinese economist and member of the CPPCC National Committee.
There should not be a universal redline. Rather, the ratio should be determined by a country’s debt balance and structure, economic conditions and interest rate levels, Sheng Songcheng, director of Chinese central bank’s surveys and statistics department, wrote last month in The Economic Daily.
China could raise its budget deficit to 4 percent of GDP or even higher to support broader reforms, Sheng wrote, adding that the deficit increase would not incur big insolvency risks for the government.
“China’s deficit-to-GDP ratio and government debt ratio are lower than those of other major economies,” Premier Li said in his government work report. “Such steps are necessary, feasible, and also safe.”