Supply Side Reforms Will Push Chinese Deficit to Record High in 2017

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The latest data from the Ministry of Finance indicates that China has just posted its first Q1 fiscal deficit since the turn of the decade as the government accelerates spending to support supply side reforms.

Figures released by the Ministry of Finance indicate China’s Q1 deficit was 155.1 billion yuan (approx USD$22.53 billion), with national public revenues and expenditures estimated to be 4,436.6 billion yuan and 4,591.7 billion yuan respectively.

According to China Business Network this marks the first time that China has posted a Q1 fiscal deficit since the Ministry of Finance began to publicly release data on public revenues and expenditures via its official website in 2009.

The timing is unusual given that in China quarterly deficits usually appear towards the end of the year, while the scope of the Q1 deficit is also abnormally large, with analysts expecting the Chinese deficit to continue to breach record levels in 2017.

Deficit set to reach record-breaking high as government accelerates spending

A recent government report sees China’s deficit ratio remaining at the relatively high rate of 3% this year.

Some analysts, however, such as Wu Huabin, a senior researcher with the Shanghai University of Finance and Economics, expects it to exceed this level on the back of expanded government spending.

Wu points out that the reason for the Q1 deficit is an increase in the pace of government expenditures, and expects the deficit to hit a new historic high this year.

At a press conference for the release of the Q1 government balance figures, Li Jinghui, head of the Ministry of Finance budget department, said that budget approvals would accelerate this year, with the central government already handing down over 80% of standard public budgets.

Government expands spending to support side supply reforms

Analysts point out that China is accelerating fiscal stimulus as part of efforts to support far-reaching supply side reforms in addition to stabilising economic growth.

According to a recent paper by Liu Shangxi, head of the China Academy of Fiscal Science, China’s proactive fiscal policy is currently directed towards advancing supply side reforms and resolving structural imbalances, as opposed to a prior focus on stimulating or stabilising economic growth.

Liu writes that the government is now shifting towards cuts in taxes and administrative fees as a means of driving innovation and economic growth.

China has launched tax and fee cuts worth over 580 billion yuan this month, in order to unleash economic growth by reducing the economic burden on companies.

Premier Li Keqiang said at a recent meeting of the State Council that China would take advantages of improvements to economic conditions to reduce the burden borne by enterprises.

Zhang Bin, chairperson of the tax revenue research office of the financial strategy faculty of the China Academy of Social Sciences, said that the current round of tax cuts is directed at supporting small enterprises as well as innovative tech companies.

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