One of China’s leading economists says that consideration should be given to lifting the country’s deficit ratio to 3% next year in order to deal with more challenging economic conditions.
An executive meeting of China’s State Council held on 23 July pointed to the need for “active fiscal policy to become more active,” as worsening trade tensions with the United States cast a pall over the economy and growth continues to ease.
Speaking at the 2018 Yabuli China Entrepreneurs Forum, Jia Kang (贾康), president of the China Academy of New Supply-side Economics, pointed out that the Chinese economy has sought a soft landing and an “L-shaped transition” ever since the start of the decade, successfully posting 12 quarters of growth between 6.7 – 6.9% since the second half of 2015.
China now confronts uncertainties and fresh downward pressure as a result of intensifying Sino-US trade tensions, however, and as a consequence must make “discretionary” adjustments to macro-policy.
These include both looser monetary policy as well as an accompanying increase in active fiscal policy and a rise in China’s deficit ratio.
“This year the officially reported figure is 2.6%, for the past two years it’s been 3%,” said Jia. “If necessary next year we can at least raise it in advance to 3%….if necessary, in subsequent years it will be raised slightly higher.
“If feel that there will not be too much risk, but prudent consideration must be made.
“There is a positive correlation between the scope of debt and a rise in the deficit ratio. If there is an appropriate increase in the deficit ratio, next year and in subsequent years standard mechanisms to raise debt to supplement the deficit can be more actively applied.
“If over the next several years principal repayment pressure remains comparatively even, then greater consideration should be given to moderate increases in debt-funding each year.
“Our current public debt is under 40% of GDP according to official figures…it can be said that this is a comparatively conservative position within the safe zone, and if needed we can appropriately increase it to 40%, 45% or even 50% over upcoming years.”
Jia Kang made the caveat, however, that official debt figures do not include the “hidden debt” of local governments.
Jia also called for structured reductions in China’s tax regime, with a view to reducing the burden on private enterprise.
“The original weighted deduction of enterprise R&D investments was 150%, and subsequently rose to 175%. Consideration can now be given to further increasing it to 200% or 250%,” said Jia.
“If enterprises do not engage in R&D expenditures then they won’t be able to enjoy [the benefits] – this supports the further release of enterprise potential.
“At present in order to truly reduce the burden on enterprises we can’t just talk about it, but must definitely include various other burdens within our vision and see the full picture.”