China’s Deficit Rate to Rise to 3% in 2023 as Beijing Strives to Spur Consumption, Increase Transfers to Local Governments

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The latest budget report at China’s Two Sessions congressional event highlights a rise in the deficit ratio in 2023, as the Chinese central government endeavours to drive growth in domestic consumption while expanding the transfer of funds to the local government level.

China’s 2023 budget report was released on March 5 at the opening session of the 14th National People’s Congress, in the form of the “Report on Central and Local Budget Implementation in 2022 and the Draft Central and Local Budget for 2023” (关于2022年中央和地方预算执行情况与2023年中央和地方预算草案的报告).

Alongside the Government Work Report, the Budget Report is considered one of the key highlights of the annual Two Sessions congressional event, with policy plans for the investment and use of financial funds playing an especially critical role in China’s socialist market economy.

The Budget Report sets national general public budget revenue at 21.73 trillion yuan in 2023, for an increase of 6.7% compared to the year previously, while the national general public budget expenditure is set at 2.7513 trillion yuan, for an increase of 5.6%.

The deficit ratio is set at 3%, an increase of 0.2 percentage points over the previous year, while the national fiscal deficit is forecast to be 3.88 trillion yuan, for an increase of 510 billion yuan over the previous year.

While the scale of the fiscal deficit has expanded this year, in terms of composition, the newly increased deficit of 510 billion yuan is comprised the central government deficit, while the local fiscal deficit of 720 billion yuan is the same as the previous year.

State-owned media reports that the latest Budget Report is in line with the call for “active fiscal policy that must be more vigorous and efficient” that was made by the Central Economic Work Conference for 2023.

The 2023 Budget Report stresses the use of fiscal resources to stabilize growth, employment, and prices, particularly in the wake of last year’s Covid disruptions as well as heightened geopolitical tensions.

The Chinese central government has allocated 3.789 trillion yuan in spending at its own level, for a year-on-year (YoY) increase of 6.5%, maintaining growth for the second consecutive year.

The central government has also further increased its transfer payments to local governments to 10.0625 billion yuan in total, for an increase of 3.6%, or 7.9% following the exclusion of the one-off arrangements to support grassroots implementation of tax cuts and fee reductions and special transfer payments of around 500 billion yuan for policies such as support for local living conditions.

“We will promote greater channelling of funds to the grassroots level to ensure that expenditures for the ‘three guarantees’ (三保) are fully ensured,” the Budget Report said.

“We will consolidate local government welfare accountability, especially key county-level accountability, and urge local governments to respond quickly, properly handle and resolve risks in individual areas where ‘three guarantees’ risk events occur.”

No further tax cut quotas set

The 2023 Budget Report does not set any concrete targets for the tax and fee cut policies that have assumed prominence of place in recent Chinese fiscal policy.

In recent years, China has launched a succession of “large-scale preferential tax and fee policies” which stepped up in intensity during the Covid pandemic, as policymakers sought to help Chinese businesses to stay afloat amidst challenging economic conditions. Official data indicates that in 2022, China’s macro tax burden had fallen to the comparatively low level in global terms of 13.8%.

For this reason, the formulation of preferential tax and fee policies in 2023 and whether or not Beijing will press ahead with further tax cuts has become a focal point for discussion.

The 2023 Budget Report said that the Chinese government would “coordinate the needs for corporate bailouts, fiscal sustainability and optimization of the tax system structure in accordance with the principle of stabilising the macro-tax burden, and further improve policies such as tax cuts and fee reductions, tax refunds and tax deferrals.”

More specifically, it highlighted efforts to “strengthen the precision and targeted nature of preferential tax and fee policies… comprehensively evaluate and analyze current tax incentive policies and measures, consider the actual needs of enterprises in the current phase of economic development, strengthen the continuity of policies across the years, and adopt measures such as continuation, optimization, adjustment, and strengthening by category to prevent policy breaks or sharp turns.”

Support for expansion of domestic demand top priority

The “Major Revenue and Expenditure Policies for 2023” (2023年主要收支政策) section of the Budget Report gives first priority to efforts to expand domestic demand.

“Fiscal policy will support the growth of domestic demand across three areas: promoting recovery and expanding consumption, strengthening the guidance and driving role of government investment, and stabilizing foreign trade.”

In terms of expenditures to support living standards, 2023 will see the provision of 170 billion yuan in financial subsidies through general transfer payments, and 30 billion yuan in 2022 accrual-based carryover funds that will be used to support local governments in pandemic prevention and control, with a focus on county-level finance.

The Budget Report also states that in 2023 Chinese fiscal policy will encourage qualified parts of the country to provide appropriate subsidies or loan discounts for green smart home appliances, green building materials, and energy-saving products.

With regard to investment, the Report highlights the need for “giving attention to the performance of government investment, preventing the blind expansion of investment, and encouraging and attracting more private capital to participate.”

On the matter of foreign trade, the Report calls for “integration with international high-level economic and trade rules, and supporting the reform and innovation of free trade pilot zones.”

Special-purpose bond issuance to see slight uptick

In tandem with the increase in the deficit ratio to 3%, in 2023 the scale of special-purpose bond issuance has moderately increased. The new special-purpose bond debt quota is 3.8 trillion yuan, for an increase of 150 billion yuan over the previous year.

With regard to special-purpose bond usage, the Budget Report requires that “preliminary preparations for special-purpose bond projects should be effectively performed, the quality of outstanding projects should be improved, the concentration of funds used should be appropriately increased, and projects which are high stages of maturity as well as projects under construction should receive priority support.”

With regard to the management and reporting requirements for special-purpose bonds, the Budget Report also mandates “strengthening the post-investment management of special-purpose bonds, strictly prohibiting conduct such as ‘replacing expenditures with appropriations” and ‘allocation all at once,'” alongside “improvements to the project management mechanism, repaying the principal and interest in full and on time, and ensuring that there is no risk in relation to statutory bonds.”

In addition, the Budget Report calls for strengthening the comprehensive governance of local government financing platforms and requiring them to gradually dispense with government financing functions.

State-owned media said that expansion of the deficit ratio and the scale of special debts is a reflection of effort to improve the efficiency of China’s “proactive fiscal policy.”

“It is necessary to better coordinate the current and long-term, ensure a more sustainable fiscal situation, and firmly defend the bottomline against the onset of systemic risk.”