15th Five Year Plan set to drive China’s deficit-to-GDP ratio north of 4%
Spending on the social safety net expected to save China’s economy.
One of China’s leading economists says the 15th Five Year Plan (2026 - 2030) will see Beijing dramatically step up debt-fuelled fiscal expenditures, in a bid to satisfy ambitious long-term growth targets.
Lian Ping (连平), director of the China Chief Economists Forum, expects Beijing to raise the deficit-to-GDP ratio to north of 4% during the period of the new five-year plan, as well as issue 1.5 trillion yuan in ultra-long-term special government bonds annually.
China targets developed economy status by 2035
The Communist Party just revealed critical details on the 15th Five Year Plan, at the Fourth Plenary Session of its Central Committee held from 20 - 23 October in Beijing.
The Plan - as well as the Plenary Session - is a holdover from China’s command economy past, serving as a critical blueprint for the Communist Party’s development policies for each five-year period.
A key target reiterated by the 15th plan is the longer term goal of China achieving “mid-tier developed” nation status in terms of per capita GDP by 2035.
In a recent opinions piece (“连平：“十五五”财政政策将怎样积极有为”), Lian argues that in order to achieve this goal, China will need to maintain real GDP growth of at least 4.5% per annum during the period from 2026 to 2030 covered by the 15th Five Year Plan.
China will face major headwinds to growth during this period, including steady population declines, further adjustments to the property market, a transition in its growth model, as well as continued global uncertainties.
Consequently, Lian argues that “fiscal policy should become more active…and create a vigorous driver of aggregate demand.”
He highlights the need for expanding the scale of China’s government expenditures, as well as the more innovative usage of policy tools.
Inadequate consumption still China’s biggest challenge
Lian argues that the biggest challenge faced by China’s economy at present remains inadequate domestic demand.
For this reason, the 15th Five Year Plan calls for “upholding the strategic key point of expanding domestic demand.”
Lian highlights in particular the weakness of household consumption, due to the impacts of the property slump on personal wealth, as well as concerns over the quality of the social safety net.
“This is reflected by households having a low willingness to consume, due to expectations of payment pressures when it comes to education and healthcare,” he writes.
Given that weak consumption is viewed as the root cause of China’s inadequate domestic demand, Lian argues that fiscal expenditures should focus on improvements to the social welfare system, as well as transfer payments that seeks to redress wealth inequities.
“Fiscal policy should adopt measures that ‘invest in the people’ - via improvements to the social welfare system, in order to stabilise household expectations,” he writes.
“Fiscal policy should be a core tool for the reallocation [of wealth,] with targeted policies such as taxation and transfer payments able to effectively adjust gaps in wealth distribution, and shrink the gulf between the cities and the countryside.”
Fiscal policy as Cold War economic tool
Despite the occasional thawing of tensions between China and the US, Beijing’s political leaders anticipate the continuation of Cold War tensions between the world’s two remaining superpowers for the indefinite future.
In its recommendations on the 15th Five Year Plan, the Fourth Plenum referred specifically to an “increase in factors that are uncertain and difficult to predict” during the period from 2026 to 2030.
The Plenum issued a rallying cry for China to “dare to struggle, be adept at struggle, and have the courage to face the grand test of strong winds and urgent waves - or even raging storms.”
Lian believes this rhetoric points to the use of more active fiscal policy to offset the economic impact of any shock downturns in Sino-US relations.
“This strategic decision requires that fiscal policy not only keep an eye on current economic performance, but must also possess strategic foresight,” he writes.
“As a foundation and key pillar for state governance, fiscal policy is a firewall for withstanding risk, as well as a ballast stone for stabilising expectations.”
Specific recommendations for China’s fiscal policy
Lian offers a series of four key recommendations for Chinese fiscal policy during the period of the 15th Five Year Plan.
The new normal of a 4.0% deficit ratio
Lian expects the deficit to remain high, as growth in fiscal revenues slows and inelastic expenditures increase.
He forecasts a normalised deficit ratio of 3.8% - 4.0% - or even as high as 4.2% in the event of shock contingencies.
“This provides the necessary support to macroeconomic stability and avoids the disorderly accumulation of debt risk, “ Lian writes.
Such a change will mark a sharp contrast from precedent, with Beijing having formerly sought to keep its deficit-to-GDP ratio beneath the EU Maastricht Treaty threshold of 3%.
Transfer payments and strategic missions
Lian expects China to issue 1.5 trillion yuan (USD$322.24 billion) in ultra-long-term special bonds during each year of the 15th Five Year Plan, with funds to be directed toward scientific and technological innovation, national security, and improvements to China’s social safety net.
Key focal points will include spending on both childcare and aged care, as well as transfer payments to rural villages and underdeveloped areas, in a bid to boost household consumption.
Deepening of fiscal system reforms
China’s existing fiscal system was established by Premier Zhu Rongji in the mid-1990s, and currently suffers from the problem of imbalances when it comes to central and local revenues and expenditures.
The issue has forced cash-strapped local governments to turn to methods such as land sales and local government financing vehicles (LGFV) to raise money, contributing to both overheating property markets and widespread regional debt risk.
Lian says China should make strides in addressing this problem during the 15th Five Year Plan, by increasing the central government’s share of expenditures, as well as tax reforms conferring a greater share of revenue to local governments.
Rooting out local government debt risk
Local government debt risk is a matter closely related to the reform of China’s fiscal system.
Chinese pundits consider the deficiencies of the three-decade old fiscal system to be the root cause for the accumulation of risk-fraught debt by China’s local authorities.
Lian expects China to enter the “assault phase” for the dissolution of this debt risk during the 15th Five Year Plan.
“The mentality of policymakers will be active stabilisation, and treating both the symptoms and causes,” he writes. “They will firmly guard the bottom line against the onset of systemic risk.”
He foresees a three-part process of:
Dissolution of outstanding debts, and the inclusion of hidden debts in government balance sheets, in a bid to reduce debt cost and risks. Lian expects China to see the issuance of around 4.5 - 5 trillion in new local government special bonds each year, with some of these proceeds used to support the rollover of existing debts. He also expects the Chinese government to use debt restructuring, term extensions, rate reductions and repayment using central fiscal revenues to deal with the matter.
Strict control of new risk. This will require addressing the issue of local government finance vehicles that regional governments have long used as covert channels for raising debt.
Improvements to long-term funding mechanisms - the focus here will be on reforming fiscal relations between the central and local governments.