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Coordinating Fiscal Policy With Reforms
China should enhance proactive fiscal policy, further cut taxes and administrative fees and raise the scale of special bonds issued by local governments in 2019
  ·  2019-01-14  ·   Source: NO. 3 JANUARY 17, 2019

The proactive fiscal policy deserves much of the credit for helping the Chinese economy maintain stable growth in a volatile external environment during 2018. Throughout the year, the fiscal policy was generally expansive, and the government made great efforts to lower taxes and administrative fees. Value-added tax, corporate income tax and personal income tax were all cut, saving an estimated 1.3 trillion yuan ($189.5 billion) in 2018. The scale of fiscal expenditure was also appropriate with the fiscal deficit ratio standing at 2.6 percent. While helping the economy function within a proper range, the proactive fiscal policy has also supported reform and development of the country with remarkable achievements in forestalling and defusing major risks, carrying out targeted poverty alleviation and preventing and controlling pollution.

When there are more uncertainties, as there are today, macroeconomic control becomes increasingly difficult. To better manage the role of the fiscal policy, the government must pay attention to prevent pro-cyclical problems. China is now furthering reform in a rounded manner. The proactive fiscal policy should be coordinated with the ongoing reforms in fiscal and tax systems, and there should be reform measures in line with the orientations of the proactive fiscal policy. In 2019 China should enhance its proactive fiscal policy, further cut taxes and administrative fees and raise the scale of special bonds issued by local governments.

In China, the majority of the government's tax revenues come directly from enterprises and cuts should mainly focus on reducing the tax burden of these companies. To promote an innovation-driven country and improve people's well-being, the government should issue tax cut policies that can facilitate consumption upgrading. There is still room for reducing or exempting more administrative fees and extra charges. A more proactive fiscal policy should also be reflected in fiscal expenditure.

First, tax cuts should be focused on reducing taxes in specific categories in order to extend the scale of the cuts. Replacing business tax with value-added tax and some other programs have significantly improved China's capability of tax collection and management, laying the foundations to go further in 2019. The government could consider reducing the value-added tax rate by 1-2 percentage points. Bearing in mind global competition, the corporate income tax rate could be cut to 20 percent, or even 15 percent, for enterprises in specific sectors. Items for consumption tax could be properly readjusted and tax rates could be reduced to meet the demand of consumption upgrading.

Second, efforts to reduce administrative fees should be further enhanced. Besides the reduction or exemption of some administrative fees and extra charges, the government should also pay attention to possible problems caused by strengthened tax collection and management. For example, as of 2019 social insurance premiums will be collected by the taxation department. Since it is much more capable than the social security department in collection and management, the government is advised to lower social insurance premium rates in order to alleviate the corporate burden. Even before the rates are reduced, some transitional measures could be adopted to avoid excessively increasing businesses' financial burden.

Third, the fiscal expenditure structure should be optimized with priorities focusing on key sectors in order to improve the efficiency of a proactive fiscal policy. Fiscal expenditure on education and social security should be increased to satisfy people's demand; in the meantime, general expenditure should be reduced to meet the requirements of improved public services.

Fourth, the deficit ratio could be appropriately raised to ensure the implementation of the policy of cutting taxes and administrative fees. The expansion-oriented proactive fiscal policy is closely connected with the deficit ratio. The bigger the deficit scale is, the stronger the expansion will be. If necessary, China's deficit ratio can break free of 3 percent, a red line stated in the 1992 Maastricht Treaty. This will not cause serious problems and instead is conducive to realizing the country's goal in governance.

Fifth, limits to local government bonds could be increased, and the scale of special local government bonds could be significantly raised. China should continue its efforts to eradicate illegal local government borrowing but, at the same time, increase the limits of local government bonds to meet demands. It is of great importance to raise the scale of local government bonds for special purposes. This is especially necessary for regions facing serious pressure from the economic downturn.

This is an edited excerpt of an article written by Yang Zhiyong, a researcher with the National Academy of Economic Strategy at the Chinese Academy of Social Sciences, and published in Economic Information Daily

Copyedited by Craig Crowther

Comments to wangjun@bjreview.com

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