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Beijing Review Exclusive
Special> NPC & CPPCC Sessions 2010> Beijing Review Exclusive
UPDATED: February 27, 2010 NO. 9 MARCH 4, 2010
Sustaining Fiscal Incentives
This year's fiscal policies should follow several guidelines to lay a solid foundation for the stable and sustainable growth of the economy


CONSUMPTION BOOST: Farmers from Yushan County in Jiangxi Province buy washing machines under the government-subsidized schemes aiming to boost home appliance sales in rural areas (SONG ZHENPING) 

The current round of China's economic development is expected to clear up in 2010, the final year of the country's 11th Five-Year Plan (2006-10) that will pave the way for the next wave of economic growth. This year's fiscal policies should follow several guidelines to lay a solid foundation for the stable and sustainable growth of the economy, writes Jia Kang, Director of the Research Institute for Fiscal Science under the Ministry of Finance, in a recent Guangming Daily article. Edited excerpts follow:

In the coming years, fiscal policies should promote structural optimization and continue to be proactive while being fine-tuned. The government must develop contingency plans against financial uncertainties to ensure steady and fast social and economic development.

- Maintain proactive fiscal policies and play its role in macro-control.

It is necessary to sustain the framework of proactive policies while fine-tuning them accordingly, given related factors at home and abroad during this particular phase of the economic cycle. The continued expansion of fiscal spending for the sake of general coordination between monetary and fiscal policies is also necessary, but at the same time the government should work out a reasonable proportion of its deficits and treasury bonds in this year's budget to prepare for potential public risks.

- Enhance the function of government-funded public investments and ensure the feasibility and quality of major projects.

The majority of projects funded by the 4-trillion-yuan ($586 billion) stimulus plan implemented in 2009, with construction expected to last two years or more. Any available funds this year should first support follow-up construction for ongoing projects, and prudence should be taken before approving more projects. The economic stimulus package introduced since late 2008 has proven timely and effective, but anemic external demands and insufficient total demand have left many machines unoccupied. In the future, the Ministry of Finance should handle structural optimization of fiscal policies delicately while expanding its expenditures and prudently select projects funded by the stimulus plan in seven areas, including infrastructure, post-disaster reconstruction, new countryside construction, comfort housing, ecological protection, independent innovation, and cultural, scientific and educational facilities. The government will enhance the feasibility of these projects, strengthen supervision over investments and constructions, ensure that the funds will be in place as soon as possible to guarantee the quality of these projects, and boost economic growth.

- Attract more private capital to become the main engine of economic growth.

More government incentives will be needed to attract private capital to maintain a sustained, smooth and stable economic recovery. Fiscal policies should be designed to steer macro-control efforts in three areas: 1) expanding fields and channels for social investments, and taking advantage of the crisis to offer private capital equal opportunities of investments in finance, railway, highway, aviation, telecommunications, electricity generation and water supply; 2) giving financial supports to small and medium-sized enterprises (SMEs) through preferential tax rates, interest subsidies, government purchasing and credit underwriting, and increasing input of the special fund dedicated to SME development to support more of them, exporters in crisis-stricken industries such as textile, hi-tech companies and those in quake-hit areas in particular; 3) promoting the establishment of financial institutions devoted to offering convenient and easy credit to SMEs that generally have financing difficulties.

- Promote the transformation of the economic development pattern and upgrade the industrial structure.

To speed up the transformation of the economic development pattern, the ministry will provide preferential policies including direct capital injection and interest subsidies to support emerging industries of strategic importance, especially alternative energies and new material industries, that will play a vital role in industrial structure upgrading, energy saving and emission reduction.

The ministry will also offer preferential policies such as tax breaks to encourage technology upgrades within the traditional industries and the relocation of such industries to less developed regions to cut costs.

For industries where competition is sufficient, the ministry will create an equal and transparent policy environment in terms of taxation, administration, information availability and services to curb excess capacity. In addition, the government is determined to eliminate high-polluting companies that produce products using obsolete technologies or companies that produce more than the market demands through tax increases, limitative policies and other financial related punishments.

The ministry is also working on policies to enhance the competitiveness of the agriculture and service industries. It will continue to guarantee fiscal expenditures on major scientific and technological projects and pledge steady input into fundamental research and development programs serving the public interests.

Another focus of fiscal policies is to increase the input into key energy-saving and emission-reduction engineering projects, support pilot projects for a low-carbon economy, limit greenhouse gas emissions and strengthen efforts for ecological protection and pollution control.

- Encourage companies to beef up R&D investments.

Preferential fiscal and tax policies will be introduced to encourage independent innovations within companies. Development of hi-tech industries and the equipment- manufacturing industry will be accelerated. Companies will be encouraged to increase input in research and development (R&D). Fiscal policies should stimulate R&D investments and speed up restructuring within companies. The government should invest heavily in new energies, energy-efficient vehicles, pharmacies and bioengineering in order to foster investment hotspots and growth points for the next round of the economic recovery. Meanwhile, credit support, subsidies and preferential tax rates can be provided to support technological upgrades and independent innovations.

- Promote a stable recovery of exports.

The government can implement an array of fiscal policies including export tax rebates and fiscal subsidies to stabilize and expand exports while improving export structure. It should continue to impose high export rebates on certain labor-intensive products, machinery and electrical products and other heavily affected products, while cutting export tariffs on some fertilizer products. When boosting export increases, it will also keep a close eye on high energy-consuming and high-polluting products.

Another focus is to enhance the competitiveness of exports because no country can rely solely on increasing export rebates as a stabilizer. Chinese enterprises will eventually rely on the high quality of their products and high value-added products in particular to become competitive players in the global market. China should continue to increase the proportion of hi-tech products to its total exports, which currently stands at more than 30 percent. Therefore, fiscal policies should increase support to hi-tech exporters.

- Further adjust the national income allocation and steadily expand residents' consumption.

Expanding domestic demand, especially residents' consumption, plays an important role in stabilizing the economic growth, limiting overcapacity and imbalances in the economic structure, since a full export recovery cannot be expected.

Further adjusting national income allocation, increasing fiscal subsidies to farmers and low-income urban and rural residents and boosting consumption of low-income residents by increasing their income need to be at the forefront of government efforts.

The government should continue to implement and improve existing stimulus measures, and expand schemes aimed to boost sales of home appliance products, cars and motorcycles in the countryside.

The government should also increase input to speed up the establishment of a nationwide social security system, providing people with the security to spend more while saving less.

Taxation will be used as a tool for income reallocation to curb income inequalities and disparities.

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