Pressures ahead

Reducing taxes means reducing fiscal revenue. Since spending won't decrease, how can the government guarantee it has enough money to spend?

Liu Yuanchun, Vice Dean of the School of Economics at Renmin University of China, says that in 2013 China can enlarge its fiscal deficit at a controlled rate of about 2 percent.

The Ministry of Finance fixed the deficit rate in 2012 to 1.5 percent. Figures from the ministry showed that from January to November 2012, the country's fiscal revenue stood at 10.89 trillion yuan ($1.73 trillion) and spending totaled 10.49 trillion yuan ($1.67 trillion). The country had no deficit in the first 11 months and gained a fiscal surplus of 400 billion yuan ($63.59 billion), even though fiscal revenue grew at a slower pace than a year earlier because of tax reductions.

In 2013, China is unlikely to see fiscal surplus due to more drastic tax reductions, said Liu.

At the Sixth China CFO Annual Conference held in Beijing on December 18, 2012, Peng Wensheng, chief economist at China International Capital Corp. Ltd., said that because of massive spending in 2009 and 2010, which raised inflation concerns, the actual fiscal policy carried out in 2011 and 2012 was a more prudent one.

"In 2013 China should carry out a real proactive or expansionary fiscal policy, and the fiscal deficit may be increased to 1.3 trillion yuan ($206.68 billion)," Peng said.

A report by China Merchants Securities Co. Ltd. suggests the fiscal policy should be combined with the structural tax reduction. With the aim of facilitating the development of small and medium-sized enterprises and the service sector and stimulating private investment, the government should further expand VAT reform, reduce indirect tax and increase tax rebates and subsidies when it comes to scientific innovation. To boost foreign trade, China should also further cut import tariffs, raise export tax rebates and stabilize export credits.

The report also suggests the Central Government guide local governments to expand public investment in infrastructure without redundant construction. If the Central Government continues to control local investment, capital will be unable to flow, hence increasing the possibility of a local government debt crisis under heavy liquidity pressure.

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Fiscal Expenditure on People's Livelihood (Jan-Nov 2012)

(bln yuan, $1=6.23 yuan)

Education: 1,639.4

Culture, Sports and Media: 168.9

Healthcare: 602.7

Social Security and Employment: 1,108.9

Housing: 368.8

Agriculture, Forestry and Water Conservation: 944.2

Community Affairs: 791.8

Energy Conservation and Environmental Protection: 215.9

Transportation: 720.5

(Source: Ministry of Finance)

Main Focuses of a Proactive Fiscal Policy for 2013

- Further reducing taxes and promoting economic restructuring

- Further improving the way of spending and raising living standards

- Promoting the transformation of economic growth pattern and improving the quality and efficiency of growth

- Enhancing budgetary management and efficiency of expenditure

(Source: Ministry of Finance)