CHINA'S FISCAL POLICY: Some considerations

03/10/2009 | Xie Xuren

Writing exclusively for Emerging Markets, China’s finance minister Xie Xuren explains how a proactive fiscal policy has helped the country face the global financial crisis while boosting economic development

Over the past year, the world economy has undergone the most severe challenge since the Great Depression in the last century. In response to the international financial crisis, the Chinese government has adjusted macroeconomic policies in a timely and resolute manner, implemented proactive fiscal policy and moderately easy monetary policy, and formulated a stimulus package to expand domestic demand and promote economic growth in its endeavour to maintain stable and relatively fast development.

The proactive fiscal policy, which is an important component of the Chinese government’s macroeconomic policies for fighting the international financial crisis, is composed of the following five parts.

• First, expanding government investment with focus on the key programmes. Of the total 4 trillion RMB in the two-year investment plan, 1.18 trillion RMB comes from the central government. In the end of 2008 the central government allocated additional 104 billion RMB to the government-subsidized housing programme and the post-disaster reconstruction programme, and in 2009 the central government arranges 908 billion RMB for public investment with an increase of 487.5 billion RMB. In 2010, an additional 588.5 billion RMB is expected to be allocated from the central government. Such investment will be mainly used in projects concerning people’s well-being, infrastructure, eco-environment, post-disaster reconstruction and consumption demand boosting so as to accelerate economic growth.

• Second, promoting fee-and-tax reform, and conducting structural tax reduction. The central government has fully launched the consumption-based VAT system and started the fee-and-tax reform for refined oil products. The exemption and reduction policies that were launched in 2008 are maintained to relieve financial burden on enterprises and households and enhance corporate investment and household consumption capacity. It is estimated that the tax burden of enterprises and households will be reduced by around 550 billion RMB in 2009.

• Third, increasing the income level of low-income groups and forcefully expanding consumption demand. The government has further increased subsidies to farmers, raised the minimum purchasing prices of grains and increased the basic cost of living allowances for urban and rural residents so that the people will be able to spend more. At the same time, China increased fiscal input, and offered subsidies for the purchasing of home appliances, agricultural machinery, automobiles and motorcycles by farmers and subsidies for automobiles and home appliance replacement. Thus, the role of consumption demand in driving up economic growth is further reinforced.

• Fourth, further optimizing fiscal expenditure structure and safeguarding and improving the people’s livelihood. As support to development and reform in rural areas, in 2009 the central government’s allocation to the programmes related to agriculture, rural areas and farmers totals at 716.1 billion RMB, a year-on-year increase of 20.2%. To effectively safeguard and improve the people’s livelihood, in 2009 the central government allocates a total of 728.5 billion RMB to the undertakings directly related to people’s well-being such as education, health care, social security, employment, government-subsidized housing and culture, up by 29.4% year-on-year.

• Fifth, strongly supporting innovation in science and technology, energy conservation and emissions reduction, and promoting economic restructuring and transformation of the development pattern. The government increases spending on science and technology, accelerates fund alignment to major science and technology projects, explores fiscal and taxation policies favouring industrial restructuring and revitalization plans, encourages enterprises to upgrade technologies and make scientific and technological innovations, and promotes perfection and escalation of the industrial structure. The government also strengthens energy conservation and environmental protection, reins in excess capacity and supports the development of new industries of strategic significance, so that the Chinese economy will be put on a more sustainable development.

The proactive fiscal policy and other macro regulation measures have on the whole proven to be effective and fruitful. In the first half of this year, China’s GDP increased year-on-year by 7.1 % despite the serious contraction of external demand. This shows China’s macroeconomic policy and stimulus package for coping with the international financial crisis are effective and China’s economic growth is contributing to the recovery of the world economy.

Meanwhile, it is apparent that, though positive signs of recovery have emerged, the world economy still lacks a firm foundation for solid recovery. With many uncertainties ahead, the process towards all-round recovery will be slow and tortuous. The stabilization and recovery of the Chinese economy is not yet steady, solid and balanced. China will continue to take maintaining steady and relatively fast economic development as our primary task; unswervingly follow the proactive fiscal policy and moderately easy monetary policy; fully implement and continuously enrich and improve the stimulus package; and make our policies more targeted, effective and sustainable. Economic growth policies in China will not only focus on guarding against and fending off various potential risks, including inflation, but will also focus on securing long-term development and seeking the fundamental solution to the institutional and structural problems that constrain the sound development of China’s economy. China will continue to actively push forward the economic restructuring and transformation of the development pattern in a bid to balance growth speed with economic structure, quality and efficiency and reinforce the economic sustainability in an all-round way.

The future and destiny of all countries are more closely interconnected than at any time in history. Tackling the international financial crisis and promoting the healthy recovery of the world economy remain the top priorities for all countries. I believe that, as long as the international community makes concerted efforts, unswervingly stimulates economic growth, strengthens macroeconomic policy coordination and actively promotes the balanced development of the world economy, the world will definitely be able to triumph over the international financial crisis and usher in a more prosperous world economy tomorrow.

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