China’s public sector budget deficit unchanged; revenue-side a major concern

Last month’s National People’s Congress approved the finance ministry’s proposed 2019 budget. With total revenues to central and local governments of 19.25 trillion yuan (2.5 trillion euros, or nearly 20 % of GDP) and expenditures of 23.52 trillion yuan (estimated at 24 % of GDP), the deficit would be 4.27 trillion yuan, or 4.3 % of GDP. The budget deficit as a share of GDP is slightly larger than the realised 2018 deficit. Figures do not include budgeted withdrawals from state funds.

The finance ministry’s budget report indicates concern over the government’s ability to realise the budget, particularly in light of the bleak revenue outlook. While budget revenues are projected to climb 5 % this year, economic growth is slowing and the government has committed to 2 trillion yuan (300 billion dollars) in stimulative cuts to taxes (including VAT and income taxes) and fees. This does not include earlier agreed cuts that will further reduce revenues.

The need to spend to prop up economic growth and commitments to earlier public projects provide strong incentives for officials to spend beyond their budgets. While spending will increase 6 %, greater effort must be made to target spending effectively. The finance ministry has called for spending cuts at all administrative levels and placed strict controls on officials in their foreign travel, car use and business-related entertaining. The finance ministry plans to cut its own spending by at least 5 %. Caixin reports that about 50 central government ministries and agencies had already committed to spending cuts by early April. However, a similar number of ministries and agencies have increased budget expenditures.

The budget report notes many fiscal ailments in China’s public sector. Some cities are struggling to provide basic services, conduct other normal activities and even make payroll. Such basic government spending is hard to cut, even when revenue prospects are shaky. Nearly 40 % of provincial budget revenues consist of income transfers from the central government. A nearly as large share of revenues is derived from the sale of land-use rights. Sales of land-use rights declined in the first three months of this year. The finance ministry also points out that excessive commitments by provincial administrations have endangered the sustainability of their finances. Provincial governments continue to guarantee credit or lend against the rules, making it even harder to assess debt risk.

By official estimates, China’s public-sector debt is less than 40 % of GDP. Local governments, however, hold large amounts of off-budget “hidden” debt. Last summer, the IMF estimated that China’s actual government debt was 70 % of GDP. This week Zhang Xiaojing, a deputy director of the Institute of Economics at the Chinese Academy of Social Sciences (CASS), valued China’s current government debt at more than 90 % of GDP. Media have recently run stories about the debt problems of several city governments.