China’s 2020 budget deficit set to rise

The finance ministry’s budget report anticipates that central and local government spending will increase this year by approximately 1 trillion yuan to just under 24.8 trillion yuan. At the same time, revenues should decrease by around 1 trillion yuan to just over 18 trillion yuan, leaving a budget deficit of 6.8 trillion yuan or around 6.5 % of GDP. The deficit will be partly covered with 3 trillion yuan in transfers from other sources, resulting in an official budget deficit of 3.8 % of GDP.

Realised spending and deficits have consistently overshot budget projections in recent years. Also this year’s budget seems to be rather optimistic. While raising the deficit, stimulating the economy and supporting employment, the finance ministry is also calling on government administrators to tighten their belts and consider carefully how funds are spent. General expenses should be drastically reduced and spending should be slashed for such activities as hospitability, travel, training and vehicle acquisition. Construction of new administrative buildings is strictly forbidden.

Given that the Chinese public sector operates extensively off-budget, official public budget figures fail to provide a comprehensive picture of public expenditure and revenue. This year, special “off-budget” bonds will provide an important source of financing. The central government plans to issue 1 trillion yuan in special “corona” bonds. The funds raised will be channelled to local governments for crisis management and economic support measures. In addition, the quota for special purpose bond issues for local governments has been increased to 1.6 trillion yuan. Typically, provinces have used these special purpose bonds to finance infrastructure projects and other investments considered capable of generating sufficient cash flow to pay for themselves. The ministry reports that these funds may now also be channelled to promote social welfare and support consumer demand.

The IMF releases annually fiscal assessment for China which includes an estimate off-budget activity. According to the most recent estimate published in the summer of 2019, the general government deficit has exceeded 10 % of GDP in recent years and public debt was estimated at 80 % of GDP at the end of 2019 (see BOFIT Weekly 10/2020). The IMF estimates updated last week suggest that the fiscal stimulus measures announced by China to deal with COVID-19 pandemic will amount to around 3.6 trillion yuan this year (3.5 % of GDP). Thus, the general government deficit will likely exceed 15 % of GDP this year.

Realised budget expenditures, revenues and deficits of China’s central and local governments (2020 estimate included)

Sources: Ministry of Finance, CEIC and BOFIT.