Expansive fiscal policy fading out
By Xu Dashan (China Daily)
Updated: 2004-03-15 08:37

China's expansive fiscal policy focusing on heavy spending is on its way out, experts say.

This trend, says Wang Zhao, a researcher with the State Council's Development Research Centre, is apparent when looking at the figures submitted by Finance Minister Jin Renqing in his report to the Second Session of the 10th National People's Congress.

The country's budgeted deficit stands at 319.8 billion yuan (US$38.5 billion) this year, which is the same level as in 2003, Jin said.

However, the proportion of budgeted fiscal deficit in the country's gross domestic product will drop from 2.9 per cent last year to 2.5 per cent this year.

The State also plans to issue 30 billion yuan (US$3.6 billion) less in long-term treasury bonds for construction projects this year compared with last year.

The gradual phasing out of an expansive policy - also known as a pro-active fiscal policy - is good news for the country's economy, Wang said, since many experts believed the economy was facing overheating.

"The (continued expansive) fiscal policy would have added fuel to the possibility of inflation," he said.

Yuan Gangming, a senior economist at the Chinese Academy of Social Sciences, says shifting the policy from stimulating economic growth to sustainable development is a wise choice.

It was first introduced in 1998 to minimize the negative impact of the Asian financial crisis and was characterized by increasing government expenditure mainly on infrastructure projects, which helped fuel the country's economic development.

The central government has so far issued a total of 800 billion yuan (US$96.4 billion) worth of long-term treasury bonds.

But as the country's economy begins to heat up, active government investment has begun to slow down, Yuan said, as signs the efficiency of its investments weakening begin to loom.

The pro-active fiscal policy also failed to pay enough attention to social issues such as public health, social security and environmental protection.

"The State's finances should pay more attention to solving problems which cannot be solved by the market, including public health, social security and environmental protection, while government expenditure directed at expanding demand should be reduced," Yuan said.

"Fiscal policy should help create a good environment for companies, especially private companies, so that market factors can play an more important role," he said.

The government should try to regularize the market and improve the tax environment, he said.

New tax reform schemes, such as unifying income tax for domestic and foreign-funded companies and basing value-added tax levies on consumption rather than on production, should be carried out at the appropriate time, he said.

The phasing out of an aggressive fiscal policy is not surprising to Zhang Peisen, a senior researcher at the Taxation Research Institute under the State Administration of Taxation. He says high government debts incurred by such a policy in the long term would have cast a shadow over the country's future economic development.

China is still suffering from weak domestic demand despite implementing the policy for more than five years, due to the country's economic structure, which cannot be remedied by fiscal policy alone, he said.