China's Fiscal Deficit Rises, But Remains 'Safe'

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(Caixin Online) The Chinese government plans to expand its budget deficit and social spending this year, although the true depth of the nation's fiscal red ink is hard to gauge due to limited data on local government debt.

At the annual legislative sessions of the National People's Congress (NPC) and Chinese People's Political Consultative Conference (CPPCC) in March, government leaders outlined plans for continuing an active fiscal policy that includes a "moderate" deficit of 1.05 trillion yuan in 2010, an increase of about 100 billion yuan from last year.

Central authorities would continue overseeing local government debt of about 200 billion yuan, while the central government deficit would grow to about 850 billion yuan, according to a report presented to the legislature.

Academics attributed the escalating central government debt to economic structural adjustments and changes in the growth model. Li Daokui, CPPCC national committee member and director of Tsinghua University's China and the World Economic Research Center, told Caixin that China has no choice but to change its model and restructure. And that requires more government spending.

"Fiscal support is imperative for the major transformation of any economic structure or reform for a development model," said Li. In addition, he said, China should continue proactive fiscal policies – with relatively large fiscal deficits – for the next five to six years.

According to international standards, a nation's finances are judged healthy if the debt ratio for all levels of government does not exceed 60 percent of gross domestic product, and the fiscal deficit does not exceed 3 percent of GDP. Based on this rule of thumb, China's debt and deficits are far from the danger zone.

Finance Minister Xie Xuren, speaking March 6 at a NPC press conference, said the 1.05 trillion yuan deficit will be roughly 2.8 percent of GDP – and kept strictly below 3 percent. The debt rate is roughly 20 percent of GDP. Thus, he said, the budget picture "in general is safe."

However, the latest fiscal reports failed to account for hidden debt lurking in local governments.

Social Spending

This year's central fiscal expenditures for so-called "people's well-being" – a broad budget category that includes social areas such as education, healthcare, social security, subsidized housing and culture – are planned to reach 807.7 billion yuan, up 8.8 percent from last year. However, growth pace in this category this year is only 0.4 percentage points higher from that in 2009.

People's well-being allocations include 31.4 billion yuan for cultural affairs, including sports and the media. Spending in this category fell 1.9 percent from last year, when spending was high due to extensive TV and radio coverage following implementation of the 11th Five-Year Plan.

Operating budgets for state-owned enterprises (SOEs) were opened for NPC review this year for the first time, revealing what some said was serious neglect in the area of people's well-being expenditures.

Only 3.4 percent, or 1.5 billion yuan, of the 44 billion budget for SOEs this year will be set aside for this category. About 500 million yuan has been slated for social security payments for employees of central government-controlled enterprises and about 1 billion yuan for general social security.

Indeed, total government appropriations for people's well-being has been lukewarm, even though spending in this area has risen faster – from a low base – than overall spending.
 
Some 2 billion yuan has been earmarked by the central government for restoring and rebuilding areas affected by the 2008 Wenchuan earthquake. Other funds will be spent on SOE restructuring and subsidy reform, overseas investments, emissions reduction, energy efficiency, and scientific and technological research.

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