China reducing deficit rate for the sake of fiscal sustainability

The Government Work Report Premier Li Keqiang delivered to the annual session of the National People's Congress says that China's deficit-to-GDP ratio this year will be around 2.8 percent.

This lowered figure has invited extensive attention, especially as China has said it will continue to implement a proactive fiscal policy.

Since the outbreak of the COVID-19 epidemic, China has significantly increased its deficit-to-GDP ratio, to 3.7 percent in 2020 and 3.1 percent in 2021. So, does the lowered ratio now mean that the intensity of China's proactive fiscal policy, especially spending, will be weakened? The answer is "no".

China has appropriately lowered its deficit ratio, but government spending has not been reduced. Instead, through optimizing its spending structure, China has made policies more effective to ensure stable macroeconomic performance.

In the face of new downward pressures and the continuing impact of the pandemic, China must maintain a proactive fiscal policy, an important measure of which is to maintain appropriate intensity of spending. The deficit ratio will be slightly lowered, but the deficit will only dip by 200 billion yuan ($31.47 billion), as China's GDP is expanding. The source of China's increased fiscal expenditure does not rely only on debts these days.

On the one hand, China's fiscal revenue is expected to continue growing this year, and on the other hand, it has actively coordinated all kinds of financial resources, such as the profits that State-owned financial institutions and specialized institutions turned over in recent years to the budget fund. Thanks to increased availability of financial resources, China's fiscal expenditures for this year will increase by 2 trillion yuan.

A high deficit-to-GDP ratio will accumulate risks, and affect the normal operation of a country's economy. Reducing the ratio will help maintain fiscal sustainability. The sharp increase in China's deficit ratio in the past two years is an extraordinary measure to deal with the impact of the pandemic. As China's economy gradually recovers, it is imperative to normalize the ratio. It will help enhance fiscal sustainability and ensure that no systemic risks occur.

Despite the challenges, the fundamentals for China's long-term sound growth remain unchanged. The return to a normal deficit-to-GDP ratio leaves more space for China's macro policies maneuvering in the future to promote sustained and sound economic and social development.