Prudent policy vital for economic sustainability
By Xu Dashan (China Daily)
Updated: 2004-12-03 09:55

China has finally given up the proactive fiscal policy it has adopted since 1998, as the Political Bureau of the Communist Party of China Central Committee decided on Wednesday to exercise a prudent policy next year.

Zhang Xueying, a senior economist with the State Information Centre, said a prudent fiscal policy means it should not be an expansive one, nor a tight one.

"It is neutral, similar to what Finance Minister Jin Renqing said in May this year," he told China Daily in a telephone interview.

Implementation of a prudent fiscal policy suggests the government would reduce issuing the amount of special treasury bonds used for infrastructural construction, he said.

"Fiscal expenditure will pay more attention to maintaining sustainable, stable and co-ordinated economic development, rather than merely stimulating economic development," he said.

The government would increase investment in the country's northwest and northeast, but reduce investment in red-hot sectors such as steel and cement, he said.

Peng Longyun, a senior economist with the Asian Development Bank, said a prudent fiscal policy means it would be no longer expansive.

"It would be neutral, but mildly tight," he told China Daily.

The government might maintain the same amount of deficit next year compared with this year, he said.

But as the country's economy grows, the ratio of the deficit to the gross domestic product (GDP) drops, he said.

"The country's deficit is likely to be kept at about 300 billion yuan (US$36.1 billion), and the deficit/GDP ratio will drop to about 2 per cent next year," he said.

A prudent policy also means the expenditure structure would be adjusted, Peng said.

"While continuing to put money into unfinished infrastructrual projects and projects which have yet to be started, fiscal expenditure would increase input into sectors such as poverty relief, social security, and basic guarantees for low-income families and education," he said.

The fiscal policy would help solve prominent issues such as rural education and increasing farmers' income in the short term.

"The tax-for-fees reform in rural areas, which aims at increasing farmers' income, will spread across the nation next year," he said.

The government would also increase agriculture subsidies to further increase farmers' income and increase input in rural infrastructure to improve rural people's living conditions, Peng said.

In the long term, the prudent policy would strengthen a role in the government's macro-control efforts, in co-operation with monetary policy, he said.

In this aspect, ordinary residents would be big beneficiaries of the fiscal policy adjustment, Zhang said.

"The prudent policy would help reduce fluctuations in economic development," he said.

"No one wants to live in a society with a lot of chaos, a high unemployment rate and skyrocketing inflation."

Yuan Gangming, a senior economist with the Chinese Academy of Social Sciences, said the government should have given up the proactive fiscal policy already.

The policy, characterized by increasing government expenditure in projects such as infrastructure, ports and power generation, was introduced in 1998 to minimize the negative impact of the Asian financial crisis.

It has played an important role in speeding up infrastructure construction, expanding domestic demand, increasing employment and fueling the country's economic development, during the first two years.

But it became less important in the following years.

It also failed to pay enough attention to public issues such as medicine and education, he told China Daily.

"The country should not rely on the short-term policy for a long time," he said.

Long-term reliance on the policy would be harmful to the sustainable development of the country's economy, he said.

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