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Pro-worker fiscal reform

(China Daily)
Updated: 2010-12-29 08:00

The concern that China's fiscal authorities habitually express at the end of almost every year about slow fiscal revenue growth in the coming year is understandable.

For a fast-growing developing economy as large as China's, fiscal revenue usually can't grow fast enough to meet the increasing and competing demands for public funds.

However, while Minister of Finance, Xie Xuren, reiterated this concern at the national fiscal work conference on Monday, he does not necessarily need to worry too much about the additional fiscal pressure the nation may face in 2011 from the planned taxation reforms to help the poor.

Instead, a burning task for Chinese policymakers is to tilt the distribution of national wealth in favor of the hundreds of millions of wage-earners rapidly and aggressively enough in the coming 12th Five-Year Plan period (2011-2015) to facilitate inclusive growth.

After more than three decades of nearly double-digit growth, China is now shifting decisively toward consumer-led growth, for it is no longer possible for the world's second biggest economy to keep relying on exports.

Yet, to boost domestic consumption into a key growth engine, policymakers have to face the truth that, on average, workers in this country simply earn too little.

Shortage of official data has prevented experts from agreeing on the actual percentage by which the personal income share of gross domestic product (GDP) has dropped over the past decade, but the fact that the rise of wages has fallen far behind the country's productivity gains during most of the past three decades is more than obvious.

Worse, latest statistics show little improvement in the distribution of national wealth among the government, businesses and workers.

In the first 11 months of this year, the country's fiscal revenue increased by 21.1 percent year-on-year to 7.67 trillion yuan ($1.16 trillion), while the profits of industrial enterprises soared 49.4 percent to 3.88 trillion yuan ($585 billion).

It is estimated that Chinese farmers' incomes will have increased by about 10 percent this year, the highest in many years, while urban workers saw the minimum wage rise by some 20 percent in many cities. But clearly, these are still not enough to arrest the steady decline in the share of GDP that goes to wages.

Xie said that the country will adopt a proactive fiscal policy next year to help the poor. That means the country will likely unveil tax reforms next year to reduce the income tax for low-income families.

Such a tax cut for the poor is badly needed to help narrow the country's widening income gap and boost domestic consumption.

While a targeted cut in personal income tax will add to the difficulties of financial authorities trying to make ends meet, that is not much cause for concern if many Chinese families are thus enabled to spend a little more for a better life.

The real problem of such a fiscal reform is not that it may be too bold to undermine the country's fiscal health. Rather, that it will not be bold enough to effectively boost domestic consumption as soon as possible.