Bigger budget deficit amid growth push

China is running a larger budget deficit this year as it seeks to maintain social expenditure and infrastructure investment, despite an expected dip in government revenues on the back of a slowing economy and tax cuts for businesses.

A deficit of 2.18 trillion yuan (S$460.3 billion) is expected this year, 560 billion yuan more than last year, Premier Li Keqiang said yesterday at the opening of China's annual parliamentary session.

This means the deficit-to-GDP ratio will rise to 3 per cent, as Beijing turns to a "more proactive" fiscal policy to boost flagging growth while pushing ahead with structural reforms amid weakening global demand.

The figure is the highest since 1979 and sharply up from the projected 2.3 per cent last year and 2.1 per cent in 2014. While falling below market expectations, the higher fiscal spending signalled a step in the right direction, economists say.

According to the Finance Ministry, nationwide revenue will climb 3 per cent this year while expenditure is set to rise by 6.7 per cent.

Key hikes in central government spending are expected in the areas of poverty alleviation funding, up 43.4 per cent, and interest payments on debt, up 15.1 per cent. Defence spending is projected to rise 7.6 per cent, its slowest since 2010.

Mr Li said the bigger deficit, up from 1.62 trillion yuan last year, is expected to cover mainly fee and tax reductions for firms, with businesses and individuals saving more than 500 billion yuan this year.

"At the same time, we will increase government expenditures and investment... to work on living standards and other areas in need of strengthening," he added. China's deficit-to-GDP ratio and government debt ratio are still lower than those of other major economies, Mr Li emphasised.

Economists welcomed the fiscal stimulus as a means of cushioning the ongoing slowdown, although some say the figure has fallen short of expectations. "More fiscal rather than monetary stimulus is necessary as the latter has caused problems like high debt levels in the past," said Dr Wang Xiaolu of the National Economic Research Institute.

"But higher spending does not mean just physical investments but spending on livelihood issues such as healthcare. This helps to boost consumption and is in line with structural reforms."

But Dr Chen Long from research firm Gavekal Dragonomics said the increase was too low.

Last month, central bank officials said China had room to raise its budget deficit to 4 per cent of GDP.

"I'm really disappointed because a 3 per cent budget deficit is not really going to have an impact on the economy," Dr Chen said.

A version of this article appeared in the print edition of The Sunday Times on March 06, 2016, with the headline 'Bigger budget deficit amid growth push'. Print Edition | Subscribe