The Chinese government work report for 2020 pointed out that proactive fiscal policy should "improve the quality and efficiency and be more sustainable", emphasizing the sustainability of stimulus policies and fiscal policies. In terms of the size of the budget deficit, this year's public budget deficit will be RMB 3.57 trillion, only a slight change from last year's RMB 3.76 trillion, though still significantly higher than the RMB 2.76 trillion in 2019 prior the outbreak of the COVID-19 pandemic. At the same time, an additional RMB 3.65 trillion of special local government bonds, which is not included in the general public budgets but is included in the budgets of government-managed funds, is also little changed from last year's RMB 3.75 trillion. This budget plan embodies the "no sharp turn" in fiscal policy. Analysts believe that the fiscal policy stance this year remains "proactive". However, with government leverage rising sharply last year, the overall policy this year has shifted from "stabilizing growth" to an equal emphasis on stabilizing growth and preventing risks. Monetary policy has in effect returned to a "neutral" stance since last year. In the view of ANBOUND researchers, there are also increasingly obvious changes in fiscal policy this year.

In fact, in terms of the fiscal budget, this year's special pandemic-prevention government bonds are RMB 1 trillion less than last year's, and the deficit-to-GDP ratio (including special government bonds) will reach 6.6%, down 1.8 percentage points compared to last year's deficit ratio (including special government bonds). In terms of the growth rate of fiscal expenditure, fiscal policy is actually not that aggressive. According to the government work report, fiscal expenditure in the national public budget will only increase by 1.8% in 2021. Given the low base effect in 2020 (fiscal expenditure in 2020 only increased by 2.8% compared with that in 2019), this year's fiscal expenditure will be modest. According to the National People's Congress budget report, China's fiscal revenue and expenditure in 2020 are generally "more revenue and less spending" compared to the budget. At the same time, local fund revenues increased significantly, while expenditures did not reach the expected level. This actually indicates a change in the proactiveness of fiscal policy.

This trend is also evident this year. In terms of budget revenue and expenditure, with the economic recovery, the national public budget revenue reached RMB 5.7115 trillion in the first quarter, up 24.2% year-on-year and 6.4% compared with the same period in 2019, achieving a recovery growth. Expenditures in the national public budget reached RMB 5.8703 trillion in the first quarter, up 6.2% year-on-year. In terms of growth rate, revenue growth is greater than expenditure growth, which shows signs of improvement in the fiscal position. Therefore, although the overall fiscal policy has remained "proactive" since last year, the proactiveness of the fiscal policy has been further weakened, showing an overall trend of "stronger revenue and weaker expenditure".

From a broader perspective, the trend of "stronger revenue and weaker expenditure" is more evident in the government-managed funds. In terms of fiscal revenue in the first quarter, the national tax revenue reached RMB 4.8723 trillion, up 24.8% year-on-year, with little change in the overall fiscal revenue; non-tax revenue reached RMB 839.2 billion, up 20.7% year-on-year. Budgetary revenue of government-managed funds nationwide is expected to reach RMB 1.8605 trillion, up 47.9% year-on-year. This figure includes RMB 1.7679 trillion in budgetary revenue from funds managed by local governments, up 48.8% year-on-year. This was mainly attributable to RMB 1.6467 trillion from the transfer of state-owned land-use rights, up 48.1% year-on-year. In other words, a large part of the increase in local governments' fiscal revenue comes from "land sales". The substantial increase in the revenue of government-managed funds shows that government revenue is increasingly dependent on non-tax revenue as the tax and fee reduction policies continue. Judging from the recent release of the new budget management regulations, fiscal policy is increasingly focused on expanding and stabilizing fiscal resources. While reducing the tax burden on enterprises, local governments rely on a variety of non-conventional revenue to increase fiscal revenue.

In terms of expenditure, not only has the growth of budgetary expenditure slowed down, expenditures from government-managed funds has also declined. In the first quarter, budgetary expenditures of government-managed funds nationwide amounted to RMB 1.7331 trillion, down 12.2% year-on-year. Of this, expenditures from local government-managed funds totaled RMB 1.7155 trillion, down 12.3% year-on-year. This is due to the spending on local investment-related projects, but spending on key areas such as on people's livelihood continues to grow rapidly. From the perspective of tax and cost reduction policies, the past approach of relying on government investment to drive urbanization and economic development is giving way to a model of helping market entities recover and make profits by reducing the burden on enterprises and households, that is, supporting economic growth with inclusive policies. This new policy change also means it will be harder to increase tax revenues in the future, while fiscal revenue will increasingly depend on increases in non-tax revenue and other kinds of revenue.

To some extent, the trend of "stronger revenue and weaker expenditure" reflects the current policy focus on controlling government debt risks, with the hope to control government leverage level. This will be the main element of risk prevention in the future, which is also more challenging for the fiscal sector. It is becoming more and more important to maintain the debt sustainability for the local governments' explicit debt, which is currently dominated by local government debt. Considering the new bonds maturing in the past few years, the expenditure for debt repayment will keep increasing. Among all fiscal expenditures, the growth rate of government debt interest payment in the first quarter was the highest. The national debt interest payment increased by 27.4% year-on-year to RMB 199.4 billion, 21.2 percentage points higher than the growth rate of the overall expenditure. On the other hand, with the pace of government bond issuance slowing down, refinancing bonds became the main part of local government bond issuance in the first quarter. In the first quarter, RMB 895.1 billion of local government bonds were issued nationwide. Of this, RMB 36.4 billion was issued as new bonds and RMB 858.7 billion was issued as refinancing bonds. The proportion of the issuance of refinancing bonds is significantly higher.

In addition to rising government debt, a recent report by the Institute of Finance and Banking under the Chinese Academy of Social Sciences also cited the indebtedness of local financing platforms and local SOEs as a particular concern. The report stated that defaults by local SOEs could trigger an avalanche of debt defaults, which could in turn trigger regional or even systemic risks and have a significant negative impact on financial institutions. The government needs to avoid debt defaults from turning into an avalanche of credit. Increasing interest payments on debt and easing the pressure on government debt both indicate that the government will need to allocate more funds to maintain debt continuity, which will be an important factor for future fiscal policy.

Final analysis conclusion:

Under the direction of "improving quality and efficiency, being more sustainable" in fiscal policy, China's fiscal revenue and expenditure situation is undergoing obvious changes, which reflects the trend of "stronger revenue and weaker expenditure". This actually reflects that the focus of the overall fiscal policy has shifted from expanding government investment to the inclusive policies and "three guarantees (i.e., guarantees for salary payment, smooth functioning of grassroots government, and the basic wellbeing of the people)", so as to achieve the macro policy objectives of stable growth and risk prevention.