From the middle of 2018, the implementation of a more proactive fiscal policy has led to extensive and ongoing discussions in China, especially on whether China's deficit rate can exceed 3%. Just as we entered 2019, discussions on breaking the deficit rate began to heat up again in China, indicating that this issue has become the focus of fiscal policy.
The National Financial Work Conference held earlier refines the fiscal policy of the Central Economic Work Conference to regulate the 2019 fiscal policy, that is, the active fiscal policy should be strengthened to improve efficiency, implement large-scale tax reduction, and increase the scale of local governments' special debts for building projects. The market generally expects that the positive fiscal policy will be reflected in the increase in the fiscal deficit rate, and may even exceed the red line of 3%. This provides space for tax reduction, while maintains high expenditure intensity and serves as the foundation for the economy.
Yang Zhiyong, of Chinese Academy of Social Science, Institute of Finance and Trade Economics, pointed out that historically, it is not unusual for the world's major economies to have the deficit rate that exceeds 3%. According to the IMF's statistics for the years 2008 to 2017, the deficit rates in the United States and Japan had been 6.5% and 6.8% respectively. Over the past decade, among the BRICS countries, the deficit rates of India, Brazil and South Africa reached 7.9%, 4.8% and 4.1% respectively. Looking back at the Chinese government work reports from 2003 to 2018, China's fiscal deficit rate target had never exceeded 3%. Yang Zhiyong emphasized that in the process of formulating fiscal policy, it should not be bound by the 3% red line. The so-called 3% deficit rate red line is actually a product of the EU political compromise and there is no need to stick to it. Behind the large-scale tax cuts, it is more important to ensure the sustainability of fiscal operations. If the sustainability of fiscal operations is not affected, then crossing this 3% red line will not have unbearable consequences.
Yu Yongding, a committee member of the Chinese Academy of Social Sciences, said that with the Federal Reserve's continued interest rate hike and the divergence of the world economy, China's economy will still face downward pressure, and external uncertainty still exists. At the same time, a number of short-term, medium- and long-term tasks such as steady growth, economic system reform, economic restructuring, and financial risk prevention have yet to be completed. At this point, it is important to grasp the key issues. China's current imminent problem is to stop the further decrease in its economic growth rate. For this, it is necessary for China to implement an expansionary fiscal policy, supplemented by a moderately loose monetary policy. China's experience over the past 40 years has shown that without a certain rate of economic growth, all problems will worsen because most economic and financial problems are based on economic growth. Without a certain economic growth rate, long-term problems such as structural adjustment and economic system reform cannot be achieved. Yu Yongding believes that China has the conditions to implement an expansionary fiscal policy. "The ratio of China's budget deficit to GDP may exceed 3% in the future, but this is not an untouchable level. China should not be stuck with the 3% deficit target."
According to the estimation of CITIC Securities, if the growth rate of infrastructure investment in 2019 is 8%, the corresponding incremental capital demand for infrastructure is RMB 1.2 trillion; if the incremental capital demand is met by local debt, then the special debts for building projects would be RMB 350 billion. Under the incremental assumption, the general debt needs to increase by RMB 850 billion, then the national deficit rate will rise to 3.2% in 2019. Hua Changchun, an economist with Guotai Junan Securities, believes that the deficit rate in 2019 must be exceeding 3%. He pointed out that the tax reduction of value-added tax is superimposed with the reform of reducing the number of VAT rates from three to two, or tax reductions of RMB 1.3 trillion, while the current tax reduction scheme shows or reduces taxes by RMB 300 billion to RMB 400 billion, so the margin of the total tax reduction in 2019 is quite obvious. "In the case of rigid spending, the budget deficit rate is bound to exceed 3%. The government may partially ease the rise in the deficit rate by carrying over the previous balance and government fund budget, but the budget deficit rate will still reach 3.2%. "
Those who support crossing the deficit rate of 3%, and those who oppose it, will compete in the 2019 plenary sessions of the National People's Congress and the National Committee of the Chinese People's Political Consultative Conference. Both sides are striving to influence the central government's decision-making, which in turn affects the easing of future monetary and fiscal policies. Judging from the current situation, the call to cross the deficit rate of 3% is gaining wide recognition from society, the market and the academic community. When this kind of voice is louder, it will form a kind of pressure, which will have a certain influence on the implementation of China's macroeconomic policy in 2019.
Regarding whether the deficit rate can exceed 3%, Anbound research team has already given its views a long time ago. Anbound believes that facing increased economic downward pressure, China needs to implement a large-scale stimulus policy. The corresponding deficit rate absolutely needs to cross the 3% or even 4%. According to the research and calculations of the Anbound research team, China will have room to expand the deficit rate in the future. From the perspective of balancing economic growth and controlling fiscal risks, the government's fiscal warning line for the next period should be set at a fiscal deficit rate of 4.5% and the government debt burden rate to be 55%.
According to the previous analysis by Anbound, China is now already in a certain degree of economic crisis or financial crisis, rather than waiting for the crisis in the future. In the face of this situation, what needs to be considered is how to deal with the crisis. What kind of major policies should be introduced? What is the percentage of disputes such as the deficit rate that can be compared? Based on this view, the large-scale stimulus policies referred to by Anbound have a systematic connotation, including not only fiscal and monetary policies but also active investment by other economic entities driven by the government. For example, if private government investment can lead private investment, the market effect will be very good. The pessimistic mentality of the current market would be reversed through stimulus policies to vitalize the entire economic system.
Final analysis Conclusion:
A more proactive fiscal policy should dare to cross the 3% limit on the deficit rate; the voices for such policy have increased significantly since early 2019. If this voice can be turned into specific policy, it will certainly help to reverse market confidence and vitalize the entire economic system.
