The Government Work Report released during China’s Two Sessions, i.e., the annual meetings of the country’s top legislative body, the National People’s Congress, and its top political advisory body, the Chinese People’s Political Consultative Conference, emphasizes that China will continue to pursue a more proactive fiscal policy. For the coming year, the report proposes setting the deficit-to-GDP ratio at around 4%, with a total deficit of RMB 5.89 trillion, marking an increase of RMB 230 billion compared to the previous year. Meanwhile, general public budget expenditure is projected to reach RMB 30 trillion for the first time, representing a year-on-year increase of approximately RMB 1.27 trillion. Overall, the fiscal budget reflects a clear policy commitment to sustaining strong fiscal support and aligns with ANBOUND’s expectations regarding the intensity of fiscal policy. However, achieving these targets and effectively implementing a more proactive fiscal stance will depend less on how the government allocates spending, and more on its ability to generate sufficient revenue.
In earlier assessments of the fiscal outlook for 2025, researchers at ANBOUND had already noted the slowdown in fiscal revenue growth and emphasized that stabilizing government revenue would be a highly challenging task. This issue is closely tied to broader macroeconomic conditions, as well as the trajectory of the real estate market. Under such circumstances, ANBOUND’s founder Kung Chan pointed out that with instability on the revenue side, China’s fiscal policy will become increasingly reliant on a “bond-driven economy” and “bond-based finance”. In practice, this means that maintaining the desired intensity of fiscal expenditure can only be achieved through an expansion of government debt.
Fiscal data for 2025 further confirms this trend. According to the Ministry of Finance, the country’s national general public budget revenue totaled RMB 21.6045 trillion in 2025, a year-on-year decline of 1.7%. Of this, tax revenue reached approximately RMB 17.64 trillion, up 0.8% from the previous year, while non-tax revenue amounted to about RMB 3.97 trillion, down 11.3% year-on-year. On the expenditure side, the general public budget spending totaled RMB 28.7395 trillion, marking a year-on-year increase of 1.0%. Overall, fiscal operations in 2025 have clearly entered a phase of structural pressure, with both revenue and expenditure growth slowing significantly compared to budgeted targets, which projected a 0.1% increase in revenue and a 4.4% increase in expenditure. Moreover, both revenue and expenditure fell short of their respective budget targets. General public budget revenue reached only 98.3% of the budgeted figure, while expenditure achieved 96.8% of its planned level.
A negative turn in revenue growth has a significant dampening effect on expenditure expansion. This is largely driven by the sharp decline in non-tax revenue and is also closely associated with deflationary pressures. Tax revenues have performed relatively better, with major categories such as value-added tax remaining broadly stable, reflecting a certain degree of economic resilience. However, the lack of strong recovery momentum has limited the drivers of tax growth. The decline in non-tax revenue signals a weakening of alternative revenue sources, suggesting that future growth potential, including efforts to mobilize existing assets, will also be constrained. Looking at the general budget revenues and expenditures, China’s fiscal performance in 2025 has been heavily affected by the economic slowdown, with particularly acute pressures on local government finances. Given that the economic growth target for the new year has been adjusted to 4.5%–5%, the outlook for general budget revenue in 2026 is likely to remain under similar pressure. On the expenditure side, although government borrowing helps to cover the deficit, spending is typically paced in line with revenue conditions. In this context, if revenue performance remains weak and tax income approaches its ceiling, it may prove difficult to sustain last year’s level of expenditure intensity.
When government fund budgets are taken into account, fiscal revenues and expenditures showed a further divergence last year. In 2025, the national government fund budget revenue totaled RMB 5.7704 trillion, a year-on-year decline of 7%, achieving only 92.3% of the budgeted target. Breaking this down, central government fund revenue reached RMB 505.6 billion, up 6.8% year-on-year, while local government fund revenue amounted to RMB 5.2648 trillion, down 8.2%. Notably, revenue from the transfer of state-owned land-use rights fell to RMB 4.1518 trillion, a sharp decline of 14.7% compared to the previous year. On the expenditure side, the national government fund budget spending reached RMB 11.2874 trillion in 2025, an increase of 11.3% year-on-year, but only 90.4% of the budgeted amount. Central government fund expenditure stood at RMB 1.0984 trillion, surging by 1.3 times, while local government fund expenditure reached RMB 10.189 trillion, up 5.3%. Among this, spending related to state-owned land-use rights transfer revenue totaled RMB 4.712 trillion, down 7.6% year-on-year. This trend is largely attributable to the continued decline in local land transfer revenues, as the real estate market has yet to stabilize, leading to reduced income and expenditure related to land development. Growth in the central government fund budget was mainly driven by special treasury bonds and ultra-long-term special treasury bonds, reflecting the central government’s increased role and the evolving division of fiscal responsibilities between central and local authorities in supporting economic stability. At the local level, the shortfall from declining land transfer revenues has been primarily offset by special-purpose bonds. In other words, government investment in construction and infrastructure last year relied more heavily on government debt as a source of funding.
From the perspective of broader fiscal measures, the decline on the revenue side is even more pronounced than in the general public budget. According to some estimates, in 2025, broad fiscal expenditure that comprised the national general public budget and the government fund budget reached approximately RMB 40.03 trillion, representing a year-on-year increase of 3.7%. In contrast, broad fiscal revenue totaled about RMB 27.38 trillion, marking a decline of around 2.9% year-on-year. As a result, the broad fiscal deficit, which is defined as the gap between expenditure and revenue, expanded to roughly RMB 12.65 trillion, an increase of 21.3%. On the one hand, the contraction on the revenue side remains significant, with the shortfall in land-based fiscal income still difficult to offset. On the other hand, the continued expansion in expenditure reflects the proactive stance of fiscal policy. The widening broad fiscal deficit has been largely financed through increased government borrowing, and the growing scale of this gap is primarily driven by shrinking revenues. In effect, this trend constrains the ability of proactive fiscal policy to fully exert its intended impact.
According to the latest Government Work Report, the fiscal budget plan for 2026 shows little change compared with 2025. First, the general budget deficit is expected to remain at last year’s level, maintaining the intensity of expenditure. The deficit-to-GDP ratio is planned at around 4%, with a deficit of RMB 5.89 trillion, an increase of RMB 230 billion over the previous year. General public budget spending is projected to reach RMB 30 trillion for the first time, up approximately RMB 1.27 trillion year-on-year. This implies that the growth rate of general budget expenditure needs to reach 4.4%, matching last year’s budgeted growth rate but far exceeding the actual growth achieved. Based on last year’s budget execution, there is reason to be concerned about whether fiscal revenue growth can turn positive this year, and whether the expenditure targets can realistically be achieved. Although government bonds have been arranged to cover the fiscal shortfall, the challenge is that bond issuance plans must be scheduled in advance. If budget execution falls short, there may be a need for mid-year emergency adjustments, similar to what occurred in 2023.
In terms of expenditure composition, the general budget emphasizes “investment in people”, noting that last year, spending related to public services accounted for 38% of total fiscal outlays. This type of rigid expenditure is inherently difficult to reduce. With revenue on the decline, the fiscal room for maneuver on the expenditure side is likely to narrow further. At the same time, the 2026 budget includes RMB 1.6 trillion in ultra-long-term special treasury bonds, of which RMB 1.3 trillion is allocated to the “dual priorities” (major national strategies and security capability building) and “dual innovations” (large-scale equipment upgrades and consumer trade-ins), roughly the same as last year. An additional RMB 300 billion is designated to replenish commercial bank capital, down nearly RMB 200 billion from the RMB 500 billion allocated in 2025. Regarding local special-purpose bonds, the allocation for this year remains the same as last year at RMB 4.4 trillion, with similar uses. This includes funds earmarked to help address local hidden debts, which are also unchanged from 2025.
On the expenditure side, government investment had already slowed in 2025 due to weakening demand and insufficient household consumption. At the same time, the resolution of local government debt and the sluggish real estate market have limited the capacity for local government investment. With the domestic economy moving away from a land-driven model, how investment is carried out may become the key test of local governments’ ability to implement fiscal policy. Even when local authorities are actively promoting projects in emerging sectors such as artificial intelligence and data center construction, these initiatives may also generate substantial non-performing assets. After all, these sectors are not areas of government expertise, and without relatively mature business models, large-scale investment is not well-suited. Therefore, on the expenditure side, measures like consumption subsidies, enhanced public services, and social security are not the primary concern. The crucial factor is the effectiveness and sustainability of government investment. This implies that large-scale increases in government investment or massive fiscal stimulus are not necessarily the optimal policy choices.
It is worth noting that this year’s Government Work Report introduces several new measures, including the establishment of a RMB 100 billion special fund to promote domestic demand through coordinated fiscal and financial policies, as well as the issuance of RMB 800 billion in new policy-based financial instruments. These policy-driven funding arrangements are intended to attract greater participation from private and social capital in government-led investment, and to encourage and leverage such capital for broader investment activities. Fiscal funds, in this context, are expected primarily to play a leveraging role. These initiatives point to one of the future directions for expanding fiscal resources, i.e., advancing the capitalization of fiscal funds and relying on capital mechanisms to drive revenue growth. This approach aims to break through the increasingly evident “ceiling” faced by the general budget. However, judging from the revenue and expenditure performance of state-owned capital operations, the scale of such funding remains relatively small within the overall fiscal framework. In the short term, it is unlikely to fill fiscal gaps. As a result, “bond-based finance” will still be needed as the primary tool for implementing a proactive fiscal policy.
Final conclusion analysis：
China’s Two Sessions reports and the fiscal budget for the new year indicate that a proactive fiscal policy will continue broadly in line with last year in both approach and intensity, though the composition of spending may differ. Overall, the key challenge for fiscal policy this year lies in addressing the sources of funding. On the expenditure side, the challenge is how to foster new quality productive forces and sustain drivers of long-term growth within a constrained fiscal space.
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Dr. Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.
