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Adjustment for fiscal policy discussed
By Xu Dashan (China Daily)
Updated: 2004-11-29 01:23
China is likely to give up its pro-active fiscal policy and implement a
neutral policy next year, economists said.
The country is also expected to reduce issuing the amount of special treasury
bonds, which the government used to fuel its fiscal expansion.
Peng Longyun, a senior economist with the Asian Development Bank, said
implementation of a neutral fiscal policy means the government will reduce the
ratio of deficits to the total gross domestic product (GDP).
The government will also adjust its fiscal expenditure structure, he said.
Wang Zhao, a senior researcher with the State Council Development Research
Centre, said the government has an urgent need to phase out the pro-active
policy.
"Long-term reliance on the policy would be harmful to the sustainable
development of the country's economy," he said.
The pro-active fiscal policy, characterized by increasing government
expenditure mainly on investment in infrastructure projects, was introduced in
1998 to minimize the negative impact of the Asian financial crisis.
The policy has played an important role in speeding up infrastructure
construction, expanding domestic demand, increasing employment and fueling the
country's fast economic development.
But since the beginning of this year, the country's economy has witnessed an
over-investment in fixed assets.
Inflationary pressure has also been increased.
"The pro-active policy partly fuelled overheating in some industries such as
cement and steel," Wang said.
He also said if the government had given up the policy earlier, it would not
have to take a raft of macro-control measures to prevent the economy from
becoming overheated.
"Time is ripe for the government to let the pro-active fiscal policy fade
out," he said.
Peng said the government is expected to reduce the ratio of next year's
deficit to the GDP to pursue the more neutral policy.
"The government may keep the deficit the same amount as that of this year,"
he said.
But as GDP grew, the ratio of the deficit to the GDP will drop, he said.
Wang said the government is expected to cut the actual deficit/GDP ratio to
about 2 per cent next year, from 2.2 per cent predicted for this year, he said.
"So long as the economy does not have big ups and downs, the government could
gradually cut the ratio in the coming years to about 1.5 per cent," he said.
Peng said a departure from the pro-active fiscal policy does not mean the
more neutral policy is inactive.
"The neutral policy should beef up its role of structural adjustment in the
government's macro-control efforts, in co-operation with the monetary policy,"
Peng said.
For example, an interest rate hike may not have a big enough impact on the
over-heated sectors, but will have a big impact on agriculture and small and
medium-sized companies.
The government could carry out fiscal measures such as imposing an energy tax
to alleviate the pressure on energy.
Meanwhile, it could offer interest subsidies for agriculture.
With an aim to support development of small and medium-sized companies, the
fiscal expenditure should help improve the business environment and services for
them.
Fiscal expenditure should also pay more attention to social issues such as
poverty-relief and education in rural areas, he said.
Peng said China does not have fiscal risks at present, because the country's
debts are not very big.
But he said this does not mean the country's fiscal system is free from
worries.
The country has a large amount of non-performing assets by State-owned
companies, he said.
It also needs a large amount of money to fit the capital gap of establishing
a social security system.
Niu Li, a senior economist with the State Information Centre, said the
government also needs money to complete unfinished infrastructural projects and
to support its efforts to develop old industrial bases in the country's
northeastern regions.
As a result, the government will continue to issue a certain amount of
special treasury bonds next year, he said.
However the amount of special bonds will be reduced, he said.
Some economists predict the country will reduce the special bonds by less
than 30 billion yuan (US$3.6 billion).
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