Qiushi Journal

Implementing a Proactive Fiscal Policy for Overall Economic and Social Development

From: English Edition of Qiushi Journal

Updated:2012-07-04 13:50

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The implementation of a proactive fiscal policy is a major decision that the Chinese government has made in response to changes in the economic situation

In 2011, financial departments acted conscientiously to implement the various measures of China’s proactive fiscal policy, took steps to coordinate these measures with monetary and industrial policies, and guided the national economy towards the expectations of our macro-control policies. In doing so, we were able to create a favorable situation in which the economy grew at a relatively rapid pace, prices stabilized, economic efficiency was increased, and public well-being was improved.

An electrified second line from Xining to Golmud on the Qinghai–Tibet Railway was launched on June 30, 2011 (Photo taken in Wulan County on July 19, 2011). The new line, which is fully electrified, runs through the plateau region from Xining to Golmud. With an elevation of 3,200-4,500 meters, the highest point on the line is the 38 kilometer stretch from Qagan Nur to Wulan, which was constructed by the Third Company of the China CREC Railway Electrification Bureau. Starting in October 2007, construction workers braved extreme conditions and overcame enormous difficulties to build a first-rate electrified railway. The electrification of the line, which involved the building of communication and signal facilities, transformer substations, and power systems for electric traction, was completed on schedule following 3 years and 8 months of arduous efforts. The launch of this new electrified line will provide a strong boost for the Qinghai–Tibet Railway. / Photo by Xinhua reporter Wang Song

The overall state of China’s economy is set to remain sound in the year 2012, with numerous favorable factors contributing to continued development. The accelerated pace of industrialization, urbanization, and agricultural modernization will unlock the huge potential of domestic demand; the deepening of reforms in various areas will inject new vitality into institutions and mechanisms; and at the same time, the steady operation of fiscal and financial systems will give us plenty of room to maneuver in terms of macro-control.

However, we also need to be fully aware that we are still facing serious conflicts and problems caused by the imbalanced, uncoordinated and unsustainable development of China’s economy. First, there is downward pressure on economic growth. Our exports are coming up against increasing difficulties; the effects of our policies to stimulate consumption are wearing off; the income gap between urban and rural residents remains wide; and we are seeing a slowdown in the growth of consumption. Second, we are still facing an arduous task in the adjustment of our economic structure. Energy-intensive and highly polluting industries are continuing to expand at an overly rapid pace, and there are still constraints holding back the development of strategic emerging industries, the emergence of modern service industries, the elimination of backward production capacity, and the promotion of scientific and technological innovation. At the same time, environmental, energy, and resource constraints on the economy are becoming increasingly serious, signaling the growing urgency of energy conservation and emissions reduction. Third, there are still many factors contributing to the rise of goods prices. Although consumer demand will exert less influence on price increases in 2012, the costs of labor, energy conservation, and environmental protection are set to continue to rise for a period of time, and there is also an urgent need to balance the prices of certain resource products. These factors, combined with the abundance of global liquidity, have given rise to considerable inflationary pressure. In addition, we need to see that some enterprises are coming up against difficulties in their operation, the pressure to increase total employment coexists with structural shortages of qualified personnel, and there are potential risks in economic and financial sectors which cannot be overlooked.

Generally speaking, the fundamental state of China’s economic development has not been altered by the changes that have occurred in the domestic and international situations. However, the situations that we encounter are set to become more complex and more serious. Under such circumstances, we need to continue to give play to the supporting role of fiscal policy in order to maintain our steady and rapid economic development. During the implementation of proactive fiscal policies over recent years, we have always attached great importance to controlling and preventing risks through the strengthening of fiscal management. As a result, China’s deficit and external debt ratios are still within safe limits. In light of the overall situation at present, we believe that it is both necessary and possible for China to continue to implement a proactive fiscal policy.

General requirements for the implementation of a proactive fiscal policy

In order to carry out a proactive fiscal policy, we need to better coordinate our efforts to ensure stable growth, control goods prices, adjust the economic structure, benefit the people, carry out reforms, and promote social harmony in accordance with the key theme of making progress while maintaining stability. We also need to continue to keep a sound balance between maintaining steady and rapid economic development, adjusting the economic structure, and regulating inflation expectations. This requires that we maintain the continuity and stability of fiscal policy, and make financial macro-control more targeted, flexible and forward-looking.

1. We need to strengthen and improve financial macro-control in order to maintain steady and rapid economic development. By improving our capacity to anticipate, project, and analyze the changing trends in economic development and operation, we should further strengthen and improve our financial macro-control, correctly determine the intensity, pace and focus of our macro-control policies, perform timely and appropriate anticipatory adjustments and fine-tuning, and provide strong support for the development of enterprises, especially small and micro businesses, in order to sustain steady and rapid economic growth and maintain the overall stability of prices. At the same time, we need to closely integrate our efforts to improve economic regulation with our efforts to increase the momentum of development. This means that we must continue to give full play to accurately positioned, specifically targeted, direct, and effective fiscal policy as a means of regulation. Allowing fiscal policy to play a greater role in the adjustment and optimization of the economic structure will lead to solid improvements in the quality and efficiency of our economic development.

2. We need to ensure and improve public well-being, and vigorously promote the development of social programs. We should give the improvement of public well-being a higher priority in public finance, and work actively to carry out such efforts in accordance with our capacity. We need to promote the formation of a more rational income distribution structure by better exerting the role of public finance in regulating income distribution, striving to increase the incomes of low-income groups, gradually raising the proportion of individual income in the national income, and increasing the proportion of remuneration in the primary distribution. We need to maintain steady and rapid economic development, implement a more active employment policy, and make vigorous efforts to increase employment. In an effort to support the resolution of issues that concern the immediate interests of the people, we need to further optimize the structure of government spending, increase spending on public welfare, and develop long-term mechanisms to ensure and improve public well-being through public finance, which should accord with the laws that govern the development of social programs and the different features of various public services.

3. We need to advance the reform of fiscal and taxation systems to develop systems and operational mechanisms that are conducive to scientific development. In adherence to the principles of carrying out overall planning, top-level design, coordination and collaboration, as well as active and steady action, we need to develop fiscal and taxation systems that are conducive to the transformation of the pattern of economic development, deepen the reform of the fiscal management system, the budget system, and the taxation system, and work hard to achieve significant progress in certain major areas and key links.

4. We need to improve the overall effectiveness of fiscal management by striving to make fiscal management more scientific and more meticulous. We need to be fully aware of the importance of overall planning, the rule of law, innovation and efficiency, and cultivate a strong sense of rendering good service to other industries and a strong sense of responsibility. With a view to addressing prominent issues in regard to fiscal management, we need to place a major emphasis on basic management and the development of local fiscal management, improve our management systems and operational mechanisms, and strive to make fiscal management more scientific and more meticulous in a constant effort to increase our managerial standards.

Major aspects of proactive fiscal policy

1. We need to improve policies on structural tax reduction in order to promote the development of enterprises and encourage consumer spending. We need to lower tariffs on certain imports and increase imports of energy resource products, advanced equipment, and key components. We need to apply various policies to reduce the burden of taxes and fees on small and micro businesses, such as raising the threshold for value-added tax (VAT) and business tax, and implement a preferential income tax policy for small enterprises with low profits. In Shanghai, we have launched a pilot project to replace business tax with VAT in the transportation industry and in certain modern service industries. We should gradually expand the scope of these trials in order to promote the development of service industries, especially modern service industries. We need to expand the scope of trials to tax the income of logistics enterprises after deductions, and improve tax policies on the use of urban land to support the use of land by logistics enterprises for bulk commodity storage facilities. We need to abolish VAT on the wholesale and retail sale of vegetables. We also need to apply other policies regarding the reduction and exemption of taxes and fees in order to stimulate the adjustment and upgrading of the industrial structure. Moreover, we need to abolish unreasonable and illegitimate fees imposed on enterprises and conduct an overhaul of highway tolls, with a view to reducing the burden on enterprises and the public.

2. We need to increase urban and rural incomes in an effort to boost consumer demand. We need to implement a more active employment policy, support the implementation of the minimum wage system, and work to raise the wages of low-income groups. We need to increase government spending and implement relevant fiscal policy measures to stimulate the increase of rural incomes. We need to increase government subsidies to raise the basic income of low-income urban and rural residents. We need to promote the development of a modern distribution system for agricultural produce, and carry out trials for methods of approving and deducting the input VAT on agricultural produce. We need to institute a mechanism to tie the increase of social aid and social security benefits with rises in consumer prices, and implement policies to provide subsidies for subsistence allowance recipients in urban and rural areas, childless and infirm rural residents who are entitled to five forms of support (food, clothing, medical care, housing, and burial expenses), and students in higher education and secondary vocational school from poor families.

3. We need to strive to optimize the investment structure and strengthen the weak links in economic and social development. We need to maintain a reasonable level of central government spending on infrastructure, which should be directed primarily towards the development of low-income housing projects, agricultural and rural infrastructure, with priority given to water conservancy projects, educational, cultural and medical infrastructure; energy conservation, emissions reduction, and ecological improvement; the improvement of independent innovation and the development of strategic emerging industries; and economic and social development in Xinjiang, Tibet, and Tibetan ethnic areas in Qinghai, Gansu, Yunnan and Sichuan provinces. We need to give priority to ensuring funding for key projects that are under construction, and strictly control the launching of new projects, in order to prevent redundant development. We also need to further encourage and guide the sound development of non-governmental investment.

4. We need to further optimize the structure of government spending and strive to ensure and improve public well-being. We need to increase government spending on public welfare, tilt spending in favor of local communities, rural areas, remote border areas, and disadvantaged groups, and give stronger impetus to accelerate the development of social programs such as education, medical and health care, social security, employment, low-income housing projects, and public cultural initiatives. First, we need to strictly meet legal requirements in regard to increasing government spending on education. We need to further increase the proportion of public expenditure that goes to education in order to ensure that government spending on education reaches 4% of the GDP. Second, we need to accelerate the development of a social safety net. We need to achieve the total coverage of our new type of old-age insurance in rural areas and old-age insurance for non-working residents in urban areas, further raise basic pensions for corporate sector retirees, and increase the standard of subsistence allowances for eligible recipients in urban and rural areas. Third, we must promote the reform of our medical and health care systems. We need to raise the level of government subsidies for the new cooperative medical care system in rural areas and the basic medical insurance scheme for non-working residents in urban areas, and accelerate trials for public hospital reforms that are centered on the reform of county-level hospitals. Fourth, we need to establish stable funding channels and operational mechanisms for low-income housing projects, implement preferential policies for the reduction of relevant taxes and fees, and engage in a vigorous effort to support the development of low-income housing projects. Fifth, we need to support the development of irrigation and water conservancy projects, increase spending on agricultural science and technology, and strive to support the development of modernized crop cultivation and a system for spreading agricultural technology at local levels, in order to ensure the stability and growth of agricultural production, the continuous increase of rural incomes, and the prosperity of rural areas. Sixth, we need to ensure that the increase in government spending on cultural development is higher than the growth of the regular revenue, thereby better satisfying the cultural demands of the general public.

5. We need to promote the adjustment of the economic structure and the balanced development of different regions in order to transform the pattern of economic development. We need to increase spending on science and technology, ensure the implementation of major science and technology projects, and vigorously support basic research and the R&D of major generic key technologies. We need to strengthen the development of major energy conservation projects, promote the wider application of energy-efficient products, and accelerate the development of new, renewable and clean energies. We need to develop a policy system for the cap-and-trade of emissions, and ensure that the policy of subsidizing and rewarding the protection of grassland ecologies covers all herding and semi-herding counties defined by the government. We need to vigorously support the development of strategic emerging industries and modern service industries. We also need to implement various fiscal policies to promote the balanced development of different regions, and enhance the capacity of regions with inadequate financial resources to ensure the implementation of various public welfare policies.

(Originally appeared in Qiushi Journal, Chinese edition, No.3, 2012)

Author: Minister of Finance of the People’s Republic of China

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