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China’s economic growth rate has been below 5% for six consecutive quarters, and the long-awaited recovery has fallen short of expectations.
Under the macroeconomic background of insufficient effective demand and low interest rates, monetary policy is constrained by the effective lower limit, and the market expects fiscal policy to increase stimulus. However, some people believe that the current growth rate of fiscal expenditure is lower than expected, and the fiscal policy is not active enough. In fact, no counter-cyclical adjustment has been carried out.
So, how big is the current fiscal expenditure intensity? Is there any counter-cyclical adjustment? And, how much policy space is there in the future?
1. Three deficit ratio calibers
It is generally believed that the deficit ratio is an important indicator of fiscal strength.
China implements relatively strict fiscal discipline, and sets 3% as the warning line with reference to international standards. Except for short-term breakthroughs in 2020 and 2021 due to special reasons such as responding to the impact of the epidemic (3.7% and 3.2% respectively), the official deficit rate has never exceeded 3%. From 2010 to 2019, China’s deficit ratio averaged 2.39%. In 2022, the deficit will be 2.8%. In 2023, it is planned to arrange around 3%.
There is a view that the deficit ratio should be raised.
There are at least two reasons for this. First, 3% was the earliest reference value stipulated in the EU Maastricht Treaty, which came into effect in November 1993. It has neither undergone rigorous empirical testing nor solid theoretical basis, and there is no mandatory constraint even for EU countries. Second, although the deficit ratio is an indicator to measure debt risk, the deficit ratio is not equivalent to debt risk. If the expansion of the deficit scale can bring higher output and income, the expansion of the debt scale is not necessarily lead to an increase in the debt ratio.
We fully agree that deficit ratio cannot be simply equated with debt risk. However, it should be noted that countries use different calibers to calculate fiscal deficits, and sometimes the deficit ratio cannot be a good measure of the intensity of fiscal expenditures. Although China has set 3% as a warning value, there are large differences in the deficit ratio calculated according to different calibers, and the nominal deficit ratio of 3% is often exceeded.
Caliber 1: The actual deficit ratio of income and expenditure
The deficit ratio in textbooks is the ratio of the difference between fiscal revenue and expenditure to the gross national product (GDP).
China’s budget system includes four accounts: general public budget, government fund budget, state-owned capital operation budget, and social insurance fund budget. Due to the provisions of the “Budget Law”, the latter three accounts must follow the principle of balance between revenue and expenditure or the principle of determining expenditure based on revenue, and no deficit is listed. Therefore, applying the concepts in textbooks to China, the fiscal deficit that many people usually understand refers to the difference between revenue and expenditure of general public budget accounts within a fiscal year. The deficit ratio is the ratio of the balance of payments to GDP.
Caliber 2: Official Budget Deficit Ratio
However, the official fiscal budget deficit is not actually the result of subtracting the general public budget revenue from the general public budget expenditure. It is also necessary to comprehensively consider the use of the budget stabilization adjustment fund, the transfer of funds from the government fund budget and the state-owned capital operation budget, and the utilization of surplus funds. Factors such as transfer and carryover funds. After comprehensively considering the above factors, the formula for calculating China’s fiscal deficit is:
Fiscal budget deficit = (National general public budget revenue + transferred into the budget stabilization adjustment fund and other budget funds + use of carryover and surplus funds) – (National general public budget expenditure + supplementary budget stabilization adjustment fund + funds carried forward to the next year’s expenditure) , the official budget deficit ratio is budget deficit/GDP.
Caliber Three: Generalized Deficit Ratio Based on Power and Responsibilities
According to the “Budget Law”, special bonds belong to the government fund budget and are not included in the deficit. This is because, in principle, the issuance of special bonds requires that the proceeds of the project itself be able to repay the principal and interest. But in fact, since most projects still support infrastructure construction and industrial park construction with very low or even no returns, the interest payment of the current special debt still depends on the financial funds of the project location or the credit funds of the platform company. In terms of the use of funds and the assumption of rights and responsibilities, if there is a problem with the repayment of special bonds, local governments need to use general public budget revenue to cover the bottom line, so they should also be included in the fiscal deficit. The deficit rate included in special bonds is the generalized deficit rate.
In addition, the local government’s off-budget debt financing should also be included in the deficit in the broad sense. However, extra-budgetary debt financing is difficult to be traced and accurately counted, so it cannot be calculated.
Taking 2022 as an example, the official deficit rate, actual deficit rate, and generalized deficit rate calculated on the basis of official caliber, revenue and expenditure caliber, and authority and responsibility caliber are 2.8%, 4.7%, and 7.7%, respectively.
The specific algorithm is as follows:
In 2022, the national general public budget revenue will be 20.37 trillion yuan, the national general public budget expenditure will be 26.06 trillion yuan, and the actual revenue-expenditure gap will be 5.69 trillion yuan. Therefore, based on the difference between the general public budget revenue and expenditure in that year, the actual deficit rate based on revenue and expenditure in 2022 is 5.69 trillion/121 trillion = 4.7%.
However, at the beginning of 2022, the fiscal deficit disclosed in the budget report was “arranged according to 3.37 trillion yuan” and the deficit rate was “arranged according to about 2.8%”. The fiscal deficit released in the budget execution report is still 3.37 trillion yuan, and the nominal GDP is 121 trillion yuan. Therefore, it can be calculated that the official budget deficit ratio (deficit/GDP) is close to 2.8%, which is in line with the budget arrangement at the beginning of the year.
So, how to make up the difference of 2.33 trillion between 5.69 trillion and 3.37 trillion?
That is, as mentioned above, it will be supplemented by transfer of historical carryover and surplus funds, government funds and state-owned capital operating budget revenue. Among them, 2.45 trillion yuan was transferred from the budget stabilization adjustment fund, government-managed fund budget, and state-owned capital operation budget, and the use of carryover and balance was 2.45 trillion yuan, and some funds were transferred out.
If 3.65 trillion yuan of special debt is included in the deficit in 2022, the generalized deficit rate under the authority and responsibility caliber will be as high as 7.7%.
2. The actual intensity of active fiscal
Judging from the official deficit ratio arrangement, the annual fluctuation seems to be very small, and it will increase by 0.2 percentage points in 2023 compared with 2022. However, in actual operation, the financial department comprehensively coordinates the transfer of other funds, and the actual active fiscal policy The strength may not be small. Compared with the official deficit ratio, the deficit ratio based on revenue and expenditure and power and responsibility can better reflect fiscal strength.
First, the deficit rate based on the current year’s balance of payments can better reflect the tightness of fiscal policy than the official caliber.
The whole society can be understood as composed of two sectors, the government sector and the private sector. Government departments are not production departments and do not create wealth. Government revenue comes from taxes and fees, which are actually collected from the private sector. Government spending is returned to the private sector. The official budget deficit ratio actually shows the scale of new debts, but conceals the funds transferred from the budget stabilization fund, government fund budget, state-owned capital operation budget, and carryover and balance. According to the caliber of the balance of revenue and expenditure of the general public budget account of the year, on the one hand, it can better reflect the relationship between the revenue and expenditure distribution between the government sector and the private sector, and on the other hand, it can better reflect the fiscal revenue and expenditure pressure of the year, as well as different The allocation of funds between accounts can reflect the tightness of fiscal policy relatively more accurately.
Calculated based on the current year’s balance of payments, from 2018 to 2022, the actual deficit rates will be 4.09%, 4.87%, 6.17%, 3.91%, and 4.70%, respectively, with an average of 4.75%, all exceeding the nominal deficit rate.
Second, the deficit ratio included in special debt can better reflect the stimulus to the economy than the official caliber.
Special debts belong to the government fund budget in the four accounts and are not included in the deficit. Special funds are used for special purposes, and can be divided into land reserve special bonds (mainly used for land acquisition, land leveling, early-stage development, etc.), special bonds for shed renovation, special bonds for toll roads, special bonds for rail transit, etc., mainly used for infrastructure related field of. Considering the important role of infrastructure in stimulating economic growth, and special debts should also be included in the deficit according to the division of rights and responsibilities, the generalized deficit ratio included in special debts can better reflect the stimulus of fiscal expenditures to the economy.
Calculated according to the caliber included in special bonds, from 2018 to 2022, the generalized deficit ratios were 5.55%, 7.03%, 9.86%, 7.17%, and 7.97%, respectively, with an average of 7.52%, which significantly exceeded the nominal deficit ratio.
3. Is the fiscal policy really positive?
It is argued that analyzing the year-on-year growth rate of the combined accounts of general public budget expenditures and government fund budget expenditures can more intuitively reflect the strength of the proactive fiscal policy. This point of view is reasonable, but it is necessary to pay attention to the abnormal disturbances brought about by the government fund budget account China’s land transfer income and related expenditures.
The relationship between the four accounts of China’s financial system is that surplus funds from the government fund budget and the state-owned capital operation budget can be used to supplement the deficit of the general public budget, and the general public budget and the state-owned capital operation budget have special expenditure items to supplement the public budget. The insurance fund budget, and the social insurance fund budget, are earmarked for special purposes, and only come in and out.
Although the surplus funds of the state-owned capital operation budget can supplement the general public budget and social insurance fund budget, the scale of this book is very small, accounting for less than 2% of the four books. Therefore, when analyzing the impact of fiscal revenue and expenditure on When it comes to the economic impact, usually only the general public budget and the government fund budget are analyzed, because these two accounts are the absolute largest of the four accounts.
Therefore, it seems that we can more intuitively measure the strength of fiscal policy by analyzing the year-on-year growth rate of general public budget expenditures and government fund budget expenditures.
It can be calculated that from 2018 to 2022, the year-on-year growth rates of the expenditures of the two accounts are 14.18%, 9.54%, 10.10%, -0.99%, and 3.11%, respectively, with an average of 7.19%. The year-on-year growth rates in 2021 and 2022 are -0.99% and 3.11%, respectively, far below the five-year average and also below the nominal GDP growth rate of that year. Therefore, some people question whether the proactive fiscal policy is really positive or false positive when the macro economy is facing multiple challenges such as shrinking demand, supply shocks, and weakening expectations.
If we look at the year-on-year growth rates of general public budget expenditures and government fund budget expenditures, we can find that the proactive fiscal policy in 2021 may be phased out too quickly, but it has not significantly increased the burden on market players. The economy is still stimulating. In 2022, the year-on-year growth rate of the total expenditure of the two accounts will turn negative, mainly due to the sharp drop in expenditure related to state-owned land transfer income in the government fund budget expenditure, and the active fiscal policy is actually still active.
3.1 Fiscal over-collection in 2021 will be disturbed by price factors
In 2021, the general public budget revenue will be 20253.9 billion, a year-on-year growth rate of 10.74%, and an increase of 6.4% compared with 2019. The general public budget expenditure was 24632.15 billion, a year-on-year growth rate of 0.3%, and an increase of 3.12% compared with 2019. The annual revenue completion (102.5%) exceeded the budget by 2.5 percentage points, and the expenditure completion (98.5%) was 1.5 percentage points lower than the budget. Compared with the two, the fiscal policy seems to be shrinking. After comprehensively considering the budget stabilization adjustment fund, government fund budget, state-owned capital operation budget transfer in and out, and the use of carryover and balance, the official deficit is 3.57 trillion yuan, which is 190 billion yuan less than that in 2020 (3.76 trillion yuan). In fact, the stimulus is also strong. lowered.
However, it should be noted that the rapid growth of fiscal revenue is related to the rapid growth of industrial taxes brought about by economic recovery and rising commodity prices, and the one-time increase in revenue of key industries and enterprises, which is a special case. It does not mean that the financial situation of the provinces and cities with over-revenue is improving steadily, nor does it mean that the fiscal policy is being tightened intentionally.
First, the Ministry of Finance is well aware of the phenomenon of excess fiscal revenue brought about by this price factor, so it is different from repaying part of the fiscal excess to offset the deficit or transfer it to the budget stabilization fund in previous years. In 2021, the Ministry of Finance issued a special “On The Notice on Reasonably Arranging Fiscal Exceeding Revenues This Year stipulates that “if the total amount of general public budget expenditures is indeed insufficient, the general public budget expenditures may be appropriately increased through excess revenues in strict accordance with legal procedures”, allowing localities to use the excess revenues to increase current year expenditures.