Shrinking Coffers Challenge Chinese Finance Ministry

From News, page 5, issue 387 & 388, September 29 2008
Translated by Zuo Maohong
Original article: [Chinese]

Slower tax revenue growth and higher pressure for more spending have posed a challenge to Chinese budget planners in the ongoing drafting of the 2009 budget.

Tax revenue growth stumbled in July and August and was likely to continue falling, but there was a growing need for more spending to stabilize prices in China and rebuild disaster-hit areas.

Official data showed that in July, China’s state revenue grew by 16.5% compared with the same period last year, 14 percentage points lower than in June. The growth rate continued to fall in August, when state income dropped below 400 billion yuan.

“There will be no problem meeting the budget, but there may not be as much excess income as last year,” an official from the Ministry of Finance (MOF) told the EO.

Compared to the same time last year, budgeted revenue for the beginning of 2008 was up by 14%. By the end of August, the actual revenue saw a year-on-year growth of 28.4%. Judging from this, the above-mentioned official believed there would still be excessive revenue even if the growth rate continued to stumble in the next four months.

The current economic situation at home and abroad, as well as companies’ profit-earning ability, explained why state income had fallen for two consecutive months. Many officials and scholars thus worried that the high revenue era of China might come to an end.

Slower tax revenue growth would impact future government spending considerably, said Ma Caichen from Institute of Finance and Trade Economics under Chinese Academy of Social Sciences.

Before China established a special budgetary stabilization fund in 2007, China’s excess revenues were usually spent within the same fiscal year. After the fund was set up, however, each year’s excess would be siphoned off into it. So far, there was 43.2 billion yuan in the fund, which might not grow if this year’s excess revenues were small.

For local governments, excess revenues had become a major source of funding for certain projects as there had yet to be a clear system for allocating them to next years budget.

According to Ma, slower state income would not have too much actual impact on the next year’s budget. However, the government may need be more conservative in setting the 2009 budget, and set income growth at a level lower than this year’s. If this year’s growth rate was 14%, then the next year’s should be budgeted as 10% or 12%, he said.

However, some tax professionals held that weaker revenue growth should be a relief for the MOF, as questions had arose with tax revenues double or triple China's GDP.

Central government agencies had already submitted a first draft of the 2009 budget to the MOF, which would pass it back to them by the end of October for second drafting.

The agencies were asked to strictly control their spending on public servants' trips and to attain zero growth in staff and administrative expenditures in the next year's budget. In the past, such expenditures had a yearly growth of over 5%.

Though the MOF had long intended to cut administrative cost, the decision was also out of concern over this year’s income and demand for spending.

By 2010, the MOF would dedicate a total of 300 billion yuan to rebuild areas hit by the Sichuan earthquake this May. In addition, there would be growth in spending on education, environmental protection, social securities, and agriculture over the next several years.

The trend of slowing government revenues comes as massive amounts of government funds have during recent years gone unspent or were spent late in the year. The MOF has required all agencies to quicken the pace of spending for their 2008 budgets. By the end of August, only 51.79% of state budgets had been spent.

Among all these central agencies, the Ministry of Culture had to spend 70% of its budget within the last four months. The Ministry of Water Resources planned to spend 60% by the beginning of September and 75% by the end of the third quarter.

An MOF official once pointed out that excess funds at central agencies had been growing by 10% every year, and some agencies even had half of their budget untouched.

In the 2009’s budget, the MOF required all agencies to give priority to excess funds when spending, thereby reducing the amount of the excess accumulated in the previous years.

In this way, the Ministry hoped to resolve the conflict between idle funds in government bodies and a lack of funds for public services.