Tax cut is the new engine for China’s economic growth

The Ministry of Finance recently published the fiscal revenue and expenditure data of October, in which, the revenue grew at 5.9% while the expenditure grew at a stunning speed of a year-on-year growth of 36.1%, the highest since July, 2012.

Poor revenue arises out of sluggish economy. In the first 10 months of this year, the fixed asset investment of China increased by 10.2% compared with the same period of last year, creating a new low in the past 15 years. Import and export in October both showed decrease respectively of 16% and 3.6%. The industrial added value of October continued to slow down by 5.6% year on year. Indicators including the amount of power generation, CPI and PPI were not very optimistic as well. All these are signs indicating weak demand and the pressure of soaking up excess capacity of China.

The more the economy is depressed, the more important is the proactive fiscal policy. This is why the growth rate of expenditure in October hit a new high of the past 3 years. However, since there are different kinds of expanding fiscal policies, the problem of how to expand is an issue for us to ponder over.

Speaking of the reason of economic recession, it is mainly lack of demand or excess capacity. If we still follow the conventional pathway, a proactive fiscal policy will lead to expenditure expansion, which is bound to be input into large-scale infrastructure projects. Obviously, this will further worsen the situation of excess capacity and enlarge the debt scale and raise the financial risk of the enterprise.

To avoid further oversupply and meanwhile, create more demands, the fiscal expenditure should be concentrated on emerging industries, such as energy saving and environmental protection as well as public utility facilities, which was actually the main direction for fiscal expenditure in October. Anyway, during the specific implementation, there are still challenges, such as blur prospect for the emerging industries and certain risks in investment projects. And from a more practical perspective, the situation is not so optimistic. As shown in MOF data, at the end of September, the debts of the state-owned enterprises had totaled to 77 trillion yuan, increasing by 6 trillion yuan suddenly at the end of August.

Actually, there is another way for proactive fiscal policy, that is, tax cut. In recent days, Premier Li Keqiang has explicitly pointed out the importance of tax cut in different occasions. Distinct from the idea of levy-first-spend-later, tax cut can release the tax burden for enterprises and residents directly. Tax cut keeps the capital circulating in the society and thus the burden for enterprises and residents are alleviated. By which, the government can, on the one hand, lower the debt rate and reduce financial risk macroscopically, and, on the other hand, create new opportunities for investment and consumption and consequently, drive economic growth.

From the constitution of GDP in income approach, in 2014, the general fiscal revenue of the nation was 14 trillion yuan, governmental fund revenue 5.4 trillion yuan, social security revenue 3.8 trillion yuan, in total, 23.2 trillion yuan, accounting for 36.5% of the GDP, which is obviously too high comparing to the public services provided by the government currently. In consideration of that the large amount of projects supported by the government and state-owned enterprises are also one of the main reasons for excess capacity. Tax cut, which keeps the capital in society and will be invested by the society, will be a better mode than the current government-dominated one in terms of the economic improvement in middle and long term.

Though with fiscal deficit in recent years, China’s fiscal status was, actually, not bad. Chinese government always holds a deposit of more than 3 trillion yuan for years, and the amount had once reached 4.5 trillion yuan at the end of November, 2014. This means current fiscal expenditure scale has far exceeded the capacity of the government. Local governments have always been the main strength for the implementation proactive fiscal policy and the main investors for a good deal of insufficient projects. And this is the root of the high debt risk.  

Such high surplus is also a reflection of the fact that the government has found that it is hard to find any good investment project now. At this very moment, initiating tax cut based on the fiscal stock fund opens a space for the government to lessen the scale of fiscal revenue and expenditure and to provide money for private investment. This is probably a better way out.