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Adjustment for fiscal policy discussed
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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