China will continually use fiscal tools for economic stabilization this year, with an underlying focus on sustainable measures for increasing employment and output by adjusting taxes and government spending, experts said.

The Ministry of Finance, under the authorization from the State Council, the Cabinet, prepared and submitted a draft report on the central and local government budgets for this year to the fourth session of the 13th National People's Congress, and the same was passed at the end of the two sessions.

The report showed a smaller fiscal deficit with shrinking fiscal spending this year, indicating a less expansionary or tighter policy stance, compared with the fiscal relief package released after the COVID-19 epidemic outbreak.

The official fiscal deficit was set at "around 3.2 percent" of GDP this year, with a total deficit of 3.57 trillion yuan ($549 billion), down 190 billion yuan from a year ago. The budgeted ratio was "above 3.6 percent" in 2020, and the realized ratio was 3.7 percent, according to the national budget.

To achieve this goal, the government expenditure in the national general public budget is projected to be more than 25.01 trillion yuan this year, up 1.8 percent on a yearly basis. The focus of spending will remain on enhancing support for ensuring employment, meeting basic living needs, and protecting market entities, it said.

The Ministry of Finance estimates that government revenue will be 21.44 trillion yuan this year, as the economy gradually returns to normal and price levels rebound. But the recovery will be modest without the one-off fiscal relief measures, such as the special COVID-19 Treasury bonds.

To implement the fiscal policy, efforts should be made to maintain a stable government debt level and ensure a certain scale of expenditure, said Bai Jingming, former vice-president of the Chinese Academy of Fiscal Sciences, a think tank of the Ministry of Finance.

Policymakers also determined to decrease local governments' special bond issuances to 3.65 trillion yuan, down by 100 billion yuan from the 2020 quota. The measures will help decrease the interest rate payment on government debt and contain leverage ratio growth, said Bai.

But there is an even greater difficulty in balancing the budget and risks in key areas, such as the debt that cannot be overlooked, said the report.

Zhang Lianqi, a member of the Standing Committee of the 13th National Committee of the Chinese People's Political Consultative Conference, said the fiscal policy will be more sustainable, mainly focusing on setting a proper level of expenditure with a certain policy intensity in balancing development and safety.

The arrangement indicates that China is pursuing high-quality development rather than adopting a deluge of strong stimulus policies, while also leaving policy space for responding to new risks and challenges in the future, Zhang said.

Before fixing the final version of the annual budgets, the Financial and Economic Committee of the nation's top legislature, the National People's Congress, provided several suggestions for future fiscal reforms. It suggested the implementation of a policy of granting an extra tax deduction on enterprises' research and development costs and using preferential tax treatment to encourage greater investments. The tax deduction will be raised to 100 percent from 75 percent of R&D costs.

Policymakers are also expected to urge local governments to keep tabs on special bond projects which may have potential risks, and study various disposal measures. Efforts are needed to conduct and publish balance sheets to show the financing activities of local governments, along with studies in making laws to regulate government borrowings.

To sustain economic growth, the Ministry of Finance has indicated key areas in which the government will inject huge funds, including national laboratories and basic research on science and technology, high-quality manufacturing industries like integrated circuits, new materials, and next-generation information technology, boosting consumption of new-energy vehicles and refining retail import tax policies on cross-border e-commerce.

Given the size of the economy and the government's role in infrastructure spending, China's budget numbers are being closely watched by global investors, especially those interested in the commodities sector, said Lu Ting, chief economist in China with Nomura Securities.