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Fiscal reform can boost economic development

By Niu Li (China Daily)
Updated: 2006-02-28 09:26

The Chinese economy is expected to continue its steady and fast growth momentum this year, but fiscal reforms need to be continued to better facilitate sound economic development.

Last year has seen the national economy on a fast track, with gross domestic product (GDP) increasing by 9.9 percent, the third consecutive year that China has achieved an around 10 percent growth rate.

Thanks to the strong growth momentum, China has become the world's fourth largest economy following the United States, Japan and Germany.

What is more noteworthy is that economic growth was stable last year. The GDP growth rates of the four quarters were 9.9, 10.1, 9.8 and 9.9 percent respectively, with the widest quarterly gap being only 0.3 percentage points.

The economic structure has become more rational. Investment, consumption and net exports contributed 33.3, 48.8 and 17.9 percent respectively to GDP growth, which means the role of investment has been weakened while consumption has become more powerful.

Meanwhile, the services sector accounted for 40.2 percent of the economy, up by about 10 percentage points, another sign of the improved economic landscape.

In the first quarter of this year, the economy is expected to continue to grow steadily fast, although it will slow slightly. This is because the global economic environment will not change much this year, with global inflation coming under control and global trade continuing to expand, albeit at a slightly slower pace. The economies of the United States, Japan and Europe may grow faster than people have predicted.

Admittedly, from an international perspective, some special incidents, such as the nuclear dispute in Iran, rising oil prices and potential terrorism, may bring uncertainties to the world economy and in turn affect the Chinese economy. The trade frictions and violation of the principle of free trade and investment by some countries will also complicate China's trade prospects. Worse, some countries have politicized trade and investment by frequently accusing China of dumping low-priced commodities and imposing restrictions on imports of Chinese products.

All this will add to the non-economic risks for China's trade growth, an engine driving forward the dynamic Chinese economy.

Despite these potential setbacks, the Chinese economy will be backed up by the country's sound domestic environment. China is having its consumption structure upgraded and industrialization and urbanization process accelerated, both of which will push growth.

This year is the first year of the central government's 11th Five-year Plan (2006-10), so a slew of economy-boosting initiatives will be undertaken.

What may trouble policy-makers this year is the problem of energy shortages, as supplies of coal, oil, electricity and transportation cannot meet requirements. Moreover, overproduction and the unbalanced investment-consumption relationship may remain a problem in some sectors, potentially damaging their sound development.

Based on the three crucial factors of domestic demand, foreign demand and investment, the Chinese economy will continue to grow steadily.

While the overproduction in some sectors, decline in profits of some enterprises and pressure from potential deflation may, to an extent, slow down the growth of investment, the large number of projects under construction means investment will not drop abruptly this year.

Regarding domestic demand, the consumption habits of domestic residents will not change much in the short term and consumption, therefore, will remain stable.

As for foreign demand, in the first quarter of last year, net exports constituted more than 30 percent of China's GDP growth. In the first quarter this year, export growth is expected to suffer a slow-down, which may be an important factor that will drag on China's economic growth in the first three months.

Thanks to this negative impact, China's economy may slow down a little in the first quarter of this year, with GDP possibly growing by 9.6 percent, 0.3 percentage points lower year-on-year.

Against this backdrop, fiscal policy can be adjusted to balance economic growth and improve efficiency.

In the past decade, the growth of China's fiscal revenues has exceeded that of its GDP. In 1995, its fiscal income accounted for 10.3 percent of its GDP. In 2005, it was 17.2 percent, nearly 7 percentage points higher.

The expanded public finance lays down the foundation for carrying out reforms to fully bring out the role of fiscal policy in balancing investment and consumption, and to resolve overproduction.

The adjustment should start from the following aspects:

First, the structure of fiscal expenditure should be optimized so that the government can offer more support for consumption instead of investment. It should be used to improve consumer confidence to stimulate domestic demand.

Currently, the key to people's reluctance to consume lies in high-priced education, housing and medical care, the costs of which squeeze consumption of other commodities and services. So the government should support the development of rural areas to improve farmers' purchasing power. Then it needs to reform the widely criticized education, real estate and medical care services and increase government input to reduce the financial burden on consumers. Investment in infrastructure, such as power grids, roads connecting rural and urban areas and urban rail transport facilities, which can contribute to expansion of domestic demand, is also indispensable.

Second, the fiscal reform should be oriented towards tax cuts, so that people's purchasing power can be improved. A unified taxation standard for domestic and foreign businesses is necessary to put them on equal footing and ease the tax burden of domestic enterprises, which traditionally suffer higher tax levels than foreign investors.

The government should accelerate reform in monopoly industries, which have seriously impeded private investment.

Non-State investors, a source of a dynamic economy, must be ushered in to break monopolies and optimize the economic structure.

The author is an economist of the Economic Forecasting Department of the State Information Centre.