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Limited fiscal maneuverability

By Si Tingting (China Daily)
Updated: 2009-06-29 08:23

Liu Fuhuan, economist and former deputy director of the Academy of Macroeconomic Research at the National Development and Reform Commission (NDRC), China's top economic planner, believes that the global economic slump has left the country with no choice but to reform its income scheme.

"Actually, the draft proposals to reform the income distribution system came out first in 2006 and NDRC had been debating about when to launch it," he said. The reform was never put into practice because it cannot please all its stakeholders.

"As overseas demand for Chinese goods declines sharply, China must revive its domestic demand," Liu said, adding that without an income increase and a social security net, Chinese people would never tap their deep pockets.

In addition to its economic purpose, boosting income levels will also have some social impact. In the past decade, China has witnessed tremendous economic growth, whereas the income levels of ordinary workers have hardly improved.

According to statistics from the Chinese-language China Newsweek, more than half of the GDP went into people's pockets before 2003, while in 2006, the percentage dropped to about 40 percent.

"I learnt from high school textbooks that the priority of the Chinese government is to bake a bigger and bigger 'GDP cake', but it ignored the fact that people are getting smaller and smaller shares of the cake," Zhu Hongran, programmer at a small private computer software company in Beijing, told China Business Weekly in a recent telephone interview.

Problems galore

Despite the country's desperate need to boost domestic demand, some people are either skeptical about the whole exercise or concerned about its timing.

"The good fortune will not fall on those working for the small-and-medium sized enterprises (SMEs). In this bad business climate, it's good that we have our jobs, and do not expect a raise," the 27-year-old Zhu said.

In the past, Zhu and her colleagues would get a big bonus at the end of the year, but last year, their boss sent them letters asking if they would prefer to keep their jobs at lesser salaries or leave the position with a big bonus.

With more and more employers planning salary reductions to trim costs, a wage cut is the price many workers end up paying to retain their jobs.

Zhu's sentiments are echoed by many economists who do not see any possibility in the near future for the government to raise salaries for the common workers, even if the aim is to help revive the national economy.

Yao Yang, deputy director of China Center for Economic Research at Peking University, is one of the "non-believers".

As China's SMEs are living through their toughest times with limited access to funding and diminished business opportunities, it is unrealistic to expect them to raise salaries for their employees, Yao said, adding that the government decision to raise people's incomes would turn out to be another excuse for government employees as well as those employed by the State-owned corporations to get a raise. "The government made such a proposal simply because the civil servants want a raise. It'll make things more unfair, so we have to block the proposal," Yao said.

Yao believes that salaries should reflect market fundamentals - the price is low when demand is low and supply is high. The over-saturated job market in China leads to a weak bargaining power of the workers. Many areas in China do not have minimum wage requirements and employers often pay workers much lower than what they actually deserve.

"China is never short of labor, and every year, more than 20 million people are added to the job market," Yao said. "In this case, it is not possible to ask the Chinese employers to raise salaries for the employees."

Statistics show that close to 19 million students were enrolled in colleges in China in 2008, a six-fold jump in one decade. In addition, employers are likely to cut employment in response to higher labor costs.

"Therefore, the government really has to think carefully before they make any decision, lest it lead to higher unemployment," he said.

Tax cuts better option

Although Yao does not advocate an income raise for everyone, he favors an aggressive cut in income taxes to boost personal disposable incomes and spending. According to him, the individual income tax threshold should be increased to a much higher level from the current 2000 yuan ($292.71) per month, so that only half of the population is required to pay taxes.

"Right now, more than 70 percent of the Chinese people pay income tax. That is way too high," he said, adding that it'll be healthier when 50 percent of the people pay income tax.

"The government does not count on personal income tax for their fiscal income, so to cut income tax is a more feasible way to boost domestic consumption," he said.

The National People's Congress, China's highest legislative body, has already "reached a consensus" to boost individual income tax threshold soon to encourage domestic consumption, China's leading economist Zhou Qiren from Peking University revealed last November. Zhou announced the development while calling on "aggressive tax-reduction measures" at corporate and personal levels to stimulate domestic demand. "As far as I know, the National People's Congress has already reached a consensus on increasing the benchmark for individual income taxation," Zhou said.

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