Fiscal Policy Works Well

China's three-year-old proactive fiscal policy has produced noticeable results and will continue to do so in the future, an article in Economic Daily said recently.

For three consecutive years China has been implementing an active fiscal policy that calls for the expansion of government spending and an increase in the number of treasury bonds (T-bonds) issued. This policy has played a pivotal role in spurring on China's economic growth this year.

Major financial indicators and the overall endurance of the State economy all signify the fiscal policy is working, allowing the economy to remain stable and healthy so far.

The 1992 Maastricht Treaty, which requires member states of the European "economic and monetary union" to keep budget deficits below 3 percent of gross domestic product (GDP) can be used as a rough measuring stick by which to evaluate China's deficit situation.

Before 1997, China's deficits never surpassed 1 percent of the GDP. In 1998, it stood at 2 percent. Last year, it rose slightly to 2.8 percent, and the figure is unlikely to go beyond 3 percent this year, the article said.

The proportion of debts in GDP is an indicator widely used in developed economies and the majority of developing countries. The internationally recognized warning level is 45 to 60 percent.

Before 1998, China's proportion of debts in GDP lingered around 5 percent. In 1998, owing to the issue of 270 billion yuan (US$32.53 billion) special T-bonds, it climbed to 13.3 percent. Last year it was 13.8 percent, and the proportion is estimated to be similar this year.

Compared with developed countries, China's proportion of debts in GDP is apparently at a low level, staying far away from the internationally recognized warning level. The figures for the United States, Britain, France and Germany in 1997 were 62.1, 52.7, 57.5 and 62.2 percent respectively. The article attributes high levels in these countries to their 100-year history of issuing T-bonds.

As to another important financial indicator, the ratio of the amount of T-bonds to the summation of fiscal expenditure and debts repayment with interest, China's has gone beyond the 20 percent warning level.

It has been on a rise from the 1995 ratio of 20.1 percent to last year's 26.6 percent.

However, it should be pointed out that the denominator, fiscal expenditure, only includes budgetary expenditure, which is a great reduction from the actually realized fiscal expenditure. If the latter were counted, for example, the ratio for 1995 would have decreased to 15.5 percent, safely within the warning level.

Practice in the past has proved the pro-expansive fiscal policy, though implemented at a price of moderately expanding fiscal deficits and the scale of T bonds issue, was necessary for China in 1998 because of the special situation in which sluggish investment and consumption and dwindling exports hunted the economy.

Theory and practice in many countries have proved fiscal deficits and national debts within a certain period of time and a certain scale are not formidable as long as a country can maintain sustained economic growth, social stability, adequate employment and rational resource allocation and utilization. The burden of deficits and debts can be alleviated along with economic development.

Some developed countries, the United States in particular, have stepped out of the economic low ebb of the 1970s and the 1980s to embrace sustained and stable economic take-off in the 1990s led by revolution of information technology. This is a good example to support the above perspective.

The State's growing financial capacity to repay debts also indicates the economy will fare well, said the article.

The amount of deficits and the scale of national debts of a country are very often determined by a national ability to make up for the deficits and repay debts. Therefore, while making efforts to boost the sustained and effective growth of the national economy, attention should also be paid to deepening financial reforms geared towards optimizing the scope and structure of fiscal expenditure and standardizing the income mechanism of government institutions.

A stable and strong national economy will keep the country away from deficit and debt crisis, the article said.

Looking from a medium and short term point of view, especially analyzing in accordance with the internationally recognized debt ratio, there is still leeway and potential for China to issue more T-bonds. For example, this year China's GDP is likely to top 9,000 billion yuan (US$1,028.27 billion), and the figure will be doubled in 10 years according to the national blueprint. If 10 per cent debt ratio is allowed, the potential for China to issue T-bonds this year and in 2010 is 900 billion yuan (US$102.83 billion) and 1,800 billion yuan (US$217.65 billion) respectively. In fact, this year the amount of realized T-bonds only stands at 498 billion yuan (US$60.22 billion) including the planned 50 billion yuan (US$6.05 billion) in the latter half of this year.

Some scholars have suggested that China allow a 30 percent of debt ratio, still mid way to the internationally recognized debt ratio warning level of 60 percent. If this is the case, the country's potential for T-bonds issue is even more considerable, the article said.

Of course, the scale of T-bonds issue should allow for unforeseen circumstances to ward off present and future financial risks. To this end, the past three years' stable and active pace in issuing T-bonds should be continued.

In some sense, T-bonds issue is a price paid to offset economic recession and stabilize the economy. Funds allocated through this channel should be rationally used, the article stressed.

Problems ranging from mistaken choice of construction projects, insufficient fund supply, and bad construction quality to the squander of the funds have cropped up - a situation which demands special scrutiny from the supervision departments.

The effect of government investment in driving the engine of economic development does not lie in the amount of investment but in its multiplier effect. Generally speaking, the greater the multiplier effect, the more social investments it could spur on. Hence, the scale of T-bonds issue could be reduced.

Therefore, it is an urgent and long-term task for the State to use different levers to stimulate more social funds, which is instrumental in diverting financial risks and maintaining a sustained and stable growth of the national economy, the article concluded.

(China Daily)

In This Series



Web Link