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Q: China began to adopt a proactive fiscal policy in 1998. After being implemented for seven years, the proactive fiscal policy was changed to a prudent fiscal policy. What are the differences between these two policies? What is the main purpose of a prudent fiscal policy?

A: China adopted a proactive fiscal policy in 1998, mainly to cope with the impact of the Asian financial crisis and to expand domestic demand, giving impetus to economic growth. The policy played a remarkable role in buffering the impact of the Asian financial crisis, reducing pressure on the national economic operations, and maintaining stability of social and economic development.

However, since the second half of 2003, China's economy has been gradually shifting from the downturn to a new round of expansion. People have been paying increasing attention to the overheating economy and increasing investments. In addition, fiscal risks have been accumulating quickly. Except for a treasury bond of more than 2 trillion yuan (US$241.84 billion), deficit has exceeded 300 billion yuan (US$36.28 billion) for three consecutive years, setting a new record since 1949 when the People's Republic of China was founded.

Proactive fiscal policy is essentially an expansionary fiscal policy, while prudent fiscal policy is a neutral fiscal policy. Neutral fiscal policy should prevent symptoms of inflation from expanding while avoiding the reemergence of a deflationary trend, control the swelling of investment demand while expanding consumption demand, and tighten sectors with overheating investment while supporting the weak links of economic and social development.

It's the right time for the proactive fiscal policy to be replaced by a prudent fiscal policy, which is also in accordance with development changes of China's current economic situation and the objective requirements of macro-control.

The main purpose of prudent fiscal policy is to control the deficit, adjust structure, promote reform, increase revenue and reduce expenditures.

To control the deficit is to properly reduce the fiscal deficit and cut the issuing scale of long-term treasury bonds for construction. To adjust structure is to emphasize the restructuring of fiscal expenditures and the directed use of treasury bonds, according to the requirements of public finance and the scientific development concept.

To promote reform means to change the mode of economic growth mainly fueled by investment in projects funded by treasury bonds; continue arranging treasury bonds to invest in projects while integrating investment in capital construction within the budget, according to the principle of being based on the present situation and keeping the future in view; on the basis of ensuring a certain investment scale of the central budget, properly reduce the investment scale of treasury bonds and release some financial resources to promote system and institutional innovation; create a relatively relaxed financial and taxation environment for market entity and economic development; and establish a long-lasting mechanism in favor of economic self-growth.

To increase revenue and reduce expenditures is to collect taxes in strict accordance with the law to ensure the steady growth of fiscal revenue, and to strictly control the increase of expenditures and raise the efficacy of the use of fiscal funds in earnest, on the basis of maintaining the general level of tax burden or slightly reducing the tax burden.

During Spring Festival in 2005, many Beijing households have their meals in restaurants. Booming domestic demand reflects people's confidence in national economy.

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