Record high fiscal deficit possible

With tax income under pressure, analysts say it is time to raise the shortfall target

Figures released on Friday showed how the slowing economy has taken its toll on China's collection of taxes and fees in 2015, which registered the slowest expansion pace in 28 years.

But things are not looking better this year, either, which could make way for setting a record high target for the fiscal deficit of up to 3 percent of GDP - up from 2.3 percent in 2015, analysts said.

General fiscal revenue, including taxes and fines, rose 5.8 percent to 15.22 trillion yuan ($2.42 trillion), the slowest since 1987, the Ministry of Finance said. That was a drop from 2014's 8.6 percent and 10.2 percent in 2013.

It also was the first time that fiscal growth had been slower than GDP growth, which was 6.9 percent last year. For the past decade, fiscal revenue has been expanding much faster than the overall economy - often growing ferociously at above 20 percent.

The ministry attributed the slowdown to a deep slump in the producer price index and setbacks in industrial output and corporate profits, which weighed on major tax categories. The value-added tax, the largest tax, expanded only by 0.5 percent from a year before, while VAT and excise tax on imports fell 13.2 percent as a result of a contraction in foreign trade.

Special-purpose governmental funds, a separate income category, registered its first contraction in history, down 15.9 percent to 4.23 trillion yuan, compared with 3.5 percent growth in 2014 and a 39.2 percent rise in 2013. Land sale revenue, which usually accounts for 77 percent of governmental funds, tumbled 18.5 percent.

Despite the revenue slowdown, China is having to spend more to counter the economic slowdown, which has further intensified the mounting conflict between revenue and expenditures. Government outlays surged 13.17 percent to 17.58 trillion yuan.

That left a record 2.36 trillion yuan fiscal deficit, or 3.47 percent of GDP. That is significantly bigger than the 1.62 trillion budgeted deficit at the beginning of 2015, which leaves open the possibility that this year's budget deficit target could hit 3 percent of GDP.

A number of institutions have said that to counter this year's ongoing downturn, the fiscal deficit target should be raised from 2015's 2.3 percent.

"To address the downturn, besides widening the deficit, the only way is to cut spending. You can't cut spending on welfare or infrastructure. You could only downsize the bureaucracy itself," said Hu Yijian, a tax professor at Shanghai University of Finance and Economics.

Finance Minister Lou Jiwei in an earlier meeting stressed the importance of government austerity. Besides greater spending, the government will also bolster growth by cutting taxes and fees.

Hu said besides tax reform, the government should also lower administrative fees on enterprises. "In the short run this will definitely bring down revenue, but the hope is that less of a burden on enterprises would spur investment, which in the long run would cultivate a bigger tax base," he said.