(Bloomberg) — China’s plan to ramp up spending to support the economy is meeting an inevitable challenge: a slump in income due to the pandemic-induced downturn.
China’s 2020 Fiscal Spending to Rise 13% to Counter Slump
Most major income sources will shrink in 2020, the government estimates. With the decline in revenue being compounded by tax breaks offered to help firms survive, Beijing is already planning to issue over 70% more in bonds this year to plug that gap and meet stimulus needs.
Actual income can turn out better or worse than expected — 2019’s general revenue came in weaker than estimated while land sales were much better than forecast. The outcome will determine the pot of cash that the government has to play with.
Revenue will drop 5.3% this year, according estimates by the Ministry of Finance, the first decline in at least two decades. Income fell 14.3% in the first quarter and will continue contracting this quarter, before starting to grow again in the second half of the year, according to ministry forecasts.
The income shortfall is broad-based, with almost all types of revenue expected to be down from 2019. The blow is even more evident in non-tax revenues, including the profit from state-owned enterprises and charges for using state-owned assets. SOEs increased their payments to the government in 2019 but they’ll struggle to do the same this year with deflation squeezing profits and demand falling.
Tax revenues are generally used to pay for general spending such as social security, education, health and wages, while land sales are an important source of money for infrastructure projects which generate economic growth. In a good year, officials can also move excess money from land sales to fill in any tax shortfalls, something that’s unlikely in 2020, as land sales revenue is forecast to fall 3%.
Read More Here: Local coffers were depleted even before the virus hit
In fact, if that revenue drops by more than 5%, local governments will be forced to cut spending, especially for infrastructure investment, according to Huachuang Securities Co. chief macro analyst Zhang Yu. She expects officials to sell more land to make up for the falls in price.
The weak fiscal position will lead to the first deficit in the social security budget, which pays for pensions and medical insurance. The ministry expects a 500 billion yuan shortfall but the gap could be as much as 1 trillion yuan at the end of the year, according to Huachuang’s Zhang, because the government has already promised companies further exemptions from fees.
While the government can use money carried over from previous years or other revenue to make up the gap for now, the shortfall will still put pressure on spending, according to Wang Zecai, a researcher at Chinese Academy of Fiscal Sciences. “This will be a test for China’s fiscal capability at all levels.”
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