IHS Global Insight Perspective | |
Significance | The budget deficit for 2011 will be the smallest in three years, although it is still much higher than during the pre-stimulus period of 2000-08. |
Implications | What is even more significant about the budget is that it has further defined the government's role in the country's rebalancing drive, a key priority of the 12th five-year plan. |
Outlook | The normalisation of fiscal policy will have quite a limited impact on growth, as it is still relatively accommodative. When it comes to allocation of government funds, the central government is definitely progressing in the right direction, with more aggressive spending on social welfare enhancement. But the key issue is with the more opaque local budgets, which are 50% larger than the central budget, and with the willingness and capacity of local governments to also implement the much needed changes to facilitate China's rebalancing. |
Deficit to Fall to Three-Year Low
According to the draft budget report currently under review by the National People's Congress (NPC), the country's national legislature, China's deficit will be cut down to around 2% of GDP in 2011, down from 2.5% in 2010 and 2.2% in 2009, when the country's stimulus cycle started. The Chinese government had been gradually pulling itself out of deficit since the end of the Asian Financial Crisis, even managing to generate a modest 0.6% surplus in 2007, the final year of China's 2000-07 expansion cycle. But this modest surplus was short-lived, as the country took a dive into the deficit zone again with the release of the CNY4-trillion stimulus package in 2008. Specifically, in 2011 the central government deficit will be cut back by CNY150 billion (USD22.85 billion), nearly an 18% fall from the 2010 target as the government wraps up the 2009-10 stimulus cycle. The local budget deficit, however, is still maintained at CNY200 billion, which, as in the previous two years, shows up as local municipal bonds issued by the Ministry of Finance.
Biggest Spending Items—Social Welfare, Rural Sector and Transport
The biggest spending items listed in the budget report include social welfare as well as the rural sector and transport sector. Spending on social welfare, a mixture of education, healthcare, social security and social welfare housing, amounted to nearly 20% of the total CNY5.436-trillion central government expenditure for 2011. In terms of year-on-year (y/y) growth, social welfare spending also registered one of the fastest growth rates, far exceeding the overall expenditure growth of 12.5%. Particular to note is the jump in social welfare housing spending, totalling CNY129.27 billion for 2011, which will be part of a grandiose public housing project planned for the next five years. Some 36 million social welfare housing units will be added in the next five years to have 20% of households covered by the public housing programme by 2015—up from just 7-8% now, according to the country's 12th five-year plan. About 10 million such housing units will be built in 2011, another 10 million in 2012, and the rest spread out in the remainder of the five-year plan period.
Transport remains a major item of spending in the budget plan, accounting for over 5% of total central government expenditure. The amount of spending on transport, totalling CNY286.69 billion, represents a 10.3% y/y increase. While just a modest increase compared with average expenditure growth, it represents a remarkable turnaround compared with a 2.7% y/y drop in the 2010 budget report, mostly reflecting ramped-up government spending in the infrastructure in inland China at the start year of the 12th five-year plan period.
Main Items of Central Government Expenditure (2011) | |||
Expenditure Items | Amount (CNY Bil.) | Share of Total (%) | Growth (Y/Y, %) |
Central Government Expenditure | 5,436 | 100 | 12.5 |
Education | 296.36 | 5.45 | 16.3 |
Healthcare | 172.76 | 3.18 | 16.3 |
Science and Technology | 194.41 | 3.58 | 12.5 |
Social Security/Employment | 441.43 | 8.12 | 16.6 |
Social Welfare Housing | 129.27 | 2.38 | 14.8 |
Environmental Protection | 159.19 | 2.93 | 10.3 |
Transport Infrastructure | 286.69 | 5.27 | 10.3 |
Resource Prospecting/Power/Communications | 74.49 | 1.37 | -10 |
Stockpiling of Grain, Edible Oil and Other Resources | 113.05 | 2.08 | 23.9 |
Commercial Services | 70.61 | 1.30 | 3.3 |
Defence Spending | 583.59 | 10.74 | 12.6 |
Public Security | 161.73 | 2.98 | 9.6 |
Interest Payment for Government Debt | 183.98 | 3.38 | 21.7 |
Rural Sector | 988.45 | 18.18 | 15.2 |
Source: Ministry of Finance | |||
Outlook and Implications
The year 2011 will be a watershed for China, as it is the first post-stimulus year and also the first year of the 12th five-year plan period (2011-15). The budget plan of the Chinese central government has therefore on one hand reflected the normalisation of the country’s fiscal policy in the post-stimulus era, and on the other hand has shown the government's commitment to rebalancing the economy—a policy priority in the 12th five-year plan. In the short term, the impact of the fiscal policy normalisation on growth shall be minimal, as the 2% budget deficit is still quite accommodative since it is much higher than the average 1.4% deficit reported during 2000-08.
When it comes to rebalancing in the 12th five-year plan period, one important thing that the Chinese government can do is to optimise the allocation of government spending, by directing more government funds to social welfare and the public services system, such as education, healthcare and employment, and away from investment, as precautionary saving by Chinese households for education, healthcare and pension has been one main factor contributing to a high household saving rate. Based on the allocation of central government funds on the draft budget report, the Chinese government looks to be progressing in the right direction. But the key issue is with the more opaque local budgets, which are 50% larger than the central budget, and with the willingness and capacity of local governments to also implement the much-needed changes.