context: The state's propaganda of robust COVID-19 control and economic recovery is at odds with deep insecurity in economic policy. As Beijing tries to project a confident and promising image to the world, undercurrents of the shaky economic foundation and deep-rooted structural problems still persist, which prevent sustainable growth over the long run.
As the Chinese economy is experiencing 'shrinking demand, supply shock, and weakening expectations', stability becomes the macroeconomy keynote. High-level policy statements have pledged larger-scale tax and fee reduction, high fiscal spending intensity and moderately forward-looking infrastructure construction, which all give the market hope for fiscal expansion. There is no doubt that fiscal policies should be more aggressive in the near term, but the question is how.
Raising deficits is the best expansionary fiscal policy, write Zhu He 朱鹤 and Sheng Zhongming 盛中明 CF40 (China Finance 40 Forum) researchers. Tax and fee cuts are structural policies, but fiscal management is the main counter-cyclical instrument. Therefore, relaxing spending restrictions should go along with tax cuts and good use of special-purpose bonds. Being the world's second-largest economy, add Zhu and Sheng, China is fully capable of shouldering the fiscal deficit that matches its economic scale. The market also looks forward to actionable and intense fiscal policies.
There are three core problems in fiscal expansion, according to Zhu and Sheng
- achieving tax and fee cuts while delivering tangible benefits to economic actors
- declining fiscal revenue is an irreversible trend due to adjustments in overall growth and specific sectors, compressing the scope of tax and fee cuts
- SMEs do not experience tangible benefits from tax cuts, while large enterprises benefit disproportionately
- maintaining spending intensity under revenue drop
- balancing between two conflicting policy objectives of 'unswervingly hindering implicit debt growth' and 'forward-looking investment in infrastructure'
Raising fiscal deficit seems to be a way out of the three problems mentioned above, argue Zhu and Sheng.