context: PBoC research director Xu Zhong’s incendiary criticism of MoF's fiscal policy and a consequent rebuttal from an anonymous public finance practitioner have ignited a public debate.
Fiscal policies are not entirely under the control of Ministry of Finance (MoF); while MoF can make suggestions, the ultimate decision on fiscal deficit is left to the CCP Standing Committee, says Liu Shangxi 刘尚希 Chinese Academy of Fiscal Sciences (CAFS) president. As the economy is fraught with uncertainties, fiscal policies should bring more confidence, guide social expectations, and balance supply and demand by
- shifting focus from aggregate quantity to structural adjustment
- extending the emphasise from conventional economic sectors to public service related ones like education, healthcare, social security, etc
- changing from macro-adjustment to public risk prevention
There are also different interpretations for active fiscal policies. By definition, a fiscal surplus is defensive, a slight surplus or deficit is neutral, and higher deficit is active; normally a 2 percent deficit can be called active fiscal policy in China, says Zhao Quanhou 赵全厚 China CAFS finance department director. The 2.6 percent deficit in 2018 budgeting is active fiscal policy, adds Zhao. Jia Kang 贾康 China Academy of New Supply-side Economics chief economist argues that counting on raising deficit and issuing bonds to facilitate de-leveraging overlooks the fundamental problem: soft budget constraints for local governments. Fiscal authorities are busy eliminating local debt, financing vehicles, and PPP projects, and they share the same orientation with People's Bank of China (PBoC), but these efforts are often undercut in various ways, adds Jia.
Regarding tax cut effectiveness, tax revenue is the multiplication of tax base and tax rate; when the tax rate reduction is slower than tax base expansion, growing tax revenue will not render tax cuts ineffective, says Liu.
Practitioners in the financial sector insist that fiscal policies could do more. There is more space for fiscal policies, says Tang Jianwei 唐建伟 Bank of Communications chief macroeconomic analyst, because
- increase of the US Federal Reserve policy rate adds pressure to RMB depreciation and suppresses the scope for monetary easing; de-leveraging and risk prevention also requires monetary policy to remain neutral
- it is acceptable to raise the fiscal deficit from 2.6 to 3 percent, especially in light of the ongoing trade disputes with the US
- China’s corporate and individual tax rates are higher than those of the US; they should be cut to improve competitiveness
PBoC cannot provide more liquidity and MoF cannot spend more; in the end, top leadership will have to weigh in and coordinate departmental interests, maintains Guan Qingyou 管清友 Rushi Financial Research Institute president.