context: Current stimulus policies rely on tax cuts, expedited government bond issuance, and targeted monetary expansion. In the run-up to National People’s Congress deliberation of 2019 budgets, debate over raising the fiscal deficit resurfaced after PBoC-MoF discord over the summer. It appears that financiers are actively promoting a higher deficit, whereas fiscal experts and academics strongly oppose.

Fiscal deficit should be locked within 3 percent because risk prevention is a must-win battle in the transition to high-quality growth, says Gao Peiyong 高培勇 Chinese Academy of Social Sciences (CASS) vice president. Completion of 13th 5-year plan objectives only require average growth of 6.2 percent, says Cai Fang 蔡昉 CASS vice president. Given external shocks and tariff hikes, GDP growth slightly above 6 percent is already sufficient—otherwise, we haven’t learned from the 2008 crisis, warns Cai. We should be more patient in state interventions, says Liu Yuanchun 刘元春 Renmin University president. Since many economic indicators are not worsening, 2019 fiscal deficit should not surpass 3 percent in order to pressure restructuring and leave policy space for future reforms, Liu adds.

Taking tax cuts and infrastructure investment into account, the amount of remaining policy space is a contentious issue. L-shaped economic slowdown will experience two floors, the first when growth stabilises at a lower level and a second floor in mid-2019, says Ren Zeping 任泽平 Evergrande chief economist. Stimulus and reform are not conflicting agendas because reform also needs a stable macroeconomic environment; fiscal deficit should not be constrained by a 3 percent limit so as to smooth economic cycles, says Ren. Hua Changchun 花长春 Guotai Junan chief economist supports raising the deficit to 3 percent or above, in light of the balance between recent tax cuts and fixed spending responsibilities.

A China Finance 40 Forum research note proposes a combination of measures

  • short-term, responsive fiscal measures
    • making implicit borrowing explicit
    • mobilising sunk funds in state-owned enterprises
    • enhancing support to private enterprises
  • long-term, structural policies
    • streamlining tax brackets and lowering rates
    • building reasonable central-local fiscal sharing regime
    • improving fiscal spending efficiency
    • optimising spending structure to push investment into regions with good economic prospects