context: Slow growth is motivating the state to increase public spending and stabilise domestic demand and employment. In the run-up to the Two Sessions, National People’s Congress expedited 1.39 tn local borrowing quota for quick delivery of fiscal stimulus. There has been a vibrant public debate over the merits of fiscal deficit exceeding 3 percent. This lower-than-expected budget deficit signals central prudence in fiscal expansion.

The 2019 government work report set the fiscal deficit at 2.8 percent, 0.2 percentage points higher than last year. 2.15 tn of special local bond quota has been approved, marking a 800 bn increase y-o-y. The report also allows local governments to sell debt swap bonds to alleviate interest burdens. This moderate rise in the deficit comes from consideration of fiscal revenue and special bond issuance, and leaves policy space for the future, says Li Keqiang 李克强 premier.

The report promised to invest 800 bn in general railways, and another 1.8 tn in highway and waterways, key water reserve projects, the Sichuan-Tibet railway, intercity railway, logistics, urban facilities, disaster control, and civil aviation. Localities need fiscal enhancement to reasonably expand investment; the central government explicitly supports compliant borrowing and forbids illicit financing, says Huang Shouhong 黄守宏 State Council Policy Research Bureau director and lead author of the report. Implicit debt growth is being curbed, and existing implicit debt is shrinking, adds Huang.

The report also fleshed out a combination of inclusive and structural tax cuts, including lowering VAT for manufacturing from 16 to 13 percent, and construction and transportation from 10 to 9 percent, plus tax returns for other industries. Tang Dajie 唐大杰 Wuhan University visiting researcher estimates total VAT cut of 713.2 bn based on 2018 tax revenues. Tax rebates incentivise market participants, and increasing government investment will boost domestic demand, says Liu Shangxi 刘尚希 Chinese Academy of Fiscal Sciences president.

Consistent with previous high-level meetings, growth strategies from the government work report include

  • highlighting investment and consumption to foster a robust domestic market and unleash internal demands
  • developing new competitive advantages and enhancing international economic cooperation; promoting opening up of goods, factors, and creating rule-based institutions; diversifying and upgrading exports