World Crisis Online

By Bloomberg News

(Updates with finance ministry comment in third paragraph. For full NPC coverage see {EXT3 <GO>})

March 5 (Bloomberg) — China plans to run a smaller budget deficit this year as the world’s second-largest economy rebounds from the global financial crisis.

The government set a deficit of 900 billion yuan ($137 billion) in 2011, down from 1 trillion yuan in 2010, the Ministry of Finance said in its budget report presented to the National People’s Congress today. The shortfall will amount to 2 percent of the nation’s gross domestic product, lower than last year’s final ratio of 2.5 percent, the ministry said.

The reductions “take into account the need to consolidate and develop the results in responding to the impact of the global financial crisis and to maintain steady and rapid economic development, and reflect the requirement to promote the sustainable development of public finances,” the ministry said in its report.

The nation’s ruling Communist Party pledged in December to continue a pro-active fiscal policy this year as it seeks to raise incomes and consumption in the world’s most populous nation. Premier Wen Jiabao said Feb. 27 that ensuring fair income distribution will aid social stability.

China, which overtook Japan as the world’s second- largest economy, grew 10.3 percent in 2010, the fastest pace in three years, after the government implemented a two-year stimulus package to cushion the nation from the impact of the global crisis.

Higher Spending

Fiscal spending is targeted to rise 11.9 percent this year to 10 trillion yuan and revenue will grow 8 percent to 8.97 trillion yuan, the ministry said in today’s report. The government will transfer 150 billion yuan from its stabilization fund this year, taking total fiscal revenue to 9.12 trillion yuan, according to the report.

The stabilization fund is a “rainy day” fund where excess fiscal revenue is deposited and then released when needed, according to the ministry.

China’s actual fiscal spending last year rose 17.4 percent to 8.96 trillion yuan, compared with the preliminary figure in the budget of 8.45 trillion yuan. Actual revenue rose 21.3 percent to 8.31 trillion yuan, compared with a budgeted figure of 7.4 trillion yuan.

Growth in fiscal income will slow this year, the ministry said today, citing a higher base figure last year, the cooling of the auto market, difficulty in maintaining rapid growth in imports and exports, and the impact of reforms to the tax system.

Increased Subsidies

The focus of the country’s pro-active fiscal policy this year will be on raising the incomes of urban and rural residents, expanding consumer demand and focusing infrastructure spending on low-income housing projects, agricultural infrastructure, energy conservation and environmental protection, the ministry said.

It will increase subsidies for low-income households, raise pension benefits and change the personal income tax system “step by step.” Pilot projects to reform value- added taxes will be started and the ministry will push reform of the resources tax, according to the report.

National spending on housing will rise by 9.6 percent to 258 billion yuan this year. The central government’s share of that figure will rise 14.8 percent to 129 billion, the ministry said, and covers central government spending and transfer payments to local governments and includes expenditure on low-income housing, renovation of rundown areas in cities and rural housing. The remaining 129 billion will be spent by local governments from their own budgets.

Inflation Control

The ministry said it will focus more on stabilizing prices this year, supporting Premier Wen Jiabao’s pledge to “decisively” curb increases that could affect social stability. It will support the production of daily necessities including grain, edible oil, vegetables and cotton and stabilize the supply of fertilizer, coal and refined oil products, according to the report.

Inflation topped the government’s 2010 target of 3 percent each month in the second half of last year and accelerated to 4.9 percent in January. Policy makers aim to keep inflation within 4 percent this year.

The central government will issue 200 billion yuan of bonds on behalf of local governments this year, according to today’s budget plan.

The government started issuing bonds on behalf of local governments in 2009 to help them fund infrastructure projects as part of the stimulus plan announced in November 2008. The finance ministry issued 200 billion yuan in both 2010 and 2009.

The amount of outstanding treasury bonds at the end of 2011 is estimated to be 7.77 trillion yuan, compared with 6.75 trillion yuan at the end of 2010, the ministry said.

–Zheng Lifei, Huang Zhe. With assistance from Kevin Hamlin in Beijing. Editors: Nerys Avery, John Liu