II. Draft Central and Local Budgets for 2009
1. Current national economic and financial situations
The year 2009 presents both severe challenges and important opportunities to China's economic development. The still spreading global financial crisis and global economic slowdown, coupled with cyclical adjustments in the domestic economy, as well as the interaction between short-term difficulties and long-term problem shave made it even harder for us to maintain steady and rapid economic development. Public finance is a composite reflection of national economic performance. The year 2009 will be a very difficult one for public finance, and it will prove extremely difficult stretching revenue to cover all expenditures. Viewed from the standpoint of revenue, the problems facing national economic development have become more numerous, enterprise profits are down and revenue sources have significantly decreased due to the impact of economic slowdown. In addition, we must follow a proactive fiscal policy and carry out structural tax reductions in order to ensure continued steady and rapid economic development. In recent years, special factors have fueled the rapid increase in government revenue, but these factors will either diminish or be entirely absent in 2009, thus it will become even more difficult to increase revenue. Viewed from the standpoint of expenditures, greater financial support will be required to increase the scale of government spending, maintain and improve the wellbeing of the people, support key areas in economic and social development - such as agriculture, rural areas and farmers, education, the social safety net and employment, medical and health care, energy conservation and emissions reduction - alleviate the operating difficulties experienced by some industries and enterprises and support post-disaster reconstruction efforts. The base figure for total government expenditures is fairly large and there is little leeway. This also puts pressure on government spending. While acknowledging our difficulties, we must also recognize that China is now in an important period of strategic opportunities, and that neither the fundamentals of its economic and social development nor its positive long-term trend has changed. Carrying out reform and opening up over the last three decades has established an excellent material, technological and institutional base. Industrialization and urbanization are proceeding rapidly, creating a huge demand potential. There is more than ample capital in society and plentiful labor resources. The series of policies and measures the central leadership has introduced to boost domestic demand have effectively promoted, and will continue to promote, steady and rapid economic development, thus laying a solid foundation for increasing government revenue.
2. Overall requirements for compiling the budget and doing financial work
Taking into consideration developments and changes in global and domestic economic situations, the central leadership has decided that we must set maintenance of steady and rapid economic development as our first priority for economic work in 2009, follow a proactive fiscal policy, and concentrate on the requirements of boosting domestic consumption, maintaining economic growth, carrying out economic restructuring, raising the overall quality of economic growth, implementing reforms, making the economy more vibrant, and stressing the people's wellbeing and promoting harmony. The guiding ideology for compiling the budget and doing financial work in 2009 has been set as follows: We should fully implement the guiding principles set out at the Seventeenth National Party Congress, the Third Plenary Session of the Seventeenth Central Committee and the Central Economic Work Conference, take Deng Xiaoping Theory and the important thought of Three Represents as a guide, and thoroughly implement the Scientific Outlook on Development. Furthermore, we need to follow a proactive fiscal policy, increase government spending, carry out structural tax reductions, adjust the pattern of national wealth distribution, improve the structure of government expenditures, effectively maintain and improve the people's wellbeing, carry out reform of the fiscal and taxation systems, support scientific and technological innovation, energy conservation and emissions reduction, and promote economic growth, economic restructuring and balanced regional economic development. We also need to make financial management more scientific, more effectively utilize government funds, make full use of the role of public finance and work for both sound and rapid economic and social development.
We must focus on the following five areas in following a proactive fiscal policy:
One is to expand government spending while striving to focus on key areas. This is an important measure for boosting domestic consumption and maintaining steady and rapid economic development. In addition to increasing its public spending by 104 billion yuan at the end of 2008 to develop low-income housing and support post-earthquake recovery and reconstruction, the central government in 2009 will allocate 908 billion yuan in public spending, an increase of 487.5 billion yuan. This includes 208.1 billion yuan to develop agricultural infrastructure and improve the wellbeing of rural residents, 49.3 billion yuan to develop low-income housing, 71.3 billion yuan to finance education, medical and health care and other social programs, 130 billion yuan for post-earthquake recovery and reconstruction, 68 billion yuan for energy conservation, emissions reduction and ecological conservation, 45.2 billion yuan to make independent innovation and technological upgrading in enterprises and develop service industries, and 231.7 billion yuan to develop infrastructure such as railways, highways, airports and ports.
Two is to carry out reform of taxes and fees and implement structural tax reductions. While carrying out reform and improving the taxation system, we will implement structural tax reductions to lighten the tax load on enterprises and the people, encourage enterprises to increase their investment and boost consumer spending power. We need to fully implement a consumption VAT, reduce the tax load on enterprises and encourage them to increase spending on independent innovation and technological upgrading. We will carry out reform of taxes and fees for refined petroleum products, make the distribution of the tax and fee load fairer and promote energy conservation and emissions reduction. We will rescind and cease collecting 100 items of administrative fees. We will continue to carry out a series of policies for tax and fee reduction or elimination that were introduced in 2008 to increase the salary threshold for the individual income tax, raise the export tax rebate rates for some products, eliminate or reduce customs tariffs for some exports, reduce the securities transaction stamp tax rate, scrap the stamp tax on stock purchases, suspend the individual income taxes on interest earnings from savings and stock account balance, and reduce taxes on home sales. This should reduce the load on enterprises and individuals by about 500 billion yuan in 2009.
Three is to increase the income of the low-income population and strongly promote consumption demand. We will adjust the distribution of national wealth and increase the proportion of individual incomes in national income distribution and the proportion of the primary distribution of income that goes directly to wages and salaries to increase the consumption capacity of residents and strengthen the effect consumption has in promoting economic growth. We need to give full play to the role of fiscal and taxation policies and increase the government assistance, focusing on increasing the income of the low- and middle-income population. We will further increase subsidies to farmers. The central budget for 2009 earmarks 123.08 billion yuan for direct subsidies to grain producers, general subsidies for purchasing agricultural supplies, subsidies for growing superior crop varieties and subsidies for the purchase of agricultural machinery and tools, an increase of 20.04 billion yuan or 19.4%. In addition, we will support a large increase in the minimum purchase price for grain in order to increase rural incomes. We will also allocate 220.833 billion yuan to increase subsistence allowances for both urban and rural families, grant them and other families in financial hardship a one-time subsidy before Spring Festival, increase basic pension payments for retirees from state-owned enterprises and increase support for entitled groups. We will carry out reform of the income distribution system in institutions. In addition, we will increase government spending to encourage and guide consumer demand. We will allocate 103.341 billion yuan to implement a policy subsidizing rural residents' purchase of home appliances and vehicles and increase reserves of important materials such as grain, petroleum, nonferrous metals and specialty steel products.
Four is to improve the structure of budgetary expenditures and maintain and improve the people's wellbeing. We will support rural reform and development. The central government will allocate 716.14 billion yuan, an increase of 120.59 billion yuan or 20.2%, to assist agriculture, rural areas and farmers. We will focus on efforts to maintain and improve the people's wellbeing. The central government will allocate 728.463 billion yuan, an increase of 165.334 billion yuan or 29.4% in comparable terms, for education, medical and health care, the social safety net, employment, low-income housing and culture that are directly related to the people's wellbeing. Regular expenditures will be strictly controlled and administrative overhead further reduced.
Five is to strongly support innovation in science and technology, energy conservation and emissions reduction, and promote economic restructuring and transformation in the pattern of economic development. We will increase spending on science and technology. The central government will allocate 146.103 billion yuan for science and technology, an increase of 29.774 billion yuan or 25.6%. Twenty billion yuan in subsidies on the interest payments of bank loans will be allocated to accelerate technological upgrading and advances in enterprises and encourage banks to increase loans in this respect with the focus on projects designed to invigorate industries. Spending on energy conservation and emissions reduction will increase with a special allocation of49.5 billion yuan to support efforts to retrofit energy-conserving technology and retire backward production facilities. We will make steady progress in the reform to institute a system of compensation for the use of resources and a mechanism of compensation for degradation of the ecosystem. The system of taxes on resource use will be reformed and improved to promote the reasonable utilization of resources. A total of 9.6 billion yuan will be allocated to support development of small and medium-sized enterprises. We will accelerate improvement of the industrial structure, strengthen the ability to engage in independent innovation and promote the transformation of the pattern of economic development.
Planning for the aggregate level of budgetary revenue and expenditures and the budget deficit for 2009. In accordance with the growth in GDP of approximately 8% projected for 2009 and other anticipated economic development targets, and further factoring in the proactive fiscal policy and policies for instituting structural tax reductions and exemptions, such as the VAT reform and the increase in export tax rebates, various factors that will tend to reduce revenue and increase expenditures, such as increasing the scale of public spending and increasing expenditures to boost consumer demand and improve the people's wellbeing, in addition to the conversion of the road maintenance fee to a sales tax pursuant to reform of taxes and fees for refined petroleum products, and specifically analyzing how these factors will affect all revenue and expenditure items in the central budget, we have set the following major targets for the 2009 budget: Total revenue in the central budget should reach 3.586 trillion yuan, an increase of 318.801 billion yuan (including the increase in sales tax receipts following reform of taxes and fees for refined petroleum products) over the actual figure for 2008 (same below), an increase of 9.8%. An amount of 50.5 billion yuan will be added from the central budget stabilization fund, bringing total revenue for 2009 up to 3.6365 trillion yuan. Total expenditures in the central budget total 4.3865 trillion yuan, an increase of 848.501 billion yuan, up 24%. These consist of 1.4976 trillion yuan incurred at the central government level, an increase of 160.169 billion yuan or 12%, and 2.8889 trillion yuan paid out as tax rebates and transfer paymentsto local governments, an increase of 688.332 billion yuan or 31.3%. Expenditures exceed revenue in the central budget, resulting in a deficit of 750 billion yuan. With a corresponding increase in the volume of government bonds issued, the limit for the outstanding balance of government bonds in the central budget stands at 6.270835 trillion yuan. Revenue collected by local governments should reach 3.037 trillion yuan, up 6%. Added to the 2.8889 trillion yuan in tax rebates and transfer payments from the central government, total revenue in the local budgets should total 5.9259 trillion yuan, an increase of 860.841 billion yuan or17%. Expenditures in the local budgets should total 6.1259 trillion yuan, an increase of 1.220628 trillion yuan or 24.9%. The State Council will allow local governments to issue 200 billion yuan worth of government bonds through the Ministry of Finance, which will go into provincial budgets. Preliminary provisions for the central and local budgets indicate that total national revenue should reach 6.623 trillion yuan (not including the 50.5 billion yuan from the central budget stabilization fund), an increase of 8%, and total national debt should reach 7.6235 trillion yuan, an increase of 22.1%. Total expenditures should exceed total revenue, yielding a deficit of 950 billion yuan to be offset by bond issues.
The increase in the deficit and volume of government bonds for 2009 is an important measure initiated in response to the global financial crisis and is therefore imperative. On the one hand, the slowdown in economic growth and reduction in the tax load on enterprises and individuals are bound to brake the growth in budgetary revenue. On the other hand, we need to make full use of the role of public finance and significantly increase government investment and spending in order to promote steady and rapid economic development, maintain and improve the people's wellbeing and deepen reform. The budget deficit must increase by a wide margin and with a corresponding increase in the volume of government bonds in order to make up for the shortfall created by the slowdown in revenue growth and increase in expenditures. The deficit has been falling over the past several years, and although the deficit for 2009 has increased somewhat, it accounts for less than 3% of GDP and the balance of outstanding government bonds accounts for around 20% of GDP. The overall strength of the country can tolerate these levels, which are overall within the margin for safety.
We must note that: if the 220 billion yuan in sales tax revenue recouped by local governments following reform of taxes and fees for refined petroleum products to replace the road maintenance fee with a sales tax on refined petroleum products is deducted from the total revenue as provided for in the central budget set forth above, the total revenue in the central budget would be 3.366 trillion yuan, an increase of 98.801 billion yuan or 3% over the figure for 2008. If this added expenditure, post-earthquake recovery and reconstruction expenditures and additional government spending to boost domestic demand are excluded, the increase in the central government's regular expenditures would then be 10.4%.
Status of the central budget stabilization fund. The fund stood at 62.4 billion yuan after 19.2 billion yuan was added to it from surplus revenue in 2008. After 50.5 billion yuan is taken from the fund for the 2009 budget, it will still contain 11.9 billion yuan for use as circumstances may from time to time require.