Fellow Deputies,
The Ministry of Finance has been entrusted by the State Council to report on the implementation of the central and local budgets for 2006 and on the draft central and local budgets for 2007 for your deliberation and approval at the Fifth Session of the Tenth National People's Congress (NPC), and also for comments and suggestions from the members of the National Committee of the Chinese People's Political Consultation Conference (CPPCC).
I. Implementation of the Central and Local Budgets for 2006
Under the firm leadership of the Central Committee of the Communist Party of China and the State Council, and guided by the Scientific Outlook on Development, all localities and departments in 2006 conscientiously followed the principles and policies set by the central authorities and relevant decisions and resolutions passed at the Fourth Session of the Tenth NPC. This resulted in an excellent beginning for the Eleventh Five-Year Plan period, great new achievements in development of the economy and all social programs, and further improvement in people's lives. The central and local budgets were also satisfactorily implemented.
National revenue reached 3.934362 trillion yuan (excluding revenue generated through debt, both here and below), up 769.433 billion yuan or 24.3% from 2005. Total revenue exceeded the budget target by 392.024 billion yuan, consisting of 254.247 billion yuan at the level of the central government and 137.777 billion yuan at the local level. National revenue totaled 3.873062 trillion yuan (not including the 61.3 billion yuan that was used to clear up longstanding arrears in export tax rebates in accordance with regulations), a year-on-year increase of 708.133 billion yuan or 22.4%. This was 330.724 billion yuan or 9.3% over the budget target. National expenditures amounted to 4.021316 trillion yuan, a year-on-year increase of 628.288 billion yuan or 18.5%, representing 104.8% of the budgeted figure.
The separate figures for the central and local budgets are as follows: Total revenue in the central budget came to 2.123231 trillion yuan (not including the 61.3 billion yuan that was used to clear up longstanding arrears in export tax rebates in accordance with regulations), an increase of 397.182 billion yuan or 23% over the figure for 2005. This amount was 196.027 billion yuan or 10.2% over the budgeted figure. It included 2.044977 trillion yuan collected by the central government, 390.124 billion yuan or 23.6% more than the amount for 2005 and 192.947 billion yuan or 10.4% over the budgeted figure. Total revenue turned over from the local budgets was 78.254 billion yuan, an increase of 7.058 billion yuan or 9.9% over the total for 2005. This was 3.08 billion yuan or 4.1% over the budget target. Total expenditures in the central budget amounted to 2.348226 trillion yuan, 322.227 billion yuan or 15.9% more than that for 2005, representing 105.7%of the budgeted figure. Total expenditures included 999.156 billion yuan incurred at the central government level, an in crease of 121.559 billion yuan or 13.9% over the amount for 2005, representing 104.9% of the budgeted figure. Expenditures for tax rebates and transfer payments for local governments totaled 1.34907 trillion yuan, 200.668 billion yuan or 17.5% more than the amount in 2005, representing 106.3% of the budgeted figure. Fifty billion yuan was set aside to establish a new central budget stability and regulation fund. The deficit in the central budget for 2006 was 274.995 billion yuan, 20.005 billion yuan less than the 295 billion yuan approved at the Fourth Session of the Tenth NPC, dropping to 1.3% of GDP. At the end of 2006 the outstanding national debt in the central budget was under the set limit of 3.538168 trillion yuan. Revenue from funds controlled by the central government amounted to 170.687 billion yuan and expenditures from the above funds also amounted to 170.687 billion yuan. Total revenue in local budgets amounted to 3.177155 trillion yuan, an increase of 518.677 billion yuan or 19.5% more than the figure for 2005, representing 107.3% of the budgeted figure. This included 1.828085 trillion yuan collected at the local level, an increase of 318.009 billion yuan or 21.1% more than the amount for2005, representing 108.2% of the budgeted figure. Expenditures in local budgets totaled 3.100414 trillion yuan, a year-on-year increase of 513.787 billion yuan or 19.9%, and 104.7% of the budgeted figure. Total expenditures included 3.02216 trillion yuan spent at the local level, a year-on-year increase of 506.729 billion yuan or 20.1%, representing 104.8% of the budgeted figure, and 78.254 billion yuan turned over to the central government, 7.058 billion yuan or 9.9% more than the previous year, representing 104.1% of the budgeted figure. Local revenue exceeded expenditures by 76.741 billion yuan and this surplus will be rolled over into the budget for this year. These figures may change slightly when the final accounts are prepared.
The overall situation in the implementation of the central budget in 2006 is as follows:
1. Collection and management of revenue was improved in accordance with the law and a high rate of revenue growth was maintained. The Chinese economy enjoyed rapid growth, achieved good performance and maintained relatively low prices in 2006. Based on this, financial, tax, and customs authorities at all levels improved revenue collection and management, actively applied scientific management methods, made a full review of preferential tax policies and standardized them, stringently controlled tax reductions and exemptions and worked hard to collect all taxes due, resulting in rapid growth of revenue of the central and local governments. The increase in revenue is mainly a reflection of China's vibrant economy, but it also demonstrates that the country's revenue collection system is gradually improving and that China's revenue development is stable and balanced to some extent. However, it should be noted that although the key factor behind the rapid increase in revenue is the vibrant state of the Chinese economy with its improved efficiency, other factors, including one-time factors, government polices and non-regular factors also contributed to the increase. These other factors mainly consist of the following: The corporate tax paid by state-owned commercial banks such as the Bank of China and the China Construction Bank increased by a large margin due to increased profits after they became publicly traded companies. A special surcharge was instituted on oil sales. Income from the transfer of mineral exploration and mining rights was incorporated into revenue. Due to the effect of rapid growth in fixed asset investment and industrial production, as well as increases in the prices of resource products, the increase in tax payments from affected industries was also greater than normal. Deducting the increase in revenue due to these factors would result in a growth rate for revenue basically in line with the economic growth rate.
Revenue in the central budget for 2006 exceeded the projected figure by 257.3 billion yuan (before deducting the amount applied to resolve unpaid export tax rebates). Disposal of this surplus amount was carried out according to the uniform planning and arrangement of the Central Committee and the State Council and in accordance with the Budget Law, the Decision of the NPC Standing Committee on Improving Examination and Oversight of the Central Budget and relevant resolutions passed at the Fourth Session of the Tenth NPC. In addition to spending 23.1 billion yuan of the surplus to increase tax rebates and transfer payments for local governments and 1.6 billion yuan to increase spending on education as required by relevant laws, statutes and financial regulations, the central government mainly used the surplus to strengthen weak links in economic and social development, clear up overdue payments and reduce the budget deficit to make financial and economic development more sustainable. Specifically, an additional24.1 billion yuan was spent on the social safety net and an additional 37.2 billion yuan from special surcharge on oil sales was spent to subsidize increased expenditures in agriculture, fishery and forestry due to price increases in oil and to fund major projects in energy development and conservation and in environmental protection. Another 10 billion yuan was spent to increase regular investment in the central budget, which was mainly used to support the building of a new socialist countryside, and an additional 13.5 billion yuan in special expenditures went toward building roads, purchasing oil reserves and providing further aid to residents relocated to make way for the construction of large and medium-sized reservoirs. An additional 3.5 billion yuan was spent to increase funding for the "three rewards and one subsidy" policy, subsidies for farmers and herdsmen in Tibet and for the fight against smuggling, and transfer payments to ports. The additional 61.3 billion yuan that was earmarked for export tax rebate payments was used to clear up the remaining overdue payments. A total of 20 billion yuan was spent to reduce the deficit in the central budget. Another 13 billion yuan was reserved for funding reform of the salary system and related expenses in 2007. In addition, 50 billion yuan was allocated to establish a central budget stability and regulation fund to make compilation of the budget more scientific and appropriate and maintain the stability of the central budget and the continuity of the fiscal policy. Funding and use of the stability and regulation fund come under the scope of budgetary management and are subject to the oversight of the NPC and its Standing Committee. The State Council has reported the above arrangements for the use of the surplus to the NPC Standing Committee.
2. A combination of fiscal and tax tools was used to promote steady and rapid development of the economy. On the basis of the prudent fiscal policy, we in 2006 revised and enhanced policy tools in response to economic developments and changes, relaxing control in some areas and tightening it in others, to make the regulatory function of public finance more effective and better focused.
First, we adjusted and improved relevant tax policies. On April 1, 2006, we began making the biggest adjustment in the items and rates of the consumption tax seen since 1994, increasing some items and rates and lowering others. We raised the salary threshold for the personal income tax and increased the deductible amount for the personal income tax for employees of domestic enterprises from 800 yuan per month to 1,600 yuan per month. We adjusted the policy on the natural resources tax. We also adjusted export rebate rates for some products, eliminating or reducing export rebates for more products whose production is high in energy consumption or is highly polluting. In addition, more commodities were added to the list of those not eligible for the processing trade. We introduced export tariffs on some products whose production is high in energy consumption or is highly polluting while lowering import tariffs on some resource products. Tax reforms such as the trial VAT reform in northeast China made steady progress. Adjusting and improving tax policies played a positive role in conserving resources, protecting the environment, guiding consumption in the right direction and indirectly improving income distribution.
Second, we made necessary adjustments in the scale of central government allocations and improved the utilization structure. Central government allocations in 2006 totaled 125.4 billion yuan (including 10 billion yuan from surplus revenue). These funds were mainly used to fund items such as the building of a new socialist countryside, social programs, environmental and ecological protection and the large-scale development of the western region and to fund an appropriate number of major new projects with overall bearing on development. Moreover, the pace of implementation of the budget was regulated to keep it in line with the overall situation in economic development, and the performance of government funds was improved by strictly managing investment and tightening oversight.
Third, we adjusted and standardized fiscal and tax policies for managing housing and real estate revenue and expenditures. The required length of ownership when resale of privately owned housing is exempt from business tax was raised to five years from the two-year requirement stipulated in 2005. We improved the system for managing public accumulation funds for housing, further clarified the source of funding for building low-rent housing in urban areas and ensured that the funding was available. We also adjusted standards for fees for using land for new construction projects, revised land-use policies and formulated policies to standardize the use of revenue derived from the transfer of state land-use rights, yielding initial results in curbing speculation in the housing market. We made further progress in implementing the strictest possible system for protecting farmland and promoted more efficient and intensive use of land.
Fourth, we worked out and implemented fiscal and tax policies to encourage energy conservation and development of new energy resources. Responding to the high oil prices, we carried out a great deal of research on how to stimulate development of oil substitutes, formulated the policy to support the development of bioenergy, and set up the basics for a system of fiscal and tax policies to promote the development of alternative energy sources. In addition, we overhauled the mechanism for setting oil prices and introduced a special surcharge on oil sales. The above measures, along with other control measures, played an important role in maintaining the direction for economic development expected under the guidance of macroeconomic regulation.
3. Budgetary support for agriculture, rural areas and farmers was increased and a good start was made in efforts to build a new socialist countryside. Effective policies, numerous measures and new mechanisms were introduced to give budgetary support for agriculture, rural areas and farmers in 2006. As a result, the countryside began to feel more and more warmth from increased public spending. A total of 339.7 billion yuan (excluding the 12 billion yuan paid to grain farmers in direct subsidies from special surcharge on oil sales) from the central budget was allocated in 2006 for agriculture, rural areas and farmers, 42.2 billion yuan or 14.2% more than the amount for 2005.
First, the agricultural tax was rescinded nationwide. In addition, taxes on special agricultural products were rescinded and the Interim Tax Regulations for Tobacco Leaf were formulated and introduced. This move marks a fundamental change in the traditional income distribution arrangement between the government and farmers, and helps reduce the burden on farmers, increase farmer incomes and nourish farmers as well as promotes sustained development of agriculture. The central government allocated 78.2 billion yuan and local governments 25 billion yuan in transfer payments in 2006. The burden on rural residents was reduced by about 125 billion yuan, or 140 yuan per capita, over the level of 1999, the year before reforms were introduced, and the burden on farm laborers was also reduced. Reform of rural taxes and fees entered a new period in overall rural reforms.
Second, subsidies were increased. The central government allocated an additional 12 billion yuan in funding to grant 728 million grain farmers timely general direct subsidies to help meet increased expenses for agricultural supplies due to price rises. Another 8.59 billion yuan in subsidies was granted to the fishing industry and other industries to offset higher petroleum prices. Direct subsidies to grain farmers nationwide totaled 14.2 billion yuan, 1 billion yuan more than total grain subsidies in 2005, of which 12.68 billion yuan went to the 13 major grain-producing provinces and autonomous regions, accounting for more than 50% of the grain risk funds of those provinces and regions. The central government appropriated 4.15 billion yuan in subsidies for growing superior varieties and 600 million yuan in subsidies for purchasing agricultural machinery and tools, an increase of 100% over 2005. To improve the policy governing the price floors for the purchase of grain, 5.9 billion yuan was distributed in timely subsidies. We instituted the use of the all-in-one account across the country, enabling subsidies to be put directly into the bankcard or passbook account of farmers. We also began to set up a website for subsidies for farmers and tightened management of these subsidies. We set up the framework for an agricultural subsidy policy system suited to China's conditions with a combination of general and special subsidies and standardized management to ensure and promote security in grain production.
Third, smooth progress was made in reform of the mechanism for guaranteeing funding for rural compulsory education. The western region took the lead in the country in the reform to exempt all rural students receiving compulsory education from paying tuition and miscellaneous fees beginning with the spring semester of 2006.The region also provided textbooks free to students from economically disadvantaged households and granted living allowances to poor boarding students. The central government granted general subsidies for compulsory education expenses in rural primary and middle schools in the western region and launched a permanent mechanism to fund repair and rebuilding of all rural primary and secondary school buildings used for compulsory education across the country. Every province in the central region also chose one of its counties to launch the above trial reforms beginning with the fall semester of 2006. Most provinces in the eastern region also carried out similar reforms on their own initiative. The central government appropriated 15 billion yuan and local governments 21.1 billion yuan for this purpose. Some special funds were handled through the centralized treasury payment system so that they reached the schools directly. This measure reduced the burden on primary school students by an average of 140 yuan per student per school year and on junior middle school students by 180 yuan. This reform enabled us to gradually incorporate expenditures for rural compulsory education into the public finance system and shows that profound changes are taking place in the way public goods are delivered in rural areas. On the basis of this reform, we strongly supported implementation of the plan to attract exemplary teachers to work in rural schools providing compulsory education and launched a pilot project to build new schools with improved sanitation facilities in the new countryside of ten provincial-level localities. All this has helped increase momentum in the development of rural compulsory education.
Fourth, the trial reform to introduce a new type of rural cooperative medical care system was carried out in more areas. Statistics indicate that the trial reform was carried out in 50.7%of the country's counties, county-level cities and city districts, involving 410 million rural participants. The central government increased assistance to participants from 10 yuan per person to 20yuan per person in 2006 and governments at the provincial level made similar increases. The central government allocated 4.27 billion yuan to fund subsidies. This reform changed institutions and mechanisms to ease the problem of rural residents being driven into poverty or back into poverty because of medical problems.
Fifth, strong support was given to agricultural production and long-term development of the countryside. Support was focused on carrying out six types of small rural projects [water-efficient irrigation, potable water supplies, road building, methane production facilities, hydroelectric plants and pasture enclosure,Tr.] to improve working and living conditions in rural areas. We promoted comprehensive agricultural development, upgraded low- and medium-yield farmland and supported industrialization of agriculture, resulting in an estimated increase of 2.91 billion kilograms in grain production capacity. The central government has decided to write off 4.486 billion yuan worth of the debt accumulated for comprehensive agricultural development within a four-year period beginning in 2006 to give farmers greater incentive to develop production. The focus of spending of the 13.7billion yuan in poverty relief funds from the central budget was on infrastructure development in poor villages, job training for poor farm laborers looking for urban employment and industrialization of agriculture. We strongly supported efforts to promote greater application of agricultural technology, to develop professional farmer cooperatives, to train rural workers seeking nonagricultural employment in the cities, to launch the project to spread knowledge of science and technology and create a new type of farmer and the plan to help farmers and villages prosper through science, and to promote the action plan for helping farmers and counties prosper through science and technology.
Sixth, strong support was given to the establishment of a mechanism for diversified funding to support agriculture. We carried out a pilot project to integrate government funding to support agriculture in 162 counties in the country to improve the performance of government funds. We actively explored various mechanisms such as projects run by the local people and subsidized by the government to increase local farmer investment. We strongly supported the development of a rural financial system. In 2006 the central government appropriated 2.931 billion yuan in inflation-proof interest subsidies for rural credit cooperatives in selected areas and extended the policy on income tax reductions and exemptions by three years to credit cooperatives in selected areas to gradually reduce their longstanding debts, help drive their future development and give more play to their role as a major force in building a new socialist countryside. All these measures promoted agricultural production, increased rural incomes and stepped up progress toward balanced development between urban and rural areas.
4. Key expenditures were guaranteed in order to accelerate the development of all social programs. We directed more government spending toward social programs to shore up weak links in social development and balance economic and social development in order to truly reflect the public nature and public welfare nature of public finance, which represent its essential character.
First, we supported employment and reemployment work and development of the social safety net. Government spending in the country for employment and the social safety net in 2006 was 433.765 billion yuan, up 17.3% compared to the figure for 2005, representing 109.1% of the budgeted figure. Allocations from the central budget totaled 201.002 billion yuan, an increase of 22.9%.On the basis of the trials in the three northeastern provinces to fully fund individual retirement accounts for the basic pensions of workers retiring from state-owned enterprises (SOEs), the trial was extended to eight more provincial-level localities. We worked to ensure appropriate linkage between the urban minimum cost of living allowance system and employment and reemployment policies. We strongly supported the development of a rural medical assistance system in the central and western regions, the pilot program to provide medical assistance to urban residents in poor areas and the work of providing food, clothing, medical care, housing, and burial expenses for childless and infirm rural residents. We conscientiously carried out a strong employment policy and improved implementation measures to help SOEs in financial straits find appropriate solutions to their longstanding problems. We worked hard to assist in solving the problems of demobilized military personnel, including those working in enterprises as cadres, to help them adjust to civilian life. It is particularly worth noting that the central government promptly appropriated relief funds amounting to 11.2 billion yuan to vigorously support relief efforts in response to serious natural disasters, complemented by funds from local governments.
Second, we supported the d