How Will Fiscal Policy Work in 2015?

The Central Economic Work Conference held last December decided that China will stick to a proactive fiscal policy this year and the proactive fiscal policy should be stronger. How that can be accomplished has become a focus of attention.

This year will be crucial for China to comprehensively deepening its reforms. Because of fluctuations in the global financial market and bulk commodity prices as well as intensified debt pressure， international and domestic conditions have become increasingly complex. Since the Chinese Governments macro-control aims at making good use of existing monetary and financial resources， controlling additional resources and improving the efficiency， the fiscal policy should， when appropriately increasing expenditure， be more effective and more efficient. Taxation reform must strengthen as welll.

China should appropriately expand fiscal deficits.

According to the revised Budget Law effective as of January 1， the scale of local government debt must be subject to approval of the National Peoples Congress or its standing committee. After local government debt is incorporated into the national budget， local governments financing power will weaken. In 2015， many local governments need to repay a total of 1.85 trillion yuan （$302.29 billion）. Besides attracting private investor participation through the public-private partnership， the country may raise the deficits rate to 2.5 percent. This rate will still be within the limit of 3 percent， and fiscal deficits will increase to 1.7 trillion yuan （$277.78 billion）， which is 350 billion yuan （$57.19 billion） higher than in 2014.

The efficiency involved in using funds must improve.

Making good use of existing fiscal funds has become the core issue in the efficiency of using fiscal funds. In the long term， the solution to this issue involves streamlining administration and delegating power to lower levels， reducing fiscal expenditure by making overall budget arrangement and cutting the size of government. In the short term， the government must simply spend money more wisely.

Taxation reform must be advanced in an allround way.

The new round of taxation reform aims at establishing more stable local government tax categories. The government should improve the local government tax system， increase the proportion of direct taxes， advance the reform of value-added tax， make full play of the consumption tax， set up a more reasonable individual income tax system， accelerate drafting of the real estate tax law and the reform of resource tax， and advance the reform of changing environmental protection charges into tax， with the aim of establishing a taxation system conducive to economic growth and social fairness.

Moreover， the government should also increase spending on areas important to scientific innovation and peoples wellbeing， facilitate industrial upgrading and unleash peoples consumption potentials through structural tax cut， transferring fees and charges into taxes， and readjusting taxation structure.

China may also try to issue perpetual treasury bonds， enlarge the scale of treasury bonds and raise the proportion of treasury bonds held by the central bank and commercial banks.

Chinas public debt-to-GDP ratio is only 20 percent， much lower than the international warning rate of 60 percent， offering ample space to issue treasury bonds. Currently， local governments have to borrow money and pay high interests to satisfy the growing need for projects of public benefits. China can try new financing tools such as perpetual bonds for longterm investment in infrastructure construction and major projects involving peoples wellbeing.

The funds in the national treasury should be subject to uniform management.

In recent years， the total balance in the national treasury all over the country has remained at 3 trillion yuan （$490.2 billion）. Eighteen provincial-level governments have set up more than 480 special accounts of fiscal funds， and the balance in these accounts is equivalent to 44 percent of their treasury deposits. The matter of effectively using these fiscal funds is vital to improving the efficiency of fiscal policy. I suggest the Ministry of Finance and the central bank strengthen cooperation to set up a longterm and effective treasury cash management system. A uniform treasury fund management account should be established， and efficiency of treasury fund utilization must be improved by gaining investment earnings from market operations.