Fiscal Revenue Growth Was Falling, but the Fiscal Expenditure Structure Continued to Improve

In 2014, China's fiscal revenue grew by 8.6 %, a decrease of 1.6 % from the previous year. Fiscal expenditure grew by 8.2 %, a decrease of 3.1 % from the previous year (Fig. 2.18). The financial deficit was 113.12 billion yuan, accounting for 1.8 % of GDP.

In terms of fiscal revenue, the decline in corporate profit growth directly inhibited the increase of tax revenue. The annual tax revenue grew by 7.8 %, a decrease of 2.1 % from the previous year; the ratio of tax revenue to financial revenue was 84.9 %, a decrease of 0.6 % from the previous year. Meanwhile, the growth of nontax revenue showed an increase, growing by 13.5 %, an increase of 1.2 % from the previous year. The transfer income of state-owned land use right grew by 3.3 % in 2014, a decrease of 41.4 % from the previous year, but accounting only for 30 % of the fiscal revenue. On the tax revenue side, following the decline in corporate profit, the corporate income tax revenue grew by 9.8 % in 2014, a decrease of 4.3 % from the previous year; corporate income tax accounted for 20.7 % of all tax revenue, an increase of 0.4 % over the previous year. The growth of value-added tax revenue was by 7.1 %, a decrease of 2.0 % from the previous year; this accounted for 25.6 % of all tax revenue, a decrease of 0.2 % from the previous year. The business tax revenue grew by 3.2 %, a decrease of 6.2 % from the previous year; this accounted for 14.9 % of all tax revenue, a decrease of 0.7 % from the previous year.

In 2015, following the decline in real estate investment growth, the local government land leasing income is expected to be hard to grow rapidly. Under the slowdown of tax revenue growth, the local government should more strictly and effectively control nontax revenue growth and ease the burden on enterprises and residents, reduce the interference of market operation, and improve the market's economic vitality.

Fig. 2.18 Changes in nominal growth of financial revenue and expenditure (Data source: CEIC)

Fig. 2.19 Changes in public financial revenue and expenditure composition (Data source: CEIC)

On the side of fiscal spending (Fig. 2.19), education spending grew by 4.1 %, an increase of 0.5 % over the previous year. This accounted for 15.1 % of fiscal expenditure, a decrease of 0.6 % from the previous year.[1] Social insurance and employment expenditure grew by 9.8 %, a decrease of 5.3 % from the previous year; this accounted for 10.5 % of fiscal expenditure, an increase of 0.2 % over the previous year. The expenditure on transportation and agriculture and forestry and water affairs grew by 7.4 %, a decrease of 5.2 % from the previous year; this accounted for 16.0 % of fiscal expenditure, a decrease of 0.1 % from the previous year. The expenditure on housing security grew by 10.9 %, an increase of 10.9 % over the previous year; this accounted for 3.3 % of fiscal expenditure, an increase of 0.1 % over the previous year.[2]

In conclusion, we propose the following:

1. In 2014, a significant decline in investment growth led to a continuous drop in GDP growth. The annual real GDP grew by 7.4 %, a decrease of 0.3 % from the previous year. We expect excess production capacity and inventory accumulation in the real estate industry to inhibit investment growth in 2015 as well. Although investment in infrastructure will continue to grow faster, total social fixed assets investment growth will continue to fall and GDP growth will continue to decline.

2. In 2014, the CPI was 2 % and PPI −1.9 %. Following the economic slowdown, the price level is expected to maintain a downward trend in 2015. Although the CPI continues to decline, it will maintain a positive rise. Because excess capacity still needs to be digested, the PPI will continue to maintain a negative growth, although the fall will be somewhat less. Structural deflation is expected to continue.

3. Following the economic slowdown, the growth of urban and rural resident income will be restricted. Therefore, although the residents' propensity to consume is relatively stable, the promoting effect of consumption on economic growth in the near future will be limited.

4. Although investment growth dropped dramatically in 2014, the growth of private fixed investment has been faster than that of fixed asset investment of the whole society since 2012, and investment in the tertiary industry is gradually expanding. In terms of capital source, the proportion of investment from self-raised funds in the total investment increased significantly. In terms of industry, the profit from equipment manufacturing and high-tech manufacturing industries grew strongly, the pace of industrial transformation and upgrading accelerated, and investment demand is expected to expand further. Investment demand in the tertiary industry, except in the modern manufacturing and real estate industry, is expected to expand further in 2015. Macro-policy should guarantee that the newly increased credit resources further meet the needs of emerging industrial expansion and private investment demand. Furthermore, the government should reform the financial field and effectively resolve the long-standing problem of “financing difficulty, financing expensive” in private investment. While steadily promoting interest rate marketization, it should also speed up opening up the financial field and improve the capital market.

5. In 2014, the scale of social financing fell dramatically due to both demand and supply effects. On the supply side, the supervisory regulation on banks' offbalance sheet activity was strengthened, making it difficult for banks to expand their off-balance sheet activity. On the demand side, the decline in corporate profit growth inhibited the demand of enterprises for investment funds. However, newly increased RMB loans amounted to almost 10 trillion yuan, and to some extent, this showed that banks still had the strong willingness and ability to provide credit and enterprises the strong demand for investment funds. Monetary policy should take strong measures in 2015 to guarantee that credit resources entered the real economy, especially to meet the needs of private investment, and thus realize the stable growth of investment.

  • [1] In 2014, the proportion of education spending on GDP was 3.6 %; this was still below the level of 4 % established in 1993
  • [2] For the first 11 months of 2014, the general public service spending cumulatively rose 2.0 %, a decrease of 9.1 % from the previous year for the same period; this accounted for 9.3 % of the total financial expenditure, a decrease of 0.8 % from the previous year
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