China to propose wider 2019 fiscal deficit amid slowdown

Residential buildings under construction are seen in Quanzhou, Fujian province, China June 12, 2018. Picture taken June 12, 2018. Zhang Bin/CNS via REUTERS

BEIJING: China’s Finance Ministry is set to propose a small increase in the targeted budget deficit for this year as officials seek to balance support for the economy with the need to keep control of debt levels.

The ministry agreed the proposed deficit target of 2.8 percent of gross domestic product at its annual work conference in December, two people familiar with the matter said. 

The figure, which compares with 2018’s target of 2.6 percent, will be presented for approval at the National People’s Congress, China’s legislature, in March. The final number could still change.

While officials have pledged a pro-active fiscal policy this year amid a slowdown in the economy that’s being worsened by the trade war with the U.S., the proposed deficit expansion is smaller than many economists had forecast. 

At the same time, officials can use so-called special bonds, which don’t affect the overall budget, to finance local government projects and spur infrastructure investment.

The people asked not to be named as the matter isn’t public. The Finance Ministry didn’t immediately respond to a fax seeking comment.

Expectations of aggressive fiscal policy and tax cuts in China may be misplaced, leaving monetary policy a greater role in supporting the economy, according to Barclays Plc.

”China’s fiscal space is constrained by legacy issues arising from the extraordinarily expansionary policy in the last downcycle, a deteriorating fiscal position, and elevated contingent liabilities, including future pension costs,” economists led by Hong Kong based Chang Jian wrote in a note.

Policy makers have been forced to expand the budget shortfall by the presence of higher priorities amid the growth deceleration. 

With further tax cuts expected in 2019 and higher spending, an increase in the deficit was all but inevitable. The target is also only a guide to actual spending -- the government has had higher outlays than the target since 2015.

The modest increase in the budget target speaks to the government’s need to keep tabs on debt levels, as it’s constrained by the legacy of previous stimulus rounds. 

At over 260 percent of gross domestic product at the end of 2017, the nation’s total debt was more than four times what it was in 2008.- Bloomberg