China Can Widen Deficit to Support Economy: Former Finance Chief

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China can consider increasing its budget deficit to provide more support for small businesses battered by Covid outbreaks and weak consumption, a former finance minister suggested on Saturday.

“The budget fiscal deficit of central and local governments can be increased when necessary,” Lou Jiwei, who served as finance minister from 2013 to 2016, told the Caixin Summer Summit in Beijing. The aid to small firms “is still insufficient due to a severe slump in fiscal income across local governments,” he said.

The central government could boost transfer payments to regional authorities to help them support individual merchants and small and micro businesses, Lou said. Local governments meanwhile could invest more on public projects, he added.

Fiscal stimulus is seen playing a more important role in Chinese authorities’ policy mix this year as the local governments of the world’s second-largest economy face slumping revenue and greater spending on Covid controls. Beijing has required local authorities to speed up the sale of special bonds to fund infrastructure projects, and may allow them to sell another 1.5 trillion yuan ($ 220 billion) in bonds allocated for 2023 in the second half of this year, Bloomberg reported this week.

China’s other options to fund the increased spending include issuing special sovereign bonds and requiring state-owned enterprises or the central bank to transfer more profits, Citigroup Inc. economists said in a note Friday. The augmented fiscal deficit – a broad measure that covers the 2.8% official budget deficit – will likely increase by 3 percentage points to 14.3% of the economy this year from 2021, according to a forecast by Goldman Sachs Group Inc.

Despite the strong fiscal support this year, only a few small businesses qualify for benefits such as tax rebates and delayed payments to the social security fund, Lou said. Measures such as rent relief and consumption vouchers are more effective in helping small firms, which provide about 80% of the jobs in China, he said.

There’s still fiscal firepower in the central government budget, according to Lou. About 400 billion yuan isn’t allocated for a specific use, and he expects there will be funds remaining after 140 billion yuan in tax relief announced in May is accounted for, as well as subsidies for interest payments on infrastructure project loans.

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