China Reveals the Fiscal Tricks Needed to Deliver Record Tax Cut - EcoFinBiz Blog

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China Reveals the Fiscal Tricks Needed to Deliver Record Tax Cut

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(Bloomberg) -- Chinese Premier Li Keqiang specified on Friday a range of creative accounting measures that he’s planning to deploy in order to deliver a record tax cut in support of the nation’s slowing economy.

The government is aiming to expand its official budget deficit by a modest 0.2 percentage point this year, making the shortfall 2.8 percent of gross domestic product. That number gives little insight into the real fiscal situation, as a range of extra revenue and spending streams will augment its income.

  • 1.51 trillion yuan ($225 billion) of carryover funds
  • 2.15 trillion yuan of local government special bonds
  • Extra profits transferred from some state-owned enterprises and financial institutions
  • Government money which has been sitting idle for a long period of time

In all, the ‘actual’ budget deficit could come in somewhere between 6.2 percent and 6.6 percent, according to estimates by Standard Chartered Plc, UBS Group AG and Oxford Economics Ltd. In promising a tax cut worth more than 2 trillion yuan, Li is pushing the gap between the stated target and the deficit well beyond where it was last year.

The tax cuts rolled out this year are a major plank of the government’s “targeted” strategy to put a floor under the economic slowdown, as growth is expected to slide to around 6.2 percent this year from 6.6 percent in 2018.

Here’s the explanation of where this money is coming from:

  • Carryover funds are money central and local authorities saved from revenues in previous years, and every year they move some of the money to replenish revenue for the current year
  • China started allowing local governments to sell so-called special bonds in 2015 to finance projects with steady incomes, such as highway and shanty town renovation. The debt isn’t included in the general public budget
  • State-owned enterprises turn in a certain amount of profits to the governments every year. The amount has been rising in recent years, according to Aluminum Corp. of China Chairman Ge Honglin

Combined with idle funds, the cash grab from state-owned companies is worth as much as a trillion yuan, according to Li, but implementing it may be difficult.

"At the end of the day I don’t think that the dividends will fill that gap" as it’ll be very difficult and companies aren’t willing, said Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong.

To contact Bloomberg News staff for this story: Jeffrey Black in Hong Kong at jblack25@bloomberg.net;Yinan Zhao in Beijing at yzhao300@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger

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