Following is the full text of the Report on the Implementation of the Central and Local Budgets for 2005 and on the Draft Central and Local Budgets for 2006, delivered at the Fourth Session of the 10th National People's Congress on March 5, 2004.

Report on the Implementation of the Central and Local Budgets for 2005
And on the Draft Central and Local Budgets for 2006

Ministry of Finance

I. Implementation of the Central and Local Budgets for 2005
II. The Draft Central and Local Budgets for 2006
III. Doing Good Work to Ensure Successful Implementation of the 2006 Budget

Fellow Deputies,

The Ministry of Finance has been entrusted by the State Council to submit this report to the Fourth Session of the Tenth National People's Congress (NPC) on the implementation of the central and local budgets for 2005 and the draft central and local budgets for 2006 for your deliberation and approval, and also for comments and suggestions from members of the National Committee of the Chinese People's Political Consultation Conference (CPPCC).

I. Implementation of the Central and Local Budgets for 2005

Under the firm leadership of the Central Committee of the Communist Party of China (CPC) and the State Council and guided by the scientific outlook on development, all localities and departments in 2005 followed the principles and policies set by the central authorities and relevant decisions and resolutions passed at the Third Session of the Tenth NPC, resulting in continued economic development, further development of all social programs and improvement in people's lives. Financial, taxation, customs and other departments at all levels administered public finance in accordance with the law, improved financial oversight and management and worked hard to increase revenue and cut expenditures. As a result, the budgetary targets for both the central and local governments were successfully achieved.

National revenue broke through the 3 trillion yuan mark to reach 3.162798 trillion yuan (excluding revenue generated through debt, both here and below), up 523.151 billion yuan or 19.8% compared to the figure for 2004, representing 108.1% of the budgeted figure. National expenditures amounted to 3.370812 trillion yuan, a year-on-year increase of 522.123 billion yuan or 18.3%, representing 104.5% of the budgeted figure. Expenditures exceed revenue by 208.014 billion yuan.

The separate figures for the budgets of the central and local governments are as follows:

Total revenue in the central government budget came to 1.724979 trillion yuan, an increase of 258.102 billion yuan or 17.6% over the figure for 2004 on a comparable basis (after allowing for the additional 58.411 billion yuan used for export tax rebates), representing 106.4% of the budgeted figure. This included 1.653594 trillion yuan collected by the central government, 258.06 billion yuan or 18.5% more than the amount for 2004, representing 108.5% of the budgeted figure. Total expenditures of the central government amounted to 2.024941 trillion yuan, 238.887 billion yuan or 13.4% more than that for 2004, representing 105.4% of the budgeted figure. Total expenditures included 877.573 billion yuan incurred at the central government level, an increase of 88.165 billion yuan or 11.2% over the amount for 2004, representing 104% of the budgeted figure. Expenditures for tax rebates and subsidies for local governments totaled 1.147368 trillion yuan, 150.722 billion yuan or 15.1% more than the amount in 2004, representing 106.5% of the budgeted figure. The deficit in the central government budget for 2005 is 299.962 billion yuan, 38 million yuan less than the 300 billion yuan approved at the Third Session of the Tenth NPC, equivalent to 1.6% of GDP. The total amount paid out from the central government budget to repay the principal due on domestic and foreign debts in 2005 came to 392.325 billion yuan in 2005. To cover this expense and the deficit for 2005, the central government issued 692.287 billion yuan worth of treasury bonds. In addition, it issued 10 billion yuan worth of treasury bonds for local governments. Revenue from funds controlled by the central government amounted to 139.91 billion yuan and expenditures by the central government taken from the above funds amounted to 139.91 billion yuan.

In local government budgets, total revenue came to 2.656572 trillion yuan (including income from tax rebates and subsidies granted by the central government), an increase of 415.813 billion yuan or 18.6% over the amount for 2004 when calculated in comparable terms, representing 107.2% of the budgeted figure. This included 1.509204 trillion yuan collected at the local level, an increase of 265.091 billion yuan or 21.3% more than the amount for 2004, representing 107.7% of the budgeted figure. Expenditures in local budgets totaled 2.564624 trillion yuan, a year-on-year increase of 434 billion yuan or 20.4%, which is 103.5% of the budgeted figure. Total expenditures included 2.493239 trillion yuan spent at the local level, an increase of 433.958 billion yuan or 21.1%, representing 104.7% of the budgeted figure, and 71.385 billion yuan turned over to the central government, basically the same as in 2004. Local revenue exceeded expenditures by 91.948 billion yuan and this surplus will be rolled over into the budget for this year. These figures may change a little when the final accounts are prepared.

The overall situation in the implementation of the central government budget and other financial work in 2005 are as follows:

1. Carrying out a prudent fiscal policy and doing a good job in implementing the budget. In early 2005 the central government adjusted its fiscal policy to adapt to the new issues facing China's economic and social development by implementing a prudent fiscal policy with the focus on controlling the deficit, adjusting the pattern of expenditures, promoting reform, and increasing revenue while cutting expenditures. The deficit in the central government budget was 300 billion yuan, 19.2 billion yuan less than that for 2004. Funding for bond-financed projects was reduced by 30 billion yuan and allocations from the central government budget for investment in regular construction projects was increased by 10 billion yuan. In carrying out the fiscal policy, we carefully complied with the requirement to maintain the "five balances" [balancing urban and rural development, development among regions, economic and social development, development of man and nature, and domestic development and opening wider to the outside world, tr.], used a combination of policy measures including taxation, subsidies and transfer payments, and made appropriate adjustments in the distribution and focus of funding for bond-financed projects to strengthen the weak links in economic and social development such as agriculture and ensure funding for key ongoing projects and for items such as agriculture, forestry, water conservancy, education, science, culture, public health, and energy.

On the basis of steady and rapid growth of the Chinese economy, we improved tax collection and management, applied scientific management methods, made a full review of preferential tax policies and standardized them, stringently controlled tax exemptions and reductions and worked hard to collect all taxes due, resulting in a large margin of growth in national revenue. National revenue for 2005 exceeded the 2004 revenue by 523.151 billion yuan, an increase of 19.8%.

Figure 1
Breakdown of the 523.151 Billion Yuan Increase in National Revenue in 2005

It should be noted that the most fundamental factor behind the large increase in total national revenue in 2005 was steady and fast economic growth, but contributing to the increase were also some non-regular factors and the efforts of tax authorities to improve tax collection and management as well. The non-regular factors mainly consist of the following. First, the increase in production and sharp rise in prices of energy and raw materials such as coal, crude oil and nonferrous metals, as well as the rapid growth of the real estate industry resulted in greater collection of VAT and business tax compared to other industries. More than 60 billion yuan of the surplus was unusual in nature. Second, total national corporate income tax collected grew by 38.9% in 2005, higher than the 22.6% growth rate in profits for all large industrial enterprises in the same period. This was mainly because total corporate income tax in 2005 exceeded the previous year's figure by more than 50 billion yuan after final settlement due to the large growth in corporate profits in 2004. When three of China's commercial banks – the Bank of China, the China Construction Bank and the Industrial and Commercial Bank of China, were turned into joint stock companies in 2005, many of their non-performing loans were written off, enhancing the quality of their assets and improving profitability. This greatly improved the balance in their account books, resulting in a year-on-year increase of over 20 billion yuan in the corporate tax they paid in 2005. Third, a large part of the additional revenue was due to the efforts of tax authorities to improve tax collection, management and inspection and clear up overdue taxes. The additional revenue due to the above non-regular factors totaled around 120 billion yuan. Deducting this part of the revenue would result in a growth rate for tax revenue very similar to those for the economy and prices.

Revenue in the central government budget for 2005 exceeded the projected figure by 161.9 billion yuan (including the additional amount used to pay export tax rebates). Disposal of this surplus amount was carried out in accordance with the directives of the Central Committee and the State Council on adopting a scientific outlook on development, the Decision of the NPC Standing Committee on Improving Examination and Oversight of the Central Government Budget, and relevant resolutions passed at the Third Session of the Tenth NPC. Besides spending 32.8 billion yuan of the surplus to increase tax rebates and general transfer payments for local governments and transfer payments for ethnic minority regions as required by relevant laws and regulations and statutes of the public finance system, the central government mainly used the surplus to strengthen weak links in economic and social development and to clear up long-overdue payments. Specifically, an additional 24.4 billion yuan was spent on social security (19.4 billion yuan for the national social security fund and 5 billion yuan for subsidies to support the closure or bankruptcy of state-owned enterprises). Another 2.6 billion yuan was used to increase spending on education and science. The additional 58.4 billion yuan that was earmarked for export tax rebate payments was used to pay the additional export tax rebates of 2005 and to clear up some of the long-overdue payments. A total of 9 billion yuan was spent on payments long overdue for policy-based purchases of cotton by supply and marketing cooperatives. The remaining 34.7 billion yuan was reserved for funding reform of the salary system for civil servants and implementing support policies. The State Council reported these arrangements for the use of the surplus to the NPC Standing Committee.

2. Supporting efforts to solve the problems facing agriculture, rural areas and farmers and promoting balanced urban and rural development. In 2005 the government continued to give strong financial support to agriculture, rural areas and farmers and implement practical policies and effective measures. A total of 297.5 billion yuan from the central government budget alone was allocated in 2005 for agriculture, rural areas and farmers, 34.9 billion yuan or 13.3% more than the actual figure for expenditures in 2004.

First, the reform of rural taxes and fees was deepened. The central government allocated 66.2 billion yuan in the form of transfer payments for this purpose, a 26.3% year-on-year increase. The livestock tax and all taxes on native agricultural products except for tobacco were rescinded throughout the country in 2005 and the agricultural tax was also rescinded in 28 provinces, autonomous regions and municipalities directly under the central government, benefiting 800 million farmers.

Second, we implemented policies such as the "triple subsidy" policy [subsidies granted to farmers for growing grain, planting superior grain varieties, and purchasing large agricultural machinery and tools, tr.]. A total of 13.2 billion yuan was used for direct subsidies to grain producers in 30 provinces, autonomous regions and municipalities directly under the central government, 13.8% more than in 2004. Another 3.87 billion yuan was spent to help farmers purchase improved strains, 35.8% more than in 2004. The central government also paid 300 million yuan in subsidies to purchase agricultural machinery and tools, more than four times as much as the amount for 2004. In addition, 5.5 billion yuan of special funds was earmarked to support major grain-producing counties. The central government rescinded the VAT on urea manufactured or distributed by domestic enterprises and used tariff policies to encourage the import of agricultural supplies that were in short supply in China. This encouraged local governments to pay closer attention to agriculture and grain production and helped safeguard the food security of the country.

Third, we supported the long-term development of agriculture and farmers. The central government spent 81.278 billion yuan from bond sales and budgetary allocations for capital construction in agricultural and rural infrastructure development in 2005 to further improve production and living conditions in rural areas. Another 9.855 billion yuan from the central government budget was spent on general agricultural development, and 76.6% of the increased funding went to rural infrastructure projects such as those to upgrade low- and medium-yield farmland in major grain-producing areas. In addition, we also experimented with the use of equity investment and special discounts to make the guiding, demonstrating and stimulating role of the government's funding of general agricultural development more effective. The central government spent 400 million yuan to subsidize the training of 2.8 million rural workers to help them find nonagricultural jobs, an increase of 60% over the amount of 2004. Funding for poverty alleviation through development was again increased, reaching 13 billion yuan in 2005. The central government appropriated 25.17 billion yuan to directly subsidize farmers who returned their cultivated land to forests. We continued to finance efforts to spread application of agricultural science and technology, industrialize agricultural operations, develop special farmers' cooperatives, build small water conservancy facilities, and test soil to determine the correct fertilizer formula.

Figure 2
Breakdown of the 297.5 Billion Yuan Spent from the 2005 Central Government Budget to Support Agriculture, Rural Areas and Farmers

3. Increasing government spending to stimulate development of all social programs.

First, we supported employment, reemployment and social security work. Total national expenditures for employment and social security in 2005 totaled 364.927 billion yuan, a year-on-year increase of 17.1%. This included 162.359 billion yuan spent by the central government on social security, up 10% over the previous year's amount. We provided strong support for pilot programs to improve the urban social security system in the three northeastern provinces, improved the system of basic old-age pensions for retired enterprise employees, and worked out plans for expanding trials to fully fund personal retirement accounts. The Ministry of Finance actively participated in the drafting and implementation of the preferential fiscal and tax policies of the central government related to employment and reemployment. Most provinces, autonomous regions and municipalities directly under the central government have basically incorporated basic living allowances for workers laid off from SOEs into the unemployment insurance system and basically all eligible needy urban residents are now covered by the subsistence allowance program. We supported efforts to solve the problems of demobilized military personnel, including those working in enterprises as cadres. Strong support was provided for disaster relief work. Charges levied on rural residents seeking jobs in cities were reviewed to eliminate unreasonable charges, and active measures were taken to address the financial problems of rural migrant workers in sending their children to school and the difficulty the government has in providing management and services for such workers.

Second, we supported faster development of education, science and culture. Total expenditures across the country for education in 2005 amounted to 395.159 billion yuan, a 17.4 % year-on-year increase. Spending on education from the central government budget grew by 15.9% to reach 38.438 billion yuan. This included 33.864 billion yuan spent on education at the central government level, 17.2% more than the previous year, making the rate of increase higher than the growth rate for regular revenue in the central government budget. Over 7 billion yuan in special funds was allocated by the central government and local governments at all levels to extend the "two exemptions and one allowance" program [exemption from paying for textbooks, exemption from paying for miscellaneous education-related fees and allowances for room and board for the children of poor rural families living at schools while receiving compulsory education, tr.], benefiting 34 million primary and secondary school students in the central and western regions. An additional 5.5 billion yuan was allocated from the central government budget to continue supporting programs such as the project to renovate dangerous primary and secondary school buildings across the country, the plan to make nine-year compulsory education basically universal and basically eliminate illiteracy among young and middle-aged adults in the western region, and projects to support modern distance education in rural primary and secondary schools and make adjustments in the geographic distribution of such schools. The central government earmarked 770 million yuan in a special fund to set up experimental vocational training centers and strengthen support for the reform and development of vocational education. A special fund of 3.26 billion yuan was set up to continue implementation of the 211 Project and the May 1998 Project for higher education and other key projects to enhance the ability of universities to make advances in science and technology and serve society. The central government also set aside 3.64 billion yuan in a special fund to continue supporting reform of the management system of colleges and universities. Especially worth noting is that in 2005, a yearly state scholarship fund of 1 billion yuan was set up in the central government budget to offer more aid to needy university students. The country's total expenditures on science and technology in 2005 reached 99.156 billion yuan, a 20.9% year-on-year increase. Of this amount, 60.078 billion yuan was from the central government budget, an increase of 21.8%. Efforts were focused on setting up a national platform to develop basic conditions for science and technology and the pilot knowledge innovation program of the Chinese Academy of Sciences. China spent 69.288 billion yuan on culture, sports, and radio, 18% more than the previous year, of which 9.927 billion yuan was from the central government budget, up 17%. Efforts to develop cultural facilities at the lower levels were strengthened and continued support was given to national programs to share cultural information and resources, extend radio and TV coverage to every village, and send books to the countryside. A special fund of 250 million yuan was allocated to preserve important heritage sites, such as major historical and cultural ruins.

Third, we supported efforts to develop and make structural improvements in medical and health care systems. Total expenditures for medical care and public health across the country reached 102.699 billion yuan, up 20.2%. The central government earmarked 4.2 billion yuan to develop a system for responding to public health emergencies, a disease information network and a system for overseeing enforcement of public health laws. A total of 542 million yuan was earmarked for subsidies to support pilot programs to establish a new type of rural cooperative medical care system; the new system expanded from 11.6% in 2004 to 23.5% of the counties, cities and city districts across the country in 2005. In addition, vigorous efforts were made to develop the medical assistance systems in urban and rural areas. A total of 335 million yuan was allocated to reward rural families that observe the family planning policy, an increase of 68% over the amount for 2004. A particularly important move was to set up a 2 billion yuan fund in the central government budget to prevent and control outbreaks of avian flu and adopt temporary tax reduction and exemption policies to guarantee funding for the effort to prevent and control highly pathogenic avian flu and facilitate recovery of the poultry industry.

Fourth, funds were set aside to ensure funding for strengthening government authority. A special fund totaling 4.81 billion yuan was set up in the central government budget in 2005 for this purpose, effectively improving conditions for case-processing work in lower-level procuratorial, judicial and public security departments. Furthermore, efforts to improve management resulted in constant improvement in performance of funds used. Another 400 million yuan was earmarked especially to simplify customs clearance procedures, resulting in initial progress toward the goal of higher speed, lighter burden, improved efficiency and stricter oversight. The central government also earmarked 924 million yuan to continue trial reforms of the prison system taking place in some provinces, autonomous regions, and municipalities directly under the central government. Vigorous support was given to the central government, localities and departments drawing up contingency plans for public emergencies.

4. Increasing transfer payments and making the distribution of basic public services more even. We implemented preferential fiscal and tax policies for developing the western region and revitalizing northeast China and other old industrial bases and constantly looked for new ways to support this effort while increasing funding.

First, we improved the mechanism for alleviating the financial difficulties of counties and townships. In 2005, the central government began allocating a yearly 15 billion yuan to implement a policy measure centered on "three rewards and one subsidy" in line with the basic philosophy of "clearly defined responsibilities, comprehensive approach, incentives plus restraints and guidance on a case-by-case basis." This encouraged local governments at all levels to allocate more funds to the lower levels, develop county economies, streamline organizations and reduce their staffs, and improve public finance at and below the provincial level. Provinces and autonomous regions allocated an additional 10.8 billion yuan for rewards and subsidies on top of the original scale of fiscal transfer payments to their counties and townships, stopping the financial slide of these counties and townships and allowing them make a turn around.

Second, transfer payments were increased substantially. In addition to the 414.371 billion yuan in tax rebates and structural subsidies in the 2005 budget, the central government paid out 732.997 billion yuan in transfer payments and subsidies of various kinds, an increase of 21.6% over the previous year. Funding for fiscal transfer payments amounted to 381.272 billion yuan, a year-on-year increase of 46.4%. More than 90% of the transfer payments went to central and western regions. This not only improved the level of basic public services where they are insufficient, but also helped alleviate the financial difficulties of counties and townships, thus promoting more balanced development among regions.
 
5. Deepening fiscal, tax and other reforms to improve the socialist market economy.
First, marked progress was made in reforming the tax system. We further improved the plan for the VAT trial reform and worked out a tax policy for the depreciation of fixed assets in industrial enterprises in northeast China. This experience will help us in expanding the VAT reform throughout the country. We carried out careful research to work out a plan for adjusting the individual income tax, after which the NPC Standing Committee approved raising the tax threshold for monthly salaries for the individual income tax from 800 yuan to 1,600 yuan starting January 1, 2006. In addition, the number of items to be reported by taxpayers on their own initiative was increased and efforts to collect income tax from high-income people were strengthened. More research was carried out to improve the new Law on Corporate Income Tax (draft) and the plan to adjust the policy on the consumption tax. In addition, we adjusted the mechanism for distributing responsibility for export tax rebates in light of the new circumstances arising in the course of reform. Beginning January 1, 2005, the ratio of the responsibility of central and local governments for the portion of tax rebates that exceeds the base figure was changed from 75: 25 to 92.5: 7.5, thus reducing the burden on local governments and promoting development of foreign trade.

Second, reform of the budget management system was deepened and broadened. On the basis of the reform requiring all central and local government departments to prepare their budgets, we steadily implemented the trial reform to set the allowable amounts for expenditures on items that constitute part of salary and benefits in central government departments, practiced a method of managing project budgets on a rolling basis, and improved the uniformity, completeness and fairness of budget compilation. We tightened control over surplus budgetary funds and steadily implemented performance assessment trials to improve the performance of government funds. Management of non-tax revenue was improved, and progress continued in deepening the reform to separate the management of revenue from management of expenditures. The reform to set up a centralized treasury payment system was expanded in 2005 to include central government departments and over 3,300 of their subsidiary units responsible for preparing their own budgets, and the system now incorporates more than 370 billion yuan of budgetary funds. The reform of oversight for revenue collection and transfer was also expanded to include all central government departments with non-tax revenue. The reform to set up a centralized treasury system for collecting revenue and paying expenditures now covers 36 provinces, autonomous regions, municipalities directly under the central government and cities specially designated in the state plan as well as over 500 counties and more than 200 cities at the prefecture level. Significant progress was made across the country in the reform to establish a government procurement system, with both the central government and provincial-level governments completing separation of bodies responsible for managing government procurement from the bodies that use the purchased items, thus effecting separation of corresponding functions. Government procurement reached 25 0 billion yuan in 2005, a year-on-year increase of 36.4 billion yuan, resulting in an 11% drop in the use of funds. The Chairperson's Council of the NPC Standing Committee approved introduction of outstanding balance management of the national debt starting this year to raise the transparency of national debt management and reduce financial risk. Satisfactory results were attained in the pilot reform of the classification of government revenue and expenditures introduced in six central government departments and five provinces and municipalities directly under the central government. Progress in the establishment of the Government Financial Management Information System was accelerated and more effort was put into developing and implementing a public finance core activity system; a network system linking the central, provincial and city (prefectural) networks and connecting relevant functional departments and units responsible for preparing their own budgets at the same level has been basically established, thus laying a good foundation for efforts to apply IT in the management of public finance. 

Third, vigorous support was provided for the reform of SOEs and the banking system. A total of 21.9 billion yuan was earmarked in the central government budget for 2005 to support policy-based closure or bankruptcy of 116 SOEs and arrangements for 550,000 laid-off employees. Work to relieve the second group of 74 enterprises owned by the central government of the obligation to operate social programs proceeded smoothly. We supported the reorganization, restructuring and debt-to-equity swap for SOEs, promoted reform of the postal service and industries such as electricity, telecommunications, railway, and civil aviation, and introduced preferential tax policies to support corporate reorganization, restructuring, and debt-to-equity swap and efforts to relieve enterprises of their obligation to operate social programs. We instituted export tariff measures to adjust the mix of export textiles and defuse trade tensions and supported the strategy of textile firms to go global. We supported reform and innovation in the banking industry, focusing on support for the financial reorganization and restructuring of the Industrial and Commercial Bank of China, the Bank of China, the China Construction Bank and the Bank of Communications to convert them to listed companies. We tightened financial management of the four asset management companies of China and formulated and implemented preferential tax policies to stimulate development of the insurance, securities and other capital markets. The central government appropriated 2.931 billion yuan to subsidize the interest on inflation-adjusted savings deposits in order to support the efforts of 29 provinces, autonomous regions and municipalities directly under the central government to deepen the reform of their rural credit cooperatives.

Fourth, we promoted reform of the housing system. We further improved the system for managing accounts of government and private matching funds for housing, and adopted tax policies to curb speculation in the housing market, leading to basic stability in housing prices and sound development of the real estate industry.

6. Administering public finance in accordance with the law and tightening financial oversight and management. On one hand, we paid close attention to handling financial affairs in accordance with the law, standardizing management, exercising strict oversight and improving the legal framework for the administration of public finance in all our financial work, and constantly strengthened internal oversight of public finance. On the other hand, we followed up on the relevant decisions of the NPC and the comments from auditing authorities by first carefully analyzing and studying them and then taking improvement measures.

First, improvements were made in the laws and regulations for public finance. We put into practice the Program for Implementing All Aspects of Law-Based Administration in Accordance with the Law formulated by the State Council, fully implemented the Regulations on Penalties and Sanctions for Illegal Fiscal Acts, and formulated the Guidelines for Financial Departments on Promoting All Aspects of the Administration and Handling of Financial Affairs in Accordance with the Law. We drafted or revised major financial laws and regulations such as the Budget Law, the Law on Transfer Payments, the Basic Law on Tax Collection, and the Regulations for Implementing the Law on Government Procurement. We combined implementation of the Administrative Approval Law with a review of all financial items requiring administrative examination and approval, eliminating 39 items and streamlining the process for 6 others.

Second, improvements were instituted in basic accounting work. We stepped up the effort to bring China's accounting and auditing standards in line with international practices and train more accounting experts, improved management of certified public accountants and strengthened their integrity. We organized unified examinations to evaluate accounting firms and the quality of corporate accounting information.

Third, constant efforts were made to improve public finance oversight. We focused this effort on oversight for key funds closely watched by the public by promoting more effective oversight. The mechanism for financial oversight became sounder and the efficiency of oversight improved. Irregularities in funds totaling 60.6 billion yuan were discovered in 2005, resulting in reduction in total expenditures and recovery of funds totaling 15.9 billion yuan and collection of 26.6 billion yuan of non-tax revenue for the central government budget.

Fourth, improvement efforts were intensified. The State Council attached great importance to the relevant decisions of the NPC as well as the comments and suggestions raised in auditing reports. The State Council called on all concerned departments and organizations to subject their work to auditing oversight, implement auditing decisions, and correct any problems. All concerned departments and organizations have now improved their work. Most of the problems arising in the implementation of the central government budget that were discovered in the auditing process were solved, and the responsible parties were held accountable. As of the end of October 2005, 1.183 billion yuan of funds had been recovered, 472 rules and regulations had been revised, and 121 persons had been subjected to disciplinary action by the Party or the government. The State Council reported the improvements to the NPC Standing Committee.

The year 2005 was the final year for implementing the Tenth Five-Year Plan. A review of the last five years shows that some changes have occurred in China's financial situation. The main changes are as follows.

The nation's financial strength continued to grow. Government revenue passed the important benchmarks of 2 trillion one year, 2.5 trillion the next and 3 trillion yuan the year after that. Total revenue during the Tenth Five-Year Plan period was 11.5 trillion yuan, representing a rise of 6.4 trillion yuan or 126.5% compared to the figure for the Ninth Five-Year Plan period. Breaking this down by level, there was a 141.5% gain in the revenue of the central government and a 111.3% gain in the revenue of local governments. The ratio of revenue to GDP in 2005, the final year of the Tenth Five-Year Plan period, reached 17.3%, 3.8 percentage points more than the 13.5% ratio of 2000, the final year of the Ninth Five-Year Plan period. The nation's expenditures totaled 12.8 trillion yuan, an increase of 7.1 trillion yuan or 124% compared to the figure for the Ninth Five-Year Plan period. Breaking this down by level, there was a 109.5% gain in expenditures of the central government and a corresponding 130.5% gain for local governments. Revenue growth was more stable and balanced and there was constant acceleration in the pace of growth in public finance.

Macroregulation through public finance operations played an increasingly bigger role. We made a timely adjustment in the fiscal policy in light of the objective requirements for economic development, successfully shifting a proactive policy to a prudent one, thus promoting continued steady and rapid economic development. On the basis of a careful review of the implementation of the fiscal policy, we put in place a sound financial macroregulatory system that is basically equipped to handle all situations in economic operations including inflation, deflation, and maintenance of a basic balance between supply and demand in spite of structural imbalances by setting appropriate targets, integrating policies, choosing opportunities carefully and carefully organizing implementation.

The way government funds were spent was improved by putting people first. We adjusted the pattern of expenditures by continuously reducing government investment in regular competitive and profit-making industries with the aim of gradually phasing out such investment in line with the requirements of a scientific outlook on development and the growth of the socialist market economy. We supported the reform and development of social programs such as those to develop compulsory education, employment services, social security and public health. We directed more funds toward financially strapped areas, industries and groups of people, making it the starting point and ultimate goal of government spending to realize, safeguard and develop the fundamental interests of the overwhelming majority of the people.

Reform of the system for administering public finance was constantly deepened. We promoted the reforms of the export tax rebate mechanism, the VAT, and the individual income tax and the reform for sharing income tax revenue, deepened the reform of the budgetary management system, and supported other aspects of economic restructuring. We promoted development of the legal framework for public finance work, strengthened basic accounting work, improved oversight of public finance, and further improved the administration of public finance.

Figure 3
Changes in Government Revenue During the Tenth Five-Year Plan Period

At the same time, we are keenly aware that there are still quite a few problems that need to be solved in the operation of public finance and implementation of the budget.

First, now that China has entered a new stage of economic and social development, financial support to ensure all-round, balanced and sustainable social and economic development is no longer adequate. For instance, we need to increase investment in weak links in development such as agriculture, rural areas and farmers, compulsory education, public health and environmental protection.

Second, we need to increase funding for efforts to improve our capacity for independent innovation, promote scientific and technological progress, and transform the pattern of economic growth.

Third, progress in the effort to make the level of basic public services available more uniform across the country is still too slow. Lower-level governments in some areas are still experiencing financial difficulties, and more funding is needed to safeguard government authorities at lower levels and strengthen their ability to serve the public.

Fourth, there are still quite a few other areas that are affected by heavy debt obligations both overt and covert that are affecting economic development, making it extremely difficult for us to prevent and defuse financial risks.

Fifth, reform of the budget system and the management system of public finance needs to be deepened still more to make management of public finance more standardized, scientific and transparent. The State Council is paying close attention to these issues, and has called on the Ministry of Finance and relevant departments to take effective measures to solve them. We must boost our sense of urgency and our sense of mission as we constantly work to improve services and the management of public finance by accelerating development of the public finance system, setting up a scientific policy-making mechanism, deepening reform and optimizing the pattern of expenditures.

II. The Draft Central and Local Budgets for 2006

In light of the arrangements and requirements of the central leadership for economic work and the new situation facing financial work, our general philosophy for formulating the budgets and arranging financial work for 2006 was as follows. We take Deng Xiaoping Theory and the important thought of Three Represents as our guide and implement the guiding principles of the Sixteenth National Congress of the Party, the Third, Fourth and Fifth Plenary Sessions of its Sixteenth Central Committee and the Central Economic Work Conference. We are guided overall by a scientific outlook on development and continue to implement a prudent fiscal policy. We work hard to increase revenue and reduce expenditures, optimize the pattern of expenditures and guarantee key expenditures. We devote a great deal of effort to deepening reform, promoting economic restructuring and transforming the pattern of economic growth to promote sustained, rapid, balanced and sound development of the economy and all-round progress of society, thus ensuring that efforts to meet the targets in the Eleventh Five-Year Guidelines get off to a good start.

In line with the above philosophy, the major budgetary targets for 2006 were set as follows. Total revenue in the central government budget should reach 1.927204 trillion yuan, an increase of 202.225 billion yuan or 11.7% over the amount for 2005. This figure includes 1.85203 trillion yuan in revenue collected by the central government, an increase of 198.436 billion yuan or 12% compared to the 2005 revenue. Expenditures in the central government budget total 2.222204 trillion yuan, a rise of 197.263 billion yuan or 9.7%. This figure includes 952.5 billion yuan of expenditures for the central government, up 74.927 billion yuan or 8.5% over 2005, and 1.269704 trillion yuan in tax rebates and subsidies for local governments, up 122.336 billion yuan or 10.7%. Expenditures exceed revenue in the central government budget, leaving a deficit of 295 billion yuan, 5 billion yuan less than that for 2005. The deficit will drop to 1.5% of the GDP. Funds in the central government budget for bond-financed projects in 2006 total 60 billion yuan, 20 billion yuan less than in 2005 (including a reduction of 10 billion yuan worth of treasury bonds issued by the central government for local governments). In addition, allocations from the central government budget for investment in regular construction projects have been increased by 10 billion yuan. The outstanding national debt in the central government budget will reach 3.5568 trillion yuan, an increase of 295.4 billion yuan over 2005 calculated in comparable terms. Total revenue in the draft central and local budgets for 2006 is 3.542338 trillion yuan, 379.54 billion yuan or 12% more than that for 2005. Total expenditures in the draft central and local budgets amount to 3.837338 trillion yuan, up 466.536 billion yuan or 13.8%.

Figure 4
Ratio of Outstanding National Debt and Deficit in the Central Government Budget to GDP

Projected revenue growth for the whole country in 2006 is 12%. We set this target by taking into account both the macroeconomic targets set by the central leadership and all factors that might reduce revenue this year. These factors include policy changes like rescinding the agricultural tax nationwide, carrying out the trial VAT reform, lowering tariff rates, and raising the tax threshold for salaries for the individual income tax, measures to ensure adequate funding for export tax rebates, and the likely profit decline of enterprises in some industries. Setting the target at this level represents a somewhat proactive yet prudent step.

In setting the targets for the 2006 expenditures we followed a principle of taking all factors into consideration, including total possible revenue, and guaranteeing support for key expenditures and worked to meet the requirements of a prudent fiscal policy. We focused on adjusting the pattern of expenditures by guaranteeing support for public expenditures while reducing general expenditures. We gave high priority to efforts to shore up weak links in economic and social development such as agriculture, education, employment, social security and public health, support areas and groups with financial difficulties, promote scientific and technological innovation, and transform the pattern of economic growth.

1. Strengthening the macroregulatory function of public finance and promoting rapid and sound economic development. We are maintaining continuity and stability in our macroeconomic policy by continuing to follow a prudent fiscal policy as we strive to promote sound growth in investment, consumption and exports in 2006 in accordance with the guiding principles of the Central Economic Work Conference and the objective requirements of economic development.

First, we will work to optimize the structure of government investment. Projected investment in capital construction in the central government budget for 2006 totals 115.4 billion yuan, 60 billion yuan of which is in bond-financed projects and 55.4 billion yuan in projects financed through budgetary allocations. All these figures are the same as those for 2005. We will continue working to optimize the way we use funds from bond sales and central government budgetary allocations. We will make good use of the role of government investment in maintaining the "five balances," shoring up weak links and promoting balanced development. We are first of all using government investment to support rural development, science, education, culture, health, resource conservation, ecological improvement and environmental protection, development of the western region, and key projects with a bearing on implementation of the Eleventh Five-Year Development Guidelines.
 
Second, we will rectify and standardize the pattern of income distribution. We will carry out salary reform for civil servants as needed, setting up a unified state salary system for them based on both position and grade. We will make a review of all allowances and subsidies to set up a standardized and orderly system for granting them and mechanisms for oversight and restraint. We will promote reform of the income distribution system in public service institutions and improve the system for granting allowances to personnel working in remote areas where conditions are harsh to make income distribution fairer and strengthen the role of consumption in fueling economic growth.

Third, we will consolidate and build on our progress in reform of the export rebate system. Allocations in the central government budget for 2006 for export rebates total 426.4 billion yuan to ensure that export rebates are paid to exporters on time and in full. All local governments, provincial governments in particular, must guarantee the funds for paying export rebates in accordance with the regulations of the system. In addition, we will strengthen the role of tariff and other tax policies in supporting the foreign trade broker system, changing the way foreign trade is growing and promoting its sound development.
 
2. Increasing policy support and spending to accelerate the building of a new socialist countryside. A new socialist countryside is a grand objective set at the Fifth Plenary Session of the Sixteenth Central Committee. Working toward this objective will not only help develop agriculture and rural areas and help improve the lives of farmers, but even more importantly, has a direct bearing on efforts to maintain the long-term political stability of the country and rejuvenate the Chinese nation. We need to gradually expand what is paid for by public financing in rural areas and establish a sound mechanism for ensuring stable increases in government funds to support agriculture. In 2006 we will maintain continuity and stability in the policy of directing new spending increases in education, culture and health primarily to rural areas and increase the overall scale of spending in those areas, working particularly hard when it comes to farmers to "give more and take less" and give them more control over their operations. We will guide and stimulate the enthusiasm of all sectors of society to increase investment in agriculture, rural areas and farmers. A total of 339.7 billion yuan will be allocated from the central government budget for agriculture, rural areas and farmers for the year, 42.2 billion yuan or 14.2% more than was what actually spent in 2005. This was greater than the rate of growth for both revenue and expenditures in the central government budget, and the increase accounted for 21.4% of the growth of expenditures in that budget.

First, we will completely rescind the agricultural tax throughout the country, throwing it into the "dustbin of history" after a history of 2,600 years in China. The reform of rural taxes and fees will reduce the financial burden of 800 million rural residents by about 125 billion yuan a year. We will work on a plan to make up for the tax levied on tobacco as a special agricultural product, reform taxes and fees for state-owned farms, and promote comprehensive rural reforms in an all-round way in 2006. In order to carry out these changes, the central government will allocate 78.2 billion yuan annually in transfer payments, and local governments should allocate corresponding amounts.

Second, we will improve and expand the "triple subsidy" policy. We will increase the amount of funding for direct subsidies for grain producers by allocating 12.5 billion yuan for subsidies for them in 13 major grain-growing provinces and autonomous regions, 1 billion yuan more than in 2005. The total amount of subsidies for each grain-growing province or autonomous region will be equivalent to 50% of the total risk capital for grain production in that area. A total of 4.07 billion yuan will be allocated from the central government budget for subsidizing the purchase of superior varieties, 200 million yuan more than in 2005. A total of 600 million yuan has also been earmarked in the budget for subsidies for agricultural machinery and tools, double the 2005 allocation. The subsidies will be granted in more areas and the distribution has been adjusted. We will take active steps to establish a comprehensive subsidy system to increase farmers' incomes from growing grain.

Third, we will support expansion of trials of a new type of rural cooperative medical care system. We will expand the trials to 40% of the country's counties, cities and districts and raise the amount of the subsidy from both central and local government budgets from 10 yuan to 20 yuan per participant. A total of 4.73 billion yuan, more than a seven-fold increase, has been allocated in the central government budget for this purpose. We will intensify medical assistance work in the countryside to alleviate the problem of people being driven into poverty or back into poverty by medical crises.

Fourth, we will support work to increase overall agricultural production capacity. We will increase spending on rural infrastructure development, ecological conservation and improvement, advances in agricultural science and technology, comprehensive development of agriculture, and development assistance to impoverished areas, and promote the development of modern agriculture. We will also further integrate agricultural investment to improve its performance.

3. Establishing a system to guarantee funding for rural compulsory education and exempt rural primary and secondary school students in the western region from all educational fees. Strengthening rural compulsory education is a strategic task that has a direct overall bearing on economic and social development and successful completion of this task is important for achieving the strategic goals of the Eleventh Five-Year Guidelines and for efforts to build a moderately prosperous society in all respects. On the basis of clear delineation of the responsibilities of each level, sharing of the burden by central and local governments, increased government spending, stronger financial guarantees and systematic, step-by-step implementation, between 2006 and 2010 we will gradually incorporate all expenditures for rural compulsory education into the public finance system and establish a mechanism to guarantee funding for rural compulsory education that divides specific tasks between central and local governments and assigns each a proportion of the burden. The main changes brought about by this reform are: exemption for rural students receiving compulsory education from paying educational fees and provision of subsidies to students from poor families for buying books and for room and board at boarding schools, stronger public funding guarantees for rural primary and secondary schools, establishment of a long-term mechanism for repairing and renovating primary and secondary school buildings and consolidation and improvement in the current mechanism for guaranteeing payment of teachers' salaries. We will also establish a system of budgets for all rural primary and secondary schools and carry out a comprehensive education reform. In order to ensure smooth implementation of reforms, the central government will assume primary responsibility for funding the reform of the mechanism for guaranteeing funding for compulsory education in the central and western regions and also provide assistance to impoverished areas in the eastern region. We will do this on a year-by-year and region-by-region basis with the objective of implementing the reform in two years and optimizing it in three. We will carry out the reform first in the 12 provinces, autonomous regions and municipalities directly under the central government in the western region and implement a mechanism for maintaining and renovating rural primary and secondary school buildings throughout the country in 2006, and we will make rural compulsory education free nationwide in 2007. New budget allocations from all levels of government from 2006 to 2010 for rural compulsory education will amount to 218.2 billion yuan, not including any adjustments in teachers' salaries. We will support vocational education, increase support for development of experimental vocational training centers, and further improve our policies for giving financial assistance to students from poor families at vocational schools. A total of 740 million yuan will be allocated from the central government budget for building experimental vocational training centers and 800 million yuan for financial aid and scholarships for students at vocational schools, 770 million yuan for both items more than for 2005. We will also provide more support to improve higher education.
 
4. Supporting employment, reemployment and social security work and promoting the building of a harmonious society. Intensifying our employment, reemployment and social security work is an important measure for safeguarding the people's interests, promoting equal opportunity for all, and building a harmonious socialist society. Allocations from the central government budget for social security allowances and employment and reemployment work total 185.982 billion yuan in 2006, a year-on-year increase of 23.623 billion yuan or 14.5%.

First, we will continue to do a good job in our employment and reemployment work. We will implement the new policy to support employment and reemployment efforts and find satisfactory solutions to long-standing problems related to employees laid off from SOEs.

Second, we will improve the system of basic old-age insurance for enterprise employees. We wil l carry out trials of individual accounts for basic old-age insurance, and work out reform measures for establishing a system of old-age insurance for employees of public service institutions.

Third, in conjunction with the reform to establish a salary system for civil servants based on position and grade, we will increase benefits for some people with special difficulties.

Fourth, we will conscientiously help solve the problem of people being unable to meet basic living expenses. We will accelerate the development of urban community health clinics and the establishment of urban and rural medical assistance systems to gradually solve the problem of inadequate and unaffordable medical services. We will establish a social welfare system and further consolidate the fruits of our efforts to ensure that all urban residents entitled to basic living allowances are now receiving them. We will thoroughly study ways to grant social security benefits to farmers whose land has been expropriated. We will support an employment system that treats urban and rural workers equally, work out a way as soon as possible to gradually resolve the issue of social security for rural migrant workers in the cities, incorporate all such workers into the workers' compensation program in accordance with the law, and explore suitable programs to pay for serious medical problems and old-age benefits for rural migrant workers. Localities that are able should explore ways to establish a system to guarantee that rural residents have a minimum standard of living. We will continue to do a good job of providing special assistance to entitled groups and helping demobilized military personnel return to civilian life. We will strongly support production safety and disaster prevention and relief work.

Fifth, we will do everything we can to prevent and control highly pathogenic avian flu. We will again increase spending on the development of the public health system and improve its ability to prevent and control serious diseases. We will ensure adequate funding for disease prevention and control and corresponding infrastructure requirements. We will also adopt effective fiscal and tax policy measures to support the development of the poultry industry, and work out ways to support the development of a public health system for preventing and treating diseases affecting humans, livestock and poultry in both urban and rural areas.

5. Promoting independent innovation and transforming the pattern of economic growth. Increasing our capacity for independent innovation is the key to raising China's scientific and technological level and core competitiveness, a major link in efforts to adjust the industrial structure and transform the pattern of economic growth, and the only path to sustained, steady and fast economic growth and sustainable economic development.

First, we will greatly increase government spending on science and technology. In accordance with the requirements set forth in the Outline of the National Program for Long- and Medium-Term Scientific and Technological Development (2006-2020) and the Eleventh Five-Year Program for Scientific and Technological Development, we will allocate 71.604 billion yuan from the central government budget for science and technology, an increase of 11.526 billion yuan or 19.2% over the amount for 2005; local governments will make corresponding increases in spending as well. This policy will encourage society to have a higher regard for scientific and technological innovation and to increase investment in science and technology. We will increase financial support for basic research, research in cutting-edge technologies, research in technologies for public benefit applications, science and technology infrastructure development, and efforts to increase application of science and technology. We need to rationally apportion the money allocated to research bodies (centers) between normal operations, research projects and improvement of basic research conditions, and provide steady, continuous support to organizations engaged in basic research and research in technologies for public benefit applications. We will improve the management of funds by using the money spent on science and technology more effectively and gradually establishing a system for evaluating the performance of government funds spent on science and technology.

Second, we will make full use of the role of tax policies in promoting scientific and technological progress. We will fully utilize tax support measures to encourage and guide enterprises to increase spending on science and technology and develop key technologies for which they own intellectual property rights. We will work out tax policies to support technological innovation in enterprises and encourage the development of related venture capital enterprises. We will improve import and export tax policies, encourage the import of energy-related and resource products, and high-tech equipment and corresponding parts, and limit the export of resource products, highly polluting products, and products that consume excessive quantities of energy. Preferential tax policies for imports will gradually be shifted from entire pieces of equipment to major materials and parts that Chinese enterprises need to develop products and equipment for which they own the intellectual property rights.

Third, we will improve the financial system and wealth distribution system in enterprises. We will accelerate reform of their financial systems to establish a financial management system suitable for a modern corporate structure that will also encourage independent innovation. We will reform the wealth distribution system in enterprises to allow them to use stock options and similar methods of encouragement to reward key scientific and technological personnel for outstanding contributions and to attract outstanding scientists and technicians. We will strengthen the function of government procurement policy in supporting domestic production of important new- and high-tech equipment with domestically-held intellectual property rights.

Fourth, we will formulate and implement fiscal and tax policies to support the development of a circular economy. We will make the prices of resources better reflect their true value by establishing a pricing mechanism that ensures that the prices of resources reflect their relative abundance or scarcity. We will gradually implement the system of compensation for mining rights to promote the rational use and comprehensive development of mineral resources. We will gradually increase support for clean production, renewable resources and the development of new energy resources. We will coordinate funding to focus efforts on promoting R&D in science and technology required for development of a circular economy, expanding application of such technology and building major demonstration projects of a circular economy. We will use fiscal and tax policy measures to guide the formation of production and consumption models that help conserve resources and reduce pollution. We will support the establishment of sound policies and mechanisms for ecological improvement and environmental protection. In accordance with a principle of making polluters pay for pollution, we will gradually increase charges for discharging pollutants, giving full consideration to the scarcity of resources and environmental protection costs in order to fully reflect environmental factors in production costs. On the basis of a principle of making project developers responsible for protecting the environment around their projects and making end-users responsible for compensating for any environmental damage they cause, we will gradually establish a sound mechanism for making those responsible pay for ecological damage. We will promote commercialization of pollution treatment, starting with the treatment of urban wastewater and garbage. We will increase spending on preventing and controlling pollution, improving the ecology, and develop pilot and demonstration projects to protect the environment, and on enhancing government capability to manage and oversee these areas.

6. Increasing transfer payments to promote balanced development among regions. Making the level of basic public services more equal across the country and promoting balanced development among regions are objectives in the operation of public finance and important requirements for creating a harmonious society.

First, we will increase financial support for underdeveloped areas to help old revolutionary areas, ethnic minority regions, border areas and other poverty-stricken areas develop more rapidly. The central government will allocate 135.9 billion yuan in 2006 for general transfer payments to local governments, mainly those in the central and western regions, an increase of 23.8 billion yuan or 21.2% over the amount for 2005. The transfer payments include 20 billion yuan for ethnic minority regions, 4.077 billion yuan or 25.6% more than in 2005.

Second, we will increase spending on efforts to alleviate poverty through development. The central government will allocate 13.7 billion yuan in 2006 for poverty alleviation through development, 700 million yuan more than in 2005. We will focus on supporting infrastructure development in poor villages, mainly to improve production and living conditions there. We will support the industrialization of agriculture in poverty-stricken areas, mainly to improve the way agricultural production is organized and raise the productivity and incomes of poorer villagers, as well as help poor rural workers receive training for nonagricultural jobs.

Third, we will implement all fiscal and tax policy measures in the general strategy for regional development. We will focus on implementing preferential fiscal and tax policies to develop the western region and rejuvenate northeast China and other old industrial bases. We will work out ways to formulate fiscal and tax policies to promote the rise of the central region. We will support the eastern region to lead the country in development.

7. Supporting reform and improving the socialist market economy. Reform is the engine that drives development and is an important guarantee for success in scientific development.

First, we will support SOE reform. The central government will allocate 33.8 billion yuan to continue carrying out policy closure or bankruptcy of SOEs and to relieve enterprises owned by the central government of their obligation to operate social programs. We will organize trial solutions for the problem of SOEs running collectively-owned factories in the northeast.

Second, we will support steps to deepen reform of the banking system. We will focus on finding a way to reform the system for managing state-owned financial assets to promote the creation of an internal restraint mechanism for policy banks and mechanism for their sustainable development. We will support deepening of the reform of the rural banking system to improve services in rural financial institutions.

Third, we will further improve the tax system. We will implement the reform to allow the tax on new enterprise equipment to be included in the deduction for the VAT throughout the country as soon as possible. We will implement the revision of the tax threshold for salaries for the individual income tax. When conditions permit, we will implement the reform to introduce a sales tax on some resource products and luxury consumer goods. We will carry out trials in some areas for the use of simulated appraisals to determine real estate taxes and carry out reforms in taxation for resources, vehicles and boats, and arable land. We will promote reform to collect corporate income taxes at the same rate regardless of form of ownership. We will continue to support structural reform and innovation in grain distribution, public service institutions, foreign trade, the postal service and housing.

8. Increasing funding to guarantee success in efforts to strengthen government authority. In order to consolidate and expand the progress achieved in alleviating the financial difficulties of counties and townships, we will continue to improve the policy of "three rewards and one subsidy." In 2006 the central government will allocate 21 billion yuan for rewards and subsidies, an increase of 6 billion yuan over the amount for 2005. We will also work out the proper distribution of revenue and responsibility for expenditures among governments at different levels, focusing on improving fiscal management at the provincial level and below. We are allocating 5.93 billion yuan to improve lower-level courts and procuratorial, judicial and public security organs in impoverished areas, 1.12 billion yuan or 23.3% more than in 2005. We will allocate 280.729 billion yuan for national defense, an increase of 36.025 billion yuan or 14.7% over the amount for 2005, in order to raise soldiers' pay by a suitable amount and strengthen the army's capability to fight a defensive war with the application of high technology, to respond to emergencies, and to safeguard the country's sovereignty and territorial integrity. We are allocating 8.5 billion yuan for foreign aid, 1.03 billion yuan or 13.8% more than in 2005, in order to strengthen international exchanges and cooperation. The central government is setting 15 billion yuan aside to improve the country's emergency response capabilities, an increase of 5 billion yuan over 2005, and local governments will increase their allocations accordingly. Financial guarantees for other important programs that are necessary to follow a scientific outlook on development and that serve the overall interest of reform, development and stability are also contained in the central government budget.

III. Doing Good Work to Ensure Successful Implementation of the 2006 Budget

In accordance with the general requirements for the work of the government in 2006, we will concentrate on the following tasks.

1. Paying close attention to collection and management of tax and non-tax revenue to promote steady growth in government revenue. On the basis of strong support for economic development and efforts to enlarge the economic "pie," we need to improve revenue collection and management in accordance with the law, collecting as much as possible of the revenue that is due and preventing revenue erosion. We will also strictly control tax reductions and exemptions, promptly stop following favorable tax policies that are no longer in effect, and firmly curb and correct unauthorized tax reductions and exemptions in disguised forms such as policies to first collect taxes and then refund them. Finally, we will work hard to establish and standardize order in tax collection and strictly prosecute people committing tax fraud and all similar types of illegal activities. We will further improve management of non-tax revenue and continue to look for and tap potential sources of non-tax revenue. We will work out standard methods for managing non-tax revenue and expand the current scope of the management of non-tax revenue to gradually include income from use of state-owned assets, income from state capital operations, income from franchise operations, revenue from fines and confiscations, and revenue from contributed funds. We will separate management of revenue and expenditures more strictly and pay particular attention to doing a good job in special tasks to lighten financial burdens and establish order in the areas of education, farmers and enterprises. We need to improve dynamic monitoring and management of revenue, strive continually to raise the quality of analysis for revenue monitoring, plug all loopholes, ensure steady revenue growth, gradually combine overall arrangements for tax and non-tax revenue and improve regulatory capability at all levels of government. We will do a good job of formulating and implementing the Eleventh Five-Year Program for Financial Development, actively seek effective ways to deal with township and village debt, guard against and defuse financial risks, and promote sustainable development of the public finance.
 
2. Guaranteeing funding to maintain the "five balances" and combating waste and extravagance. Although the size of the economy has been consistently growing in recent years along with a rapid increase in government revenue, we still need to keep our heads clear and become more alert to the possibility of danger. China is still in the primary stage of socialism. Safeguarding stability, promoting development, supporting reforms, and maintaining the "five balances" all require financial support and guarantees, leading to mounting pressure to increase expenditures in these areas. Just because government revenue growth has been pretty good absolutely does not mean we can start spending money as if it grew on trees. We must meet expenditures just as they are listed in the budget for key programs such as carrying out reform to establish a mechanism for guaranteeing funding for rural compulsory education, expanding the trial reform to set up a new type of rural cooperative medical care system, and promoting more innovations in science and technology. It is not only the central government that needs to ensure adequate funding in this regard; local governments also need to ensure they have enough funds to cover expenditures and leave no planned expenditures whatsoever without definite financial backing. We must meet the requirements of the "two imperatives" [It is imperative to always be modest, prudent and free from arrogance and rashness in our work and it is imperative to continue following a principle of hard struggle and plain living, tr.] by strictly managing expenses and being economical wherever possible, focusing efforts on holding down expenses for meetings, receptions and official car use, and taking effective measures to control the number of unnecessary forums, celebrations, and international conferences. We must also resolutely put a stop to the building of "image projects" and "vanity projects" and combat unplanned and redundant development. We will promote performance evaluations, oppose waste, extravagance, and frivolous squandering of funds, increase standardization, security and effectiveness of the use of budgetary funds, and promote the building of an economy-minded society.

3. Adopting new revenue and expenditure items in the government budget to further reform of the budgetary management system. The reform in the classification of revenue and expenditure items in the government budgets represents an innovation in the budget management system, one that has great significance for efforts to increase the transparency of the budget, improve budgetary management and oversight, attack corruption at the root and promote development of socialist democracy. On the basis of a careful review of our experience with the 2005 simulated trial classification of revenue and expenditure items in the budget, we will improve corresponding measures to gradually develop a scientific, standardized system for classifying budget items. The new headings for budget items will officially go into use in the 2007 budget. We need to further deepen the reform to implement a system of departmental budgets and a treasury management system. Both the central and provincial-level governments will expand the scope of the reform to centralize all expenditures through the treasury to all lower-level governments that prepare their own budgets, gradually expanding the scope until all government funds are included in the reform. This reform will also be carried out at the prefecture and city level and active measures will be taken to extend the reform to the county level. We need to promote the horizontal computerized integration of the accounts of finance departments and tax departments with the treasury and reform of the system for collecting and managing non-tax revenue to set up a sound mechanism for collecting and managing revenue. We will standardize management of government procurement and strengthen international coordination and cooperation in government procurement policy through operation of procurement policy, striving to push the scale of government procurement over 300 billion yuan. We need to promote introduction of outstanding balance management for the national debt to establish a scientific and flexible mechanism for managing it. We will promote the development of the Government Financial Management Information System to improve the online platform and security system for managing information on government finance. The management of state-owned assets in government administrative offices and public service institutions needs to be strengthened by improving related legislation to monitor all their assets and liabilities. Studies need to be conducted to address issues related to setting up a budgetary system for the operation of state capital.

4. Managing public finance in accordance with the law and improving oversight and management of public finance and basic accounting work. The Program for Promoting All Aspects of Law-Based Administration will be implemented, and we will promote revision of the Budget Law and the Law on Corporate Income Tax to improve legislation governing public finance. In accordance with the unified arrangements of the Central Committee and the State Council, we need to promote more openness in government work, formulate and introduce corresponding implementation measures, and willingly subject ourselves to public scrutiny. A sound oversight mechanism needs to be set up for public finance, one that covers all facets of public finance and follows transactions from before to during to after the fact. We will give full play to the positive role of oversight of government financial affairs in improving the market economic system, establishing and standardizing order in the market economy, ensuring implementation of macroeconomic policy for public finance, and enhancing the performance of government funds. We will formulate and introduce new accounting standards and auditing standards to form a system of accounting and auditing standards that meets the requirements for the development of China's socialist market economy and is more in line with international practices. Trustworthiness and professional ethics need to be strengthened through education. We need to improve the system of internal controls and corporate culture for enterprises and accounting firms, do a good job of managing and developing the profession of certified public accountants and appraisers, strictly manage and oversee the profession, improve the quality of information, and strengthen public trust in the profession. While increasing efforts to introduce innovations in the system of public finance management, we must willingly subject ourselves to the oversight of the NPC and auditing authorities, heighten our sense of mission and sense of urgency, strengthen our sense of responsibility to the people for managing public finance, improve oversight and management for the use of government funds, improve internal mechanisms, continuously promote standardization of the work of managing public finance, and prevent all types of violations of the laws and regulations governing financial and economic matters.

The year 2006 marks the start of the Eleventh Five-Year Development Guidelines. It is very important that we satisfactorily implement the budget and complete all facets of our public finance work. Under the leadership of the Central Committee with Comrade Hu Jintao as General Secretary, we must hold high the great banner of Deng Xiaoping Theory and the important thought of Three Represents and firmly instill and diligently implement a scientific outlook on development. In accordance with the requirements set at this session for economic and financial work, we will willingly subject ourselves to the oversight and guidance of the NPC for public finance work, solicit comments and suggestions from the CPPCC, make substantive changes in our work practices, carry out careful survey and research work, work hard to serve the overall interest of the country, enlarge the economic "pie" and the scale of public finance, put people first, be innovative and take the initiative in offering a hand, and contribute to promotion of sustained, fast, balanced and sound development of the national economy and smooth attainment of the objectives set in the Eleventh Five-Year Development Guidelines!

(China.org.cn March 16, 2006)