China's sound fiscal situation will continue for the rest of this year, experts say.

Revenue will continue to grow at a higher rate, while expenditure will reach this year's budget or be slightly smaller than the budget, according to Ni Hongri, a senior researcher with the State Council Development Research Centre.

The country's economy would not have big ups and downs, she said.

"The strong momentum in revenue growth will also continue, although the rate might slow down due to the central government's macro-control measures to cool the economy," Ni said.

Since the second half of last year, the central government has taken a series of measures to try to cool down the economy. The measures include raising bank reserve requirements three times and curbing unwanted fixed asset investment projects.

"These measures will have a big impact on value-added tax and enterprise income tax, two important sources for the country's revenue," she said.

A number of policy factors such as a cut in tariffs, tax favours for re-employment, western development strategy, revitalization of Northeast China and "tax-for-fees" reform in the rural areas would continue to lead to a reduction in revenue.

The potential of increasing revenue through beefing up tax collection has also lessened, as revenue growth has surpassed that of the economy for many years.

"The country's fiscal revenue is likely to grow about 20 per cent in 2004," she said.

During the first half of this year, fiscal revenue grew 30.6 per cent or 335.2 billion yuan (US$40.4 billion) compared with the same period a year ago to 1,430.7 billion yuan (US$172.3 billion), accounting for 60.7 per cent of the year's budget, said earlier figures from the National Bureau of Statistics.

Niu Li, a senior economist with the State Information Centre, said he agreed that the nation's revenue growth would continue to be strong, but said expenditure would be reduced because of the macro-control measures.

State expenditure on infrastructure projects has been stopped, because of concerns of economic overheating, he said.

"The government will be unable to achieve the year's expenditure budget," he said.

The government said earlier that this year's budgeted fiscal revenue was 2,357 billion yuan (US$284 billion), an increase of 8.7 per cent, while budgeted expenditure stood at 2,676.8 billion yuan (US$322.5 billion), an increase of 8.8 per cent.

The year's budgeted debt was 319.8 billion yuan (US$38.5 billion).

End to policy

Yuan Gangming, a senior economist with the Chinese Academy of Social Sciences, said the proactive fiscal policy should be blamed for the present's macro-economic situation.

"The government should put an end to proactive fiscal policy," he said.

Yuan said this was necessary, because the government should be prudent in using monetary policy to adjust the economy.

"Overuse of the monetary policy will hit market forces," he said.

The expansive fiscal policy was introduced in 1998 to minimize the negative impact of the Asian financial crisis.

The policy was characterized by increasing government expenditure, mainly on investment in infrastructure projects. The proactive fiscal policy played an important role in fuelling the country's economic development during the past six years.

But as market forces have begun to play an important role in economic development, the proactive policy should fade out in time, Yuan said.

Fiscal policy should pay more attention to public affairs such as public health, social security and environmental protection, he said.

It should also help create a good environment for companies, especially private companies, so that market factors could play a more important role, he said.

"The government should manage to regularize the market and improve the tax environment," he said.

New tax reform schemes such as unifying income tax for domestic and foreign-funded companies and implementing a consumption-based value-added tax policy should be carried out as early as possible.

The threshold for personal income tax levy, which stood at 800 yuan (US$96), should also be raised, because taxation should be aimed at people with high-level incomes to promote economic development and social stability.

Future orientation

China's fiscal system has experienced important changes during recent decades, says Ni.

Great achievements have also been made in fiscal and taxation reform, she said. The system had laid a solid foundation and provided strong financial support for the government to effectively implement macro-control measures.

However, the present fiscal and taxation system are only transitional and could not meet demands from the development of a socialist market economy, she said.

Reforms to fiscal revenue management and expenditure management systems, as well as the central and local budget management system have not been finished.

"The fiscal system has accumulated a lot of experience in adjusting the total volume of economy," she said. But it had played a weak role in adjusting the economic structure, including industry structure and income distribution.

"The existing fiscal and taxation system needs further reform," she said.

The financial side should focus on social public services, rather than developing the economy and fostering financial sources, Ni said.

"The government does not need to collect money to develop the economy first, then to provide public services," she said.

The government should rely on the market to develop the economy, while government finance should be used to meet expenditure demand in public sectors, she said.

First priority should be given to expenditure on national defence, government administration, basic education, a basic medical system and basic social security.

In the coming decades, the ratio of government expenditure on economic construction should be reduced, Ni said.

Substantial reform should be conducted on supply and management of government expenditure for institutions in sectors such as medical and high-level education, she said.

A market mechanism should be introduced and non-government funds should be used to develop science, high-level education and part of medical undertakings.

Ni said the government should try to enhance the role of income tax and raise the ratio of income tax revenue to the total revenue incoming years.

"This would be beneficial for the sustainable development of the country's fiscal revenue," she said.

It would also be beneficial for the adjustment of income distribution.

The fiscal system could better play the role of auto stabilizer for the economy, she said.

Since China initiated reform and opening-up in 1979, the government has conducted two major, all round fiscal and taxation reforms, in 1983-1984 and 1994 respectively.

"The two reforms achieved great success," Ni said. But they also raised many problems.

The third reform, which started this year, could improve some of the existing tax varieties first, then gradually improve the whole system.

"The central government should try to rationalize and regularize the distribution relationship and management system between central and local finance," Ni said.

Local governments could start to levy new taxes such as property taxes to improve local tax systems.

Local governments should also be given the right to levy taxes on their decisions.

The budget law should be revised at a proper time, she said.

(China Daily August 16, 2004)