The fiscal situation for the first three months of this year was healthy. This period featured the highest revenue growth and lowest expenditure increase since 1998.

By April 20, the increased fiscal revenue reached 161.6 billion yuan (US$194.7 billion), well above the 158.7 billion yuan (US$19.1 billion) increased revenue budgeted for 2003.

In spite of the excellent situation, we should calmly analyze the new features of the fiscal situation and pay great attention to some latent issues.

Special attention should be given to the changes and trends of the fiscal situation as a result of SARS.

** Fiscal situation

The fast revenue growth since the beginning of this year was mainly because of the fast growing economy, while the central government's goal to maintain a zero growth of ordinary administrative spending was an important reason for the slow growth in expenditure.

The import and export tax, which includes customs duties, value-added tax and consumption tax for exported goods and export tax rebates, also played a restrictive role in fiscal revenue growth.

During the first quarter of this year, all major tax varieties grew rapidly.

The value-added tax and consumption tax collected by customs offices rose a year-on-year by 69.3 percent.

As a result, central government revenue registered a year-on-year growth of 53.7 percent.

The tax rebate, which results in a reduce in revenue, also had a great impact on fiscal revenue.

During the first quarter of this year, the tax rebate was 25.9 billion yuan (US$3.1 billion), a decrease of 36 percent compared with a year ago.

But for the first three months of 2002, customs duties dropped 24.3 percent.

Value-added tax and consumption tax collected by customs offices dropped by 0.5 percent.

The tax rebated for the period increased 94.6 percent.

As a result, the central government's fiscal revenue grew slowly during that period of last year.

The above situation suggests that the import and export tax following China's accession to the World Trade Organization has begun to impact greatly on the country's fiscal revenue.

During the first quarter of this year, fiscal expenditure obviously slowed down, largely due to a reduction in investment.

** Trends

The performance of China's fiscal situation for the coming several months will mainly be decided by the impact of SARS.

It has become a general trend that the revenue growth will decline while expenditure will grow.

Due to negative economic impact of SARS, the fast fiscal revenue growth will ease.

With an aim to alleviate the financial burden of SARS-hit sectors such as aviation companies, tourism agencies and catering firms, the government has decided to reduce or exempt part of their taxes.

The tax favors will result in a reduction of tax revenue.

The speed of revenue growth already dropped in April, and the speed of this growth will further decline in May.

Because of the SARS outbreak, the government will have to set aside a certain amount of money to fight against the disease.

In order to maintain economic growth, the government will also have to speed up investment in accordance with the budget.

The fiscal situation for the entire year will depend on how long SARS lingers.

The fiscal budget will have no problem if SARS only lasts about three months.

** Some suggestions

The government should pay special attention to several issues, including delaying tax rebate payments, which will have a significant impact on China's fiscal and financial situations next year or in the mid-term.

Last September, the government adjusted tax privileges, which are enjoyed by companies when importing new equipments from abroad, with the aim of reducing and limiting these tax favours.

The relevant regulations stipulated that the government will at first levy import tariffs and value-added tax on companies importing equipment used for foreign-funded projects.

The tax and tariff will be returned to the companies in five years.

The policy resulted in a big increase in the year's amount of tax. But the tax which needs to be returned to companies will increase in the coming years.

By the end of 2002, the delayed payment of tax rebates reached more than 247 billion yuan (US$29.8 billion).

The government paid almost no refunds for 2002 and 2003 to companies in several major provinces and municipalities.

This suggested that the fiscal revenue growth was partly due to the delay in tax rebate payment.

If the government increases tax rebate by 50 billion (US$6 billion) during the first quarter of this year, the revenue growth would drop 3 to 4 percentage points.

With an aim to deal with the problem of an insufficient floating capital suffered by foreign trade companies, which resulted from the delay in tax rebate payment, relevant government departments agreed that these companies could borrow loans from banks by showing the refund certificates.

The loans through this method accounted for a dear ratio of the total in some areas such as Ningbo in East China's Zhejiang Province.

Some foreign companies became more reliant on this kind of loans, because of a fast growth in foreign trade and the slow growth of tax rebates.

This will have negative impact on commercial banks' business.

Despite that, fiscal revenue grew at a double digit rate during the past quarter, the conflicts between revenue and expenditure continued to be serious.

The SARS outbreak introduced a lot of uncertainties.

It is still unknown how much of an impact will have on fiscal revenue and expenditure.

With an aim to spread the "fees-for-tax'' reform to the whole country to reduce farmers' financial burden, the government will have to provide enough money for rural education, sanitation, and the normal operation of rural administrative organs.

The upgrading of old industrial bases and the deepened reform of the economic mechanism will also require fiscal support.

Editor's Note: The author is a senior research fellow with the Development Research Centre under the State Council

(China Daily May 26, 2003)