With multiple fiscal challenges in 2023, China needs a more balanced fiscal policy

The annual Central Economic Work Conference held in December 2022 made it clear that major efforts will be taken to boost the recovery and expansion of consumption and to support private businesses and the real estate sector. 　

In doing so, the government will adopt a proactive fiscal policy with more “intensified” efforts and more “effective” results to boost the economy. 　

The wording has been widely interpreted that China will expand the budget deficit and scale of government bonds in 2023. But the question is how much room is left in the government’s coffers to adopt a more expansive fiscal policy. 　

For a long time, China kept its fiscal deficit below 3 percent of GDP, a psychological ceiling that is considered should not be breached. But during the Covid-19 pandemic, the government ramped up spending to combat the pandemic and shore up economic growth. The deficit ratio increased from 2.8 percent of GDP in 2019 to 3.7 percent in 2020 and 3.1 percent 2021. 　

According to government data, China’s fiscal spending amounted to 22.73 trillion yuan (US$2.66t) during the first 11 months of 2022, 4.18 trillion yuan more than its fiscal revenue in the same period. Assuming China’s GDP growth is 3 percent in 2022, the fiscal deficit ratio could further increase to 3.8-3.9 percent of the GDP in 2022. 　

In 2023, China will continue to face major challenges regarding its fiscal policy. First, although China has relaxed its Covid-19 policies, we are yet to see how the economy will respond and it is very likely that economic growth will remain sluggish in the early months of 2023 as China experiences initial waves of Covid-19 infections. As a result, China’s fiscal health will only start to improve in the second quarter. 　

Second, despite the launch of various support measures, China’s property market crises may continue well into 2023. It is estimated that the real estate sector, along with related industries, contributed 35.9 percent of China’s fiscal revenue in 2019, and the slump in the property market over the past couple of years had a major impact on China’s fiscal revenue. 　

Third, local government debt risks will remain a major concern in 2023. As local governments’ income from land sales has declined due to the collapse of the real estate market, they will continue to be under huge pressure to repay principals and interest. The central government will inevitably shoulder some responsibility for their fiscal deficits. 　

Finally, external factors such as geopolitical tensions, exported inflation and the ongoing trend of de-globalization will continue to pose a risk to China’s economic growth and fiscal well-being in 2023. 　

To improve its fiscal situation, China can ask State-owned enterprises to hand over more profits to provide fiscal support. According to the budget for 2022, State-owned institutions are to hand over 1.65 trillion yuan (US$244b) in profits to the state coffer. The government can also increase the issuance of bonds to raise funds. 　

But in general, the existence of these fiscal constraints means that China will not resort to a large-scale stimulus plan to boost its economy. Instead, China needs to seek a balance between boosting growth and controlling risks.