Minister: proactive fiscal policy 'a must' to counter slowdown

China's finance minister said an expansionary fiscal policy is a "must" to prevent a sharp economic slowdown even though the deficit rate could rise to its highest level since the financial crisis.

The economy faces pressure from weak global recovery and domestic constraints, Lou Jiwei said at a news conference during the annual session of the National People's Congress yesterday.[Special coverage]

Signs of recovery remain unclear for the United States, and China is laden with obligations to cut debt, Lou said.

"We must adopt a moderately expansionary fiscal policy in coping with downward pressures, as we deleverage the economy step by step while preventing it from nose-diving," he said.

The government has raised its budget deficit to 1.62 trillion yuan (US$259 billion), or about 2.3 percent of GDP, compared with 2.1 percent last year.

It was the widest since the 2.8 percent deficit recorded in 2009, when the government unveiled a 4 trillion yuan stimulus package in response to the global financial crisis.

The actual fiscal deficit was 1.8 percent last year, and an unspent 112.3 billion yuan from the past two years' budgets was transferred to this year's expenditure plan.

Lou said the transfer is part of the authority's efforts to boost fiscal revenue along with measures to lift consumption tax on fuel and the proportion of profits that should be paid to the government by state-owned companies and tobacco firms.

The central bank's decision to cut interest rates could also improve fiscal conditions as central and local governments could lower their funding costs from bond issuance.

China will keep its macroeconomic policy stance unchanged this year, vowing a proactive fiscal policy and prudent monetary policy, according to the government work report released on Thursday.

A proactive fiscal plan denotes a moderately expansionary policy that creates demand and stimulates the economy primarily by expanding domestic investment.

The government has ruled out major stimulus measures as China is still struggling with the aftermath of the 2009 stimulus that resulted in a mountain of local government debt.

Lou said local governments will repay more than 100 billion yuan of debt this year and the ministry is reviewing local government reports of debt burdens so as to map out reforms targeting their root cause.