At a recent meeting focusing on analysis of the current economic situation and economic work, the Political Bureau of the Communist Party of China Central Committee, the top decision-making body, said China needs to implement a proactive fiscal policy and ensure reasonable fiscal spending.
This means the proactive fiscal approach China has adopted since the 2008 global financial crisis will continue for some time in the future.
In the context of the increased pressure on the economy, it is right to maintain proactive fiscal tools, especially when the previous expansionist monetary policy is difficult to sustain and the financial system faces growing risks. But instead of just targeting the expansion of infrastructure investment, China's proactive fiscal policy should focus more on stimulating its economic growth through increased support to the high-tech sectors and expanding fiscal inputs into improving people's livelihoods so as to encourage social demand. The taxes on small and medium-sized enterprises and individuals should be also reduced to motivate their investment enthusiasm on the one hand and control fiscal risks while moderately raising the fiscal budget ceiling on the other.
Fiscal expenditure growth needs to be proportional to GDP growth, given that any considerable cut in fiscal spending will possibly lead to economic deflation. However, it is important for the country to moderately reduce its investment in infrastructure construction to coordinate the ongoing supply-side reform and eliminate surplus industrial capacity. That top decision-makers recently put the stress on "reasonable fiscal spending" while promising to maintain a proactive fiscal policy is a reflection of a positive change of approach to the previous policy obsessed with infrastructure construction.
It is time local governments stopped their addiction to infrastructure investment for short-sighted economic performance. To push for a fundamental economic structural transformation, the traditional active fiscal policy should be endowed with some new aspects.
