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Lou Jiwei: China Faces Serious Fiscal Challenges

Lou Jiwei, a prominent politician, and currently the director of the 13th CPPCC Foreign Affairs Committee, warned that China’s fiscal situation is facing serious danger and challenges. Lou Jiwei made a speech on December 22, 2020, on the topic at the Fifth Forum on Finance and National Governance (2020) and the 40th Anniversary Seminar of “Financial Research.” The full text was published in “Financial Research” 2021 (Issue No. 1).
Lou said, “We (China) are facing major changes unseen in a century. The major changes in the internal and external environment, whether it is changes in the domestic economic and social situation, the global economic downturn, high government debt, and global trade frictions, will make our country’s fiscal sustainability face huge uncertainties and severe challenges.”

“The contradiction between fiscal revenue and expenditures is extremely acute, and fiscal pressure is increasing. Since April 2020, the national fiscal expenditure growth rate has continued to accelerate and has greatly exceeded the growth rate of fiscal revenue. Local fiscal pressure has continued to increase. The fiscal deficits of different regions have maintained an expansion trend. In the medium and long term, due to the impact of the (covid-19) epidemic, the decline in the potential economic growth rate, and the global economic downturn, total national fiscal revenue is expected to remain at a low level over the next five years, while the pressure on fiscal expenditures will remain relatively high. Although the optimization of the fiscal expenditure structure can release part of the financial resources, the expansion of fiscal expenditures has not changed. There is little room for the government to reduce general expenditures. It can be said that financial difficulties are not only near-term and short-term issues, but also very difficult in the medium term.”

“From the perspective of debt, the problem of government debt has increasingly become an important factor affecting future fiscal stability and economic security. From 2009 to 2020, the proactive fiscal policy has been implemented for 11 years, the fiscal deficit has continued to expand, and the debt scale has expanded accordingly. The proportion of debt interest payments in the general public budget expenditures continues to rise. The growth rate far exceeds the growth rate of total expenditures. 2017, 2018 and 2019 exceeded the total expenditure growth rate of the year by 16, 10 and 4.5 percent respectively. From January to November 2020, debt interest payments increased by 16.1 percent over the same period in the previous year, which exceeded the growth rate of total expenditure by 15.4 percent. In 2019, the central government debt interest payment accounted for 13 percent of the central government’s expenditures. It is expected to have risen to about 15 percent for 2020. The problem of local debt is even more prominent, and the accrued local government debt has been increasing rapidly. Although increasing debt in the short term can alleviate the pressure of fiscal shortages, it poses greater challenges to the sustainability of local finances in the future. During the “14th Five-Year Plan” period, the debt sustainability of most provinces and municipalities is worrisome. About a quarter of the provincial fiscal revenues will be used for debt service and interest payments. The local government debt problem not only affects the local government’s public service supply capacity, but also accumulates fiscal and financial risks.”

“Aging will also bring severe challenges to the sustainability of our country’s finances. Statistics show that in 2019, (China) had a population of 253.88 million people aged 60 and above, accounting for 18.1percent of the total population, of which 170.03 million were 65 years old and above, accounting for 12.6 percent of the total population. The aging society is accelerating.”

“At the same time, affected by the global economic downturn and global risks, the external uncertainty of fiscal reform and development has increased. … At present, affected by the impact of the epidemic and the spillovers of major countries’ macroeconomic policies, emerging market countries are facing a double blow from the economy and finance. Economic risks are transformed into fiscal risks and financial risks. The risk of falling into a debt crisis is increasing.”

Source: NETEASE, February, 24, 2021