2010-2011 China fiscal policy analysis
China ministry of finance undersecretary Wang Jun made a speech in the fourth international taxation dialogue system plenary session. He pointed out that, “from now on, China government will keep put into effect on positive fiscal policy and stable monetary policy, which are aimed at improving the pertinences, flexibility and foresight of fiscal policy.” (Wang, 2011)

The policy and target
Review back to 2010, China government insists in implementing positive fiscal policy, especially in stimulating the economic growth, transferring the way of economic growth and applying flexible in fiscal policy. As the figure 1 shows, in 2010, China positive fiscal policy facilitate in mainly four aspects: advancing the local fiscal reformation, strengthen the medium-sized and small enterprises and rural construction, promoting the economic development and supporting the social undertaking.
Figure 1: Year 2010 China important fiscal policy content Coming out date | Fiscal policy | 4.30 | Treasury department sets fiscal policy: central budget provides specialized fund for helping to expand the minor firms ‘guarantee operations, which can improve the financing environment of minor firms. | 5.13 | Treasury department and SAT (State Administration of Taxation) make an announcement; government will solve the problem that farmers are hard to get loan, by diminishing the sales tax and income tax. | 5.31 | Government will start the trial allowance work in 5 cities for buying new energy cars in personal. This policy is aimed to advance the process of energy saving and emission reduction. | 6.8 | Treasury department will accelerate the contract energy management, facilitating the development of energy saving service industry. Central budget will arrange 2 billion for supporting energy saving service company. | 10.22 | Treasury department and SAT set new policy to support and improve employment taxation preferential in 2011. | 12.14 | Treasury department indicate that China will set a low annual import tax for resources, materials and key parts products. |
Source from the people’s Republic of China (PRC) Treasury Department tidy.

The economic theory related to the fiscal policy
When the economy state becomes overheating and having inflation risk, the government usually will put to use the tight fiscal policy. The policy means to raise the taxation and reduce the government expending or investment. And the tight monetary policy, which means to restrict the number of the money supply or delay the rate of supply. (1999, p56) And when the government takes the tight fiscal policy, the representation in IS-LM curve is: the IS curve is shifting to the bottom left. And the reason for this movement is because the taxation rises and at the same time the government expending will reduce. After the government expending get down, the government consumption and investment will reduce at the same time. At present, the LM curve is not changing. Due to the amount of the money for business is not reducing. The supply of money is bigger than the demand of money. And the homologous rate is descending. The new balance rate will become small than before when the new IS-LM curve formed. And the revenue will become smaller. This result will lead to restrict the economy overheating and the inflation. Although the decreasing rate will make the personal investment rise at the same time, in general, the GDP will get down because of the government tight fiscal policy. (Robert, 1989)

When the nation economy move forwards to the recession, China government announced the 4 billion RMB investing plan to promote China economy. And the 4 billion RMB investing plan can be as the increasing of the government purchases. So the IS curve will move forwards to the top right. And the point of intersection with the LM curve also will move forwards to the top right. So the output and the interest rate will both increase. And the expanding fiscal policy, the phase in this situation means the increasing government expending. The increasing government expending will participate in the nation economy as an investment form. And with the increasing of the employment rate, the nation revenue will increase as well. When the revenue of the nation increases, the consumption will be stimulated. The nation revenue will double increase via the multiplier effect. In the IS-LM model, the IS curve will shift right, the nation revenue and the interest rate will both rise. But due to the rising interest rate, some personal investment will be squeezed out.

China is executing the positive fiscal policy. The positive fiscal policy means to increase government purchase and reduce the taxation. And the policy also means to increase transferring payment. These policies are aimed to face the insufficient demand at present in China. China needs to expand domestic demand, especially the consumption demand. By the way, the stable monetary policy is the retrench monetary policy exactly. The inflation is serious at present China, appropriate retrench monetary policy is good for reducing the currency inflation risk.

The effect of implementing the policy
After Lehman Brother s Holdings crashed, the international financial crisis broke out in September, 2008. China economy situation suddenly in a trouble, the four quarter commercial run get down fast. And the foreign trade output is turn to minus. Central government set several stimulated fiscal policy to control the serious situation. For example, 4 billion investment plan, ten industries promoted planning, expanding the consumption and stable the output. With the stimulation of these fiscal policies, China economy comes back to normal.
In 2010, China economy continues the last year’s trend. The first three quarters in 2010, GDP increases by 10.6%. Compared to last year, the same time is accelerating to 2.5 percent. For the industry aspect, the first industry increases by 4.0%, as same as the last year. The second industry increases by 12.6%, which is accelerating to 4.5 percent when compared with last year. The third industry increases by 9.5%, which is fast than last year by 0.4 percent. The economy growth slowly every quarters, and the chart line is high then low. There are mainly two reasons: one is the base number is raise uninterrupted. (Zhao, 2011) In 2009, the economy running present “ qian di hou gao”, and the trend impact on 2010. The other is the initiative regulate and control by policy. In 2010, government generally comes on the regulating and controlling of the real estate, standard the local financial platform and increasing the policy to the energy conservation and emission reduction. Thus it can be seen, in 2010, the “qian di hou gao” situation of 2010 economy is because the base value and the policy regulating and controlling by itself. And the economy is running stably. According to the first quarter, the increasing rate has reached to 11.9%, Steve give the conclusion that the economy is overheating. Or base on the recession of the economy speed of second half year, giving the conclusion that the economy is coming to the bottom. These two conclusions are proved to be wrong.

Figure 2: China quarter GDP trend chart

Source from the people’s Republic of China (PRC) Treasury Department tidy.

And with the lead of positive fiscal policy, China fiscal policy budget performance is in good condition. The fiscal revenue is growing fast and every main point of spending get good guarantees. As the figure 2 shows, in year 2010, the cumulated fiscal revenue is 8308 billion, and compares the data to the last year, the revenue in 2010 increase 1456.2 billion and the increase percentage is 21.3%. The reason that fiscal revenue grows fast is due to the high growth economy. And the high growth economy establishes the basic of tax resources. Otherwise, the positive sales situation drives the vehicle purchase tax and vehicle consumption tax grows substantially. In addition, the price level increase is also an important reason for fiscal revenue.
In expending aspect, the whole year fiscal expending is 8957.5 billion, compared to last year, the expending in 2010 is increasing 1327.5 billion, and the increase percentage is 17.4%. The framework of expending will be optimized to move forward a single step. The main spending supports the education, medical treatment and public health, social security, employment and housing security and so on. The expending expands the input to the “triple farm”.

Figure 2: 2006-2010 China fiscal income and expenses condition change (unit: a hundred million yuan)

Source from the people’s Republic of China (PRC) Treasury Department tidy.

The coming out policy
In 2011, China have to shoulder more arduous task, the main reason is the monetary policy transfer “loose and comfortable” to “steady”. This change will bring the double stress of economy growth and control the inflation to fiscal policy generally. 1. The fiscal deficit should be reduce
Ministry of finance minister Xie Xun Ren point out that, “according to the economy back to normal and inflation become more obviously, government decides to reduce the fiscal deficit.” (Xie, 2011) In 2011, central fiscal deficit is 700 billion, and central replace the local government to issue funds 200 billion. The total nation fiscal deficit predict to 900 billion. According to the arrangement, 2011 the total nation fiscal deficit will be about 2%. According to the data from the Treasury department, China fiscal total revenue exceeds the budget nearly 1 billion in 2010. And in common, the exceeded part will be change over to budget stable adjusted funds, and the rest of the part will be arrange for the next year expending. So the good condition of fiscal revenue in 2010 will keep a space for 2011. After the economy crisis, the inflation stress becomes more and more serious. Because of America quantization loose policy, the global liquidity is overflow. Nowadays, the economy situation has changed a lot. So China does not need the massive government thrill investments like two years ago. The initiative of personal investment has come back in 2010. And economists predicted that the folk strength will form complementation with fiscal investment. If government investment takes a large percentage will extrude the folk investments. It may cause the loan problem when they are in stable policy environment. So government reduces the fiscal deficit and the scale of government investment. The fiscal expending will get down. 2. Reducing taxation in constitutive property
Keep on implementing the tax reduction is one of the main points of positive fiscal policy in 2011. And the taxation in constitutive property can use the tax reduction to stimulate the production and supply, which can diminish the stress from the inflation. The taxation in constitutive property can help to maintain the growth of the economy. In addition, the tax reduction in allusion to the firms and the residents can enhance the ability to prevent the inflation. This measurement can balance the bad influence to the economy growth brought by the tight money supply. And at the beginning year of the “Twelve Five”, China will increase the privilege policy of income tax reduction to the small size and meager profit firms.

The suggestion to the fiscal policy
In order to promote the transferring of the developing way and economic structural adjustment, I consider that China should strengthen and improve financial management system. And treasury department should accelerate the construction of the domestic demand system. Enhancing the basic status of the agriculture must be one of the important events to be noticed.
China should enhance and improve the dynamics of the people’s livelihood. And China should accelerate the construction of the new socialist countryside, advancing the development of the urban and rural. Education justice, income distribution, social security, medical treatment and public health should be considered by fiscal policy.
The most important thing that I think is the reformation of fiscal and taxation systems. According to the require of the financial resources and powers or authority of office, China should straighten out the relations of distribution among the governments at all levels. Building up a perfect and comprehensive fiscal and tax system for the public.

List of reference

Heyne, P. T., Boettke, P. J., Prychitko, D. L. (2002): The Economic Way of Thinking (10th ed). Prentice Hall.

Larch, M. and J. Nogueira Martins (2009): Fiscal Policy Making in the European Union - An Assessment of Current Practice and Challenges. Routledge

Barro, Robert. “The Ricardian Approach to Budget Deficits.”Journal of Economic Perspectives 3, no. 2 (1989): 37–54.

Mankiw, N. Gregory. Macroeconomics. 5th ed. New York: Worth, 2003. A textbook presentation aimed at undergraduates.

O’Neal, 2006, Microeconomics: Asian Perspective, 1st edn, Pearson Education South Asia Pte Ltd, Singapore.

Zhao, Ye 2011, ‘The Review of China Fiscal Policy after the Reforming and Opening’, Journal of local fiscal taxation, vol.60, no.4, p.18.