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Yu Miaojie:China should consider 4% fiscal deficit target to cushion virus impact


To cushion the economic impact of the coronavirus epidemic and maintain relatively fast growth in 2020, China should pursue more aggressive fiscal policies coupled with more relaxed monetary policies. The country should consider proposing an annual fiscal deficit target of 4 percent of the gross domestic product (GDP) and increasing its infrastructure investments. 

Following the outbreak of the epidemic, the government has swiftly adopted a series of flexible and relaxed monetary measures to ease pressure on companies, particularly small and medium-sized enterprises (SMEs), which has effectively prevented them from suddenly losing access to liquidity and failing. On Thursday, the People's Bank of China (PBC), China's central bank, cut the one-year loan prime rate (LPR), which domestic commercial banks use to decide their actual lending rates, by 10 basis points, the largest cut since LPR mechanism reform last August. Such policies are expected to benefit the majority of China's enterprises.

But we should be well aware that, as indicated by a great deal of research, aggressive fiscal policies are often much more powerful than monetary ones when it comes to boosting growth in the short term. The adopted monetary policies can support SMEs in enduring the heavy blow from the virus, but can't convince them to increase investments and expand production, especially as they are facing such great uncertainty.

It's also impossible to boost growth by merely increasing investments in state-owned enterprises (SOEs), as most are located in the downstream of industrial chains. Their raw materials and intermediate products are supplied by SMEs and private companies. If private companies and SMEs are not willing or unable to increase investments in economic recovery after the epidemic, SOEs will not survive independently.

In addition to tax and fee cuts, another important fiscal policy tool is increasing infrastructure investments, especially in roads, railways and airports. Some may worry that expanding infrastructure investments may lead to overcapacity or other issues, but such concerns are currently unnecessary. First, many regions still have sufficient demand for such projects. Second, as shown by the experiences of many economies, after an economy suffers a blow, it usually requires government investment and infrastructure construction to escape trouble in the short term.

However, more aggressive fiscal policies, particularly resorting to infrastructure investment to boost economic growth, often means a growing fiscal deficit. Therefore, the government should consider lifting its fiscal deficit target in 2020 - and there is ample room to do so. Last year, China lifted its fiscal deficit target to 2.8 percent of GDP, up 0.2 percentage points from 2018. In the same year, the US budget deficit widened to $984 billion, which was 4.6 percent of the nation's GDP. China has maintained its fiscal deficit to GDP ratio at a prudent level. Even if it plans a larger fiscal deficit target of 4 percent, it would still be at a moderate level and would not cause any problems.

The author is a deputy dean with the National School of Development at Peking University.

Source: Global Times