By Xi Si (席斯)
Economic Observer Online
Dec 6, 2011
Translated by Song Chunling
Original Article: [Chinese]

The Ministry of Finance recently held a video conference to dicuss the problem of how "excess revenue" should be spent, for the first time officials raised the proposal that some of the excess revenue should be set aside to reduce the size of the government's fiscal deficit and thus reduce the amount of debt that the government needs to take on.

Liao Xiaojun (廖小军), the deputy finance minister, explained that aside from reducing the deficit by a certain amount, excess revenue will also be used to increase spending in the education and technology porfolios, a portion of the money will also be used reimburse local governments for various taxes that the central government has collected, along with transfer payments to supplement local government revenue. The remaining funds will be channeled into the special "central budget stabilization fund" (中央预算稳定调节基金), a special "rainy day" fund where excess fiscal revenue is deposited and released when needed.

Local governments will also be instructed to spend their excess revenue in accordance with the same principles. Aside from ensuring that spending on education as a proportion of GDP reaches certain targets and also backing the construction of subsidized housing, excess revenue at the local level will also be used to meet local government debt obligations as they reach maturity and will also used to replenish "local budget stabilization funds."

As the country approaches the end of the calendar year, it's estimated that the government will collect close to 1.4 trillion yuan more in revenue than it had budgeted for at the start of 2011, but at the same time officials have budgeted for a 900 billion yuan deficit - this figure includes a central government deficit of 700 billion yuan and 200 billion yuan in bonds that will be issued by the central government on behalf of local authorities and be included in local government budgets

In the past, such excess revenue was usually spent on education, subsidized housing and a small portion of it also went to the budget stabilization funds, but none of the additional revenue went to paying down debt. This led to a confusing situation where excess revenue coexisted alongside sizable deficits.

A similar situation exists on the local level, where cash rich governments are not using additional revenue to shrink their deficits.

"With so much excess revenue, the deficit should be reduced and the issuance of new government bonds over the next few months should be halted," says Stephen Green, an economist with Standard Chartered Bank.

In accordance with the plan released at the start of this year outlining the timetable for the issuance of 900 billion yuan in government bonds through a total of 31 rounds of bidding over a 12-month period, 2 bond sales are scheduled to take place in December, one for 3-year bonds and the other for 10-year bonds.

Given that the Ministry of Finance has already released a formal notice announcing that the sale of the 3-year bonds will take place on Dec 8, this has led scholars to conclude that the government only plans to reduce the fiscal deficit by a rather small amount.