In the wake of complex internal and external conditions, the fiscal policy, bearing the heavy responsibility of stabilizing growth, is poised to adopt a more proactive and robust approachThis shift comes at a time when the economic landscape is challenging, characterized by low pressures from economic downturns and a sluggish property and land marketAs such, the anticipation of greater fiscal expenditure is more pronounced, navigating the landscape of rising government debt as a necessity to sustain this spending.

Experts have analyzed that next year’s fiscal policy will reflect a significantly more aggressive stance than this year, with new debt issuance anticipated to surpass 10 trillion yuan, possibly reaching around 15 trillion yuanThis projected shift in fiscal expenditure strategy aims to optimize how funds are allocated: moving from an investment-centric focus towards a dual emphasis on both investment and consumer spending

It will prioritize enhancing and securing public well-being while supporting technological innovation and stabilizing the housing market, ultimately guiding economic performance towards a reasonable trajectoryAdditionally, plans for fiscal and tax system reforms will aim to bolster local autonomous financial capabilities while establishing a more structured government debt management system to facilitate a high-quality economic development path.

“Unconventional” measures may extend beyond merely raising the deficit ratioPositive fiscal policies, also recognized as expansionary fiscal policies, involve government actions designed to stimulate economic recovery through increased spending, reduced taxes, expanded deficits, and the issuance of government bonds or transfer paymentsThis macroeconomic adjustment strategy has been in place since the aftermath of the 2008 international financial crisis, with varying degrees of intensity year-on-year.

The level of fiscal expenditure in China is often measured through two primary accounts: the national general public budget expenditure and government fund expenditures

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According to Zhang Jun, the chief economist at China Galaxy Securities, the predictability of expenditure from the general public budget is generally higher than that from government fund budgetsThe latter leverages a "spending determined by revenue" budgeting approachIn recent years, government fund budgets have faced challenges due to local land transfer revenues consistently falling short of budget goalsFrom this perspective, next year’s intensified fiscal policy will require increased certainty in the government’s general public budget expenditure.

Data from the Ministry of Finance shows that in 2023, national general public budget expenditures are approximately 27.5 trillion yuan, achieving 98% of the budget with a growth of 5.4%. For the first ten months of 2024, the expenditure is around 22.2 trillion yuan, representing a year-on-year growth of 2.7%. The expected total for the general public budget for the full year of 2024 is around 28.6 trillion yuan, reflecting a 4% increase compared to the previous year

One significant reason for this year’s lower-than-anticipated expenditures is the underperformance in tax revenue growth.

Given the need for fiscal counter-cyclical adjustments, forecasts suggest that next year’s national general public budget expenditure growth target will be around 5%. Consequently, the narrow deficit ratio (the national general public budget's deficit as a proportion of the total economy) may be adjusted upwards to about 3.5% to 4%. Short-term challenges such as reduced tax and land revenues indicate that government debt will play a critical role, especially since enacting new taxes poses significant difficulties during economic slowdownsIncreasing the deficit ratio emerges as one of the most straightforward and effective tools within fiscal policy.

With the finance minister’s remarks in mind and considering the socio-economic development needs for the upcoming year, experts project that the deficit ratio will likely exceed 3%. Many industry representatives believe the possibility of reaching a deficit ratio of around 4% is growing stronger

Wang Qing, the chief macro analyst at Dongfang Jincheng, anticipates that with a more aggressive fiscal approach in place, the national general public budget expenditures might reach around 30 trillion yuan by 2025, marking a growth of about 6%. This unusual counter-cyclical fiscal regulation may manifest heavily through a significant increase in the deficit ratio, forecasted to rise from about 3% this year to 4% next year.

Nevertheless, crucial data on fiscal expenditures and deficit ratios will remain to be disclosed during the national legislative sessions next yearAs China possesses considerable room for debt issuance, alongside insufficient domestic demand and amplified external shocks, the manner in which deficit ratios are selected remains a focal point of concern.

In particular, Luo Zhiheng, the chief economist at Guangdong Development Bank, points out the unique symbolic significance of the deficit ratio compared to other fiscal tools

The public tends to judge the proactivity of fiscal policies primarily through this metric rather than comprehensive indicatorsAlthough a deficit ratio of 3%, 3.5%, or 4% may comparatively differ marginally in absolute terms, the signals released and implications for stability can vastly divergeThus, he advocates for an enhancement of the deficit ratio to 4% as this could aid in stabilizing expectations and confidence, stimulate capital markets, and quicken expenditures through ordinary government bonds vis-à-vis special bonds.

Currently, within the framework of China’s fiscal system, merely observing the scale of the deficit doesn't suffice to evaluate the rigour of fiscal policiesThe current deficit primarily pertains to the national general public budget, capturing expenditures both ordinary and extraordinary; however, special bonds and local government bonds, which influence expenditures but are not categorized under deficit considerations, need to be recognized.

Recent years saw a notable decline in government fund income primarily due to the real estate market sluggishness, affecting land transfer revenues, which represented substantial components of government fund income

Consequently, the Chinese government has relied on issuing special bonds and raised quotas for local government bonds to stabilize expenditures under the government fund bracket.

As per fiscal ministry reports, the national government fund budget expenditure is projected at about 10.1 trillion yuan for 2023, a drop of 8.4% year on yearIn the first ten months of 2024, government fund expenditures are approximately 7 billion yuan, experiencing a year-on-year decrease of 3.8%. Amidst a nearly 23% decline in land transfer revenues this year, the continued reduction in expenditure reflects the impact of 1 trillion yuan in ultra-long-term special bonds and an additional 4 trillion yuan in new local government bonds.

Concerning the more powerful fiscal policies anticipated for next year, Lan Fongan highlighted the plan to expand the issuance of special bonds, diversify investment areas, and enhance the ratio of funds allocated as capital

There are also intentions to continue the issuance of ultra-long special bonds to support national major strategies and key area security establishment.

Moreover, efforts to stabilize the real estate sector involve amplifying the application of special bonds to facilitate recovery of idle land resources and purchase of existing purchase housing for welfare projectsGiven previously confirmed debt conversion limits amounting to 800 billion yuan, many experts project that the new local special bond issuance could surpass 4 trillion yuan, with estimates as high as 4.5 trillion yuan.

Wang Qing predicts that next year’s local government land transfer revenue may remain in the negative growth amplitude, adversely impacting government fund expenditureHowever, beyond the confirmed debt conversion limits, the new special bond issuance could range from 4.5 trillion to 5 trillion yuan, incorporating space allocated for land storage

This would substantially offset the impacts of local government land transfer income declines, presenting critical support for government fund expenditure.

Beyond regular fiscal instruments, there’s increasing attention on special bonds categorized as unconventional policiesZhang Jun opines that within government fund budgets, ultra-long special bonds should play a more prominent role compared to local special bonds that face diminishing project yields and reducing viable investments.

His projections for the issuance of ultra-long special bonds next year may rise from the current 1 trillion yuan to a range of 1.5 trillion to 2 trillion yuanThe orientations of such funds could expand further into education, health care, and pensions, integrating welfare and consumption stimulation more effectivelyMoreover, he estimates that special bonds aimed at supplementing core capital for commercial banks will hover around 1 trillion yuan.

Luo Zhiheng recommends a continuation of the issuance of 1 trillion yuan in ultra-long special bonds next year, alongside a potential issuance of 3 trillion yuan in special government bonds; out of this, 1 trillion yuan for bank capital supplementation and 2 trillion yuan to establish a ‘real estate stability fund’ dedicated to guaranteeing housing completion and facilitating the acquisition of existing residential properties or stockpiled land from real estate companies.

Considering forecasts from the experts consulted, if taking into account an additional 2.8 trillion yuan earmarked for replacing local government implicit debt, the government’s total new borrowing capacity is projected at around 15 trillion yuan

Excluding this conversion quota suggests an increase of about 12 to 13 trillion yuan.

When examining the vigor of positive fiscal policies, it is essential to not only reflect on the scale of spending but also to analyze how expenditure is structured to enhance spending efficacyLuo Zhiheng emphasizes the necessity of shifting fiscal expenditure focus from investment-centered patterns to balanced growth between investment and consumer spendingBoth investments and consumer spending are crucial; however, the direction of investments remains pivotal.

“Infrastructure investment should align with population mobility, structural shifts, and augmenting potential economic growth ratesFuture fiscal expenditures should take a dual approach towards investment and consumer spending to tackle residents' concerns, thereby increasing investments in healthcare, education, and pensions to assimilate migrant labor into urban settings and heighten consumer propensity,” he elaborated.

Wang Qing concurs that infrastructure investment will need to maintain a strong growth pulse into 2025, but fiscal support policies should be increasingly directed towards household consumption

He suggests that, when necessary, direct consumer subsidies could be issued to residents, thus yielding a prompt impact on expanding domestic demand and enhancing public perception of the economic adjustments being taken amidst fluctuating macroeconomic indicators.

Zhang Jun predicts considerable investment requirements—over 1 trillion yuan annually— to facilitate urbanization within the next five years, relying heavily on sustained fiscal engagementThe success of consumption-supportive policies launched this year has manifested appreciably, suggesting continuity in consumer subsidy strategies into next year, with the potential to further broaden the scope to areas of short replacement cycles and heightened demand such as consumer electronics or service sectors.

In discussions regarding the need for extensive tax cuts or fee reductions next year, experts generally concur that, given fiscal feasibility and anticipated policy effects, the necessity for broad reforms may be limited