China has announced a record budget deficit of 950 billion yuan (US $139 billion) for 2009 - the highest in six decades - as the impact of the global financial crisis eats into the country's revenues, forcing it to resort to deficit financing that is nine times higher than last year's deficit of 111 billion yuan.
According to a prepared text of Chinese Premier Wen Jiabao's statement distruibuted to the media at the opening of the parliament's annual session this morning the total deficit is less than 3 per cent of China's GDP.
Despite the rise in deficit spending, the reduction of China's constant deficit in previous years will allow it to issue more bonds this year, Wen Jiabao, stated in the government's report to parliament.
"The ratio of the cumulative balance of outstanding government bonds to GDP, which is around 20 per cent, is within the acceptable range of what our overall national strength can bear and is therefore safe," the report said.
China set this year's central government deficit at 750 billion yuan, 570 billion yuan more than last year, and additionally, the state council, or cabinet, will allow local governments to issue 200 billion yuan worth of government bonds through the ministry of finance, which will go into provincial budgets, says the report.
The deficit is a result of its planned fiscal spending for 2009, budgeted to reach a peak of 7.6 trillion yuan, up 22.1 per cent from 2008, as the government proposes to mop up investments in 15 sectors including housing and transportation.
"We intend to significantly increase government spending," said Jiabao, adding,"This is the most active, direct and efficient way we will be able to expand domestic demand."
According to him, the large deficit is due to deteriorating government revenues with the economy slowing and reduction of tax burdens.
He further added that preliminary calculations of the comprehensive implementation of the value-added tax (VAT) restructuring will reduce the burdens on enterprises and individuals by approximately 500 billion yuan this year.
A range of measures including tax cuts, rebates and exemptions will be adopted to promote enterprise investment and consumer spending and stimulate the economy.
On the whole the government plans to withdrawn or suspend 100 administrative charges by this year, the premier disclosed.
While continuing to increase investment in key areas, the government plans to strictly control regular expenditures and intends to reduce administrative costs, he added
The swelling deficit is part of China's proactive fiscal policy finalised in November after industrial output growth dropped for the fifth straight month, to 5.4 per cent year-on-year in November – the slowest in nine years indicating the Chinese economy was slowing as a result of the global slowdown. (See: China industrial output growth hits a 9-year low in November)
Recession in the US, Europe and Japan pulled the rug from under China's exports, and for the first time in seven years the galloping Chinese economy saw its impressive year-on-year growth of exports dropping drastically in February as consumers in the West started to reign in spending. (See: Recession pulls rug under China's exports). Falling export demand has slowed investments that has made 20 million migrant workers jobless, accentuating fears of massive social unrest.
Accordingly, the Chinese government intends to add another 120 billion yuan to boost the country's agriculture and announced plans to raise the average minimum procurement price for all grain products by 13 per cent from 2008, in order to lessen the impact of the global economic crisis on rural farmers.
In January, foreign direct investment inflows to China fell for a fourth month in a row, declining by 32.6 per cent from a year earlier as foreign investors withheld investing due to the global economic downturn.(See: FDI to China plunges for the fourth month)