China’s 2024 budget turns expansionary, but will it be fully spent?

China’s draft budget for 2024, submitted to the National People’s Congress on March 5, drew attention in the West because of its proposed 7.2 percent increase in military spending.[1] Less noticed, however, was the fact that overall budget spending growth is 7.8 percent, a rate higher than military expenditure growth, making the 2024 budget slightly more expansionary than last year’s budget expenditures.

At a time when the Chinese economy is plagued by a property crisis, consumer wariness, deflation, mounting debts, and uncertain trade prospects, China’s policymakers are evidently counting on a fiscal boost to fill the gap. But that boost will not be fully realized if actual spending falls short, as happened in previous years. China needs to ensure that it spends its budget fully to help achieve its ambitious GDP growth target of 5 percent.

China’s budget spending will increase as share of GDP for first time since 2020 if it is fully expended

Officially, China’s 2024 budget deficit drops to 3.0 percent of expected GDP from 3.9 percent in 2023. But that headline deficit number covers only the General Public Budget, omitting the other three budgets that the Chinese government runs nowadays. With all four budgets taken into consideration, China’s consolidated budget spending in 2024 will increase by 7.8 percent from 2023, higher than the implied nominal GDP growth forecast that can be inferred from the budget report. The Ministry of Finance reported in the 2024 budget that the planned headline fiscal deficit for 2024 will be RMB4.06 trillion or 3 percent of GDP, suggesting that the Ministry expects nominal GDP to reach RMB135.3 trillion, an increase of 7.4 percent from the prior year before adjusting for inflation.

Measured in GDP share, consolidated budget spending is 36.1 percent of expected GDP, a tenth of a percentage point higher than 2023. If the budget is fully spent, consolidated fiscal spending in 2024 will increase as a share of GDP for the first time since 2020 (see figure 1). The consolidated budget deficit (with supplementary revenue treated as financing) in GDP share will also expand from 5.8 percent in 2023 to 7.2 percent in 2024 (see figure 2), though that expected rise in the deficit ratio stems largely from a decline in the expected revenue in GDP share.

To boost economic growth, Beijing plans a noteworthy step. It will issue “ultralong special treasury bonds” for an unspecified number of years. These bonds will not be counted in official headline deficits. In 2024, RMB1 trillion in such special treasury bonds will be issued to fund “implementation of major national strategies and building security capacity in key areas.” The budget report does not specify what those strategies and areas are, but the chairman of the National Development and Reform Commission said at a recent press conference the money would be spent on several areas that require long-term investment, including technology and innovation, balanced development between urban and rural areas and between different regions, food and energy security, and high-quality population development. Another focus of spending is likely to be directed mainly at advanced manufacturing and the digital economy, such as electric vehicles and artificial intelligence, labeled as “new quality productive forces” and emphasized in this year’s Government Work Report. This spending is intended to replace the sagging real estate sector as new engines for growth and improved productivity of the Chinese economy.

Despite its lack of details, Beijing’s fiscal plan signals the central government’s intention to take on greater debt, easing the burden on local governments, whose spending capacity has been squeezed by the housing downturn. In addition, the central government plans to take on some capital investment on its own with the special treasury bond proceeds this year. Its planned spending in the Government Funds Budget for 2024 is a record amount of RMB871 billion, an 80 percent increase from 2023 and almost double the size of its expected revenue, suggesting it will draw on its financed funds for part of the planned investment. This step is rather unusual because the central government in the past usually just remitted the entire proceeds of its special treasury bond issues to localities and let local officials decide how to spend them. That said, the planned investment by the central government is still tiny relative to that by local governments, which still accounts for most of the capital investment planned in the Government Funds Budget. But it suggests a gradual shift toward a bigger investment role by the central government.

Local governments may not be able to spend the budget fully

The Chinese government’s total spending has fallen short of its budgets repeatedly in recent years, by an average of 4.6 percent between 2020 and 2023. The reasons for that underspending in previous years are still in place, which will likely make Beijing’s intended fiscal boost to the economy fall short again this year.

For one, the 2024 budget once again makes an overly optimistic projection of land sale revenue in the Government Funds Budget, which probably reflects the government’s hope that the land sales market can further stabilize this year. But there is still considerable uncertainty in the market, despite a mild recovery in late 2023. With more developers now entering debt restructuring processes, local governments will likely see their land revenue continue to shrink this year. Given budget spending in the Government Funds Budget is largely determined by revenue projection, due to the fiscal principle “spending according to revenue” mandated in China’s Budget Law, a lower-than-projected revenue would eventually lead actual spending to fall short. This happened in 2022 and again in 2023.

For different reasons, local governments may not use up all the new RMB3.9 trillion special bond quota by the end of 2024. Last year, local governments failed to spend at least RMB388.7 billion out of the RMB 3.96 trillion in total special bond issues. These shortfalls occurred regularly during the COVID-19 pandemic, undermining the government’s intended fiscal stimulus. A problem that hampered the spending was Beijing’s requirement that these local special bonds be used only in infrastructure and public welfare–related projects that can generate sufficient returns to cover interest payments of the bond issues. But local governments, especially in less developed inland provinces, cannot find enough projects that can meet the central government's requirements, partly because of their overinvestment in infrastructure in previous decades. To the government’s credit, this year’s budget report acknowledges these problems, and it pledges to allocate more special bond quota to regions with sufficient projects ready for investment.

Now that China has announced an ambitious growth target of around 5 percent for 2024, it is critical that the government spend its budget fully to help achieve that goal. If during budget execution, it turns out either land sale revenue falls short or local special bond utilization lags, Beijing needs to be prepared to adjust the budget, just as it did in late 2023, in order to make sure that its planned spending can be fully realized.

Note

1. See, for example, “China’s military spending is a growth certainty amid rising tensions,” Financial Times, March 5, 2024, and “China Defense Spending to Climb 7.2% as Xi Pursues Buildup,” Bloomberg, March 4, 2024.