China's official deficit is no longer a meaningful measure as its budget system evolves

China's 2024 budget, released in March, indicated a decline in the fiscal deficit ratio to 3 percent of GDP, prompting some analysts to assert that the budget provides little fiscal support to the economy. But China's budget is in fact slightly more expansionary than last year's actual expenditures.  

The misunderstanding derives from the fact that the official deficit does not represent China's actual fiscal situation. The number refers only to the general government bond issuance in the General Public Budget, which is China's main budget that covers spending on public services and national issues, and does not consider any special government bonds managed under the Government Funds Budget, which is dominated by local governments and draws most revenue from land sales for spending related to land development, infrastructure, and urbanization.

To assess the actual fiscal stance, the State Capital Operation Budget and the Social Insurance Budget, which are connected with the General Public Budget in different ways, also need to be considered.
 

• The State Capital Operation Budget, which draws revenue from dividend payments from state-controlled enterprises, mostly for spending related to state firms themselves, runs a small surplus every year, most of which is transferred into the General Public Budget as supplementary revenue.
• The Social Insurance Budget, which draws revenue from social insurance payments for social security outlays, receives more than 20 percent of its revenue from fiscal subsidies out of the General Public Budget and the State Capital Operation Budget every year. After this subsidy, the Social Insurance Budget often runs a small surplus, which goes into reserves.¹

In addition, supplementary funds from past reserves are considered current revenue by the Chinese government in calculating its official deficit. Those funds are brought into the budget to lower the underlying deficit in the General Public Budget to its target level. But since those funds are essentially from past reserves, they should be treated as financing in assessing scale of fiscal stimulus.

According to the 2024 budget, more than RMB 2 trillion in supplementary revenue (about 1.5 percent of expected GDP) will contribute to government spending, more than double the level in the year before. Without considering that, the underlying deficit in the General Public Budget would be 4.5 percent of expected GDP, close to the level in 2023. With the other budgets also considered, China's consolidated budget deficit for 2024 will be 7.2 percent of expected GDP, 1.4 percentage points higher than last year.

This PIIE Chart is adapted from Tianlei Huang's Working Paper, Lessons from China's Fiscal Policy during the COVID-19 Pandemic.

Note

1. A recent exception happened in 2020 when the Social Insurance budget run a small deficit, largely due to the suspension of employer social security contribution, a temporary measure introduced by the government to deal with the pandemic shock. The deficit was financed mostly through the budget's own reserves accumulated over the years. But the National Social Security Fund, a rainy-day fund, also allocated RMB50 billion to cover a small part of that deficit. Therefore, excluding the Social Insurance Budget balance would lead to an underestimated consolidated deficit in 2020.