From Cover, issue no. 339, October 29th 2007
Translated by Zuo Maohong
Original article: [Chinese]

What do we do with this year's state revenue surplus?  This is the key question a deputy minister of Ministry of Finance posed while briefing the Standing Committee of the National People's Congress on a mid-October day.

As He Keng, a member of the tenth standing committee of the NPC recalls, this is the first time the Ministry voluntarily consulted the committee on the issue before taking action.
For several years, state revenues have exceeded budgets, and what to do with the surpluses remains a great concern of the government. In the past, the NPC has been informed of how the funds were spent only afterwards. It has been long been the NPC's wish that the Ministry report its plan for the expenditures beforehand. 

By the Ministry's count, this year's state revenues surplus will reach 700 billion yuan.
 
The First Volunteer Report Ever
The ultimate use of the surpluses weren't publicized until 2005, when the Ministry of Finance discussed the matter in its final budget and accounting report to the NPC. "Since that point, reporting on the surplus has become protocol." says Sun Gang, a researcher at the Institute for Fiscal Science under the Ministry of Finance.

But reporting on the expenditures after the fact doesn't guarantee appropriate and effective allocation to taxpayers and the NPC. But this is backed by China's Budget Law, which prescribes the government's right to independent decision on the arrangement of the surplus, and its freedom to choose whether or not to report its plans to the NPC beforehand.  
 
During the revision of the Budget Law last year, the NPC insisted that the law include a provision requiring government bodies to report ahead of time on how surpluses would be liquidated, but the proposal was bogged down as policy makers failed to reach a consensus.
"The surplus is so massive, the NPC has to know how its money is spent." says He, adding that the Congress will resurrect the proposal in the next congress.

As the Institute for Fiscal Science forecasted, state revenues this year will amount to over 5 trillion yuan. A surplus of 700 billion stands at 14 percent of this figure.

How to Spend?

The Ministry of Finance has to work out an expenditure program as soon as possible.
The NPC Finance and Economics Committee has been disappointed with liquidation of the surpluses during the past two years. According to He, the dissatisfaction arises from doubts over the necessity of exhausting all available funds. 

"We are now facing a fiscal deficit of up to 300 billion yuan. The surplus should be put towards narrowing the deficit," he says.

It is reported that that when consulting the NPC in mid October, the Ministry stressed that it would avoid splitting the funds into smaller chunks, which are usually too small for any significant projects, for distribution among various ministries and provincial governments this year.

The Ministry suggested that the funds be directed towards education, health care, environmental conservation, social security, food security, historical problems, reducing the deficit, and adding to funds meant to stabilize the budget.

He says the NPC agreed on the suggestion, but the Ministry has to prioritize the choices.

He says that last year, 20 billion yuan of last years surplus was used to reduce the deficit. The NPC suggested this time that should be reduced from 300 billion yuan to 200 by using the surplus revenues. In response, the Ministry promised to increase the proportion used for deficit reduction.

A general framework of the expenditures has yet to be reported to the State Council, and even more details would need to be specified after the Council's approval. "After all, this is not just an issue for the Ministry alone, but for all the ministries," adds He.

There are big challenges awaiting the Ministry, which must balance between the State Council and the NPC, says He.

The Budget Puzzle

The budget approved by the NPC early this year anticipated 4.4 trillion yuan of state revenues, a 13.8 percent growth over last year's. However, as the Institute calculates, the number is very likely to exceed 5 trillion. 

Sun explains that the Ministry tends to use the most pessimistic and conservative projections for revenues when budgeting. An official in the Ministry who wishes to remain anonymous says, "No one agrees to set a budget too big to balance."

This year's state revenue growth will be approximately 30 percent, double the original estimate. Such a sharp rise, Sun believes, largely stems from stricter taxation management. He adds that it's also hard to predict how revenues will pan out as the year progresses.

One example is that it only took four months for the stamp tax on securities trading to reach its budgeted number. As the stamp tax rate rose at the end of May and the stock market continued to flourish, income from stamp tax totaled 143.6 billion yuan by September, far exceeding the budget of 20.1 billion yuan. By some counts, revenues from the stamp tax alone contributed to a 4.7 percent increase in all state revenues.

Stepping back, revenues of the past three quarters closely match those for the whole of 2006.  This sets a new record in revenue growth, says Shu Qiming, director of Planning and Statistics Division under the State Administration of Taxation.

But this makes some researchers uneasy. Private enterprises are under an increasingly heavy tax burden, says Bao Yujun, chairman of All-China Society of Private Economy Research.
The Seventh Survey on Private Enterprises shows a median tax of 260,000 yuan, which contrasts against a median profit of 210,000 yuan. A rapid expansion of revenues is not in the least a happy occurrence, says Bao.

The greatest concern lies in the potential for departments and ministries to be prodigal in their hurry to spend.

"This is what we at the NPC frequently refer to as the science of budgeting," says He. "What's the point of budgeting if the funds made available aren't used? Current budgeting is so simplified that the 2,000 delegates have no idea where the money exactly goes, including the experts among them."

Chen Shu, a representative of the NPC, complains that the present budgets fail to divide items by whether they are meant for projects or people, and therefore funds for projects are often squeezed to make way for administrative costs. It's meaningless to examine the report if such details are not clarified, Chen says.

"Budget reform is the fundamental solution to the current problem. But reform faces various challenges, which arise from the interests of ministries." He says.