Not the Tax Cut: Some Chinese Provinces Report Declining Tax Revenues

More signs of a slowing economy visible in fiscal data that shows revenue slowdowns accelerating, with some provinces and local governments tipping into revenue contraction. In a vacuum, it's not surprising to see falling revenues following a tax cut and a major economic slowdown. What makes this story curious is China reports GDP growth above 6 percent. The fiscal situation makes it look more like an economy on the cusp of a nationwide recession.

On July 16, the Ministry of Finance announced the fiscal revenue and expenditure in the first half of 2019. The data shows that in the first half of 2019, the national general public budget revenue was 10,784.6 billion yuan, a year-on-year increase of 3.4 percent, a decrease of 7.2 percentage points over the same period last year.

At the press conference, Liu Jinyun, director of the Treasury Centralized Payment Center of the Ministry of Finance, explained to the national fiscal revenue in the first half of the year that due to the tax reduction and fee reduction policy, the growth rate of fiscal revenue in the first half of the year was reduced, especially with the implementation of the new VAT policy. The national general public budget revenue growth for the quarter was only 0.8 percent.
Notably, the 3.4 percent YTD increase is down from May: China's fiscal revenue up 3.8 pct in first five months. The economy is slowing.
According to the data released by the Ministry of Finance, the national general public expenditures in January-February, January-March, January-April, January-May, and January-June increased by 14.6%, 15%, 15.2%, 12.5%, 10.7% respectively. In the same period, the national general public budget revenue was 7%, 6.2%, 5.3%, and 3.8%, respectively.

Overall, in the first half of this year, the year-on-year growth rate of fiscal expenditure has slowed down, but it is still significantly higher than the growth rate of revenue during the same period.

Tang Jianwei believes that the current gap between revenue and expenditure growth is large, and there is definitely pressure on fiscal balance. However, in the context of this year’s central government’s proposal to achieve “six stables” through the counter-cyclical adjustment of policies, the fiscal balance should not be the focus of fiscal policy when the proactive fiscal policy is to be further “strengthened”.
VAT taxes are also falling after the initial tax cut hit.

JRJ: 全国财政收入增速放缓 弥补减税缺口成焦点
Such a large-scale reform has achieved immediate results: according to the data of the State Administration of Taxation, the overall net tax reduction was 221.8 billion yuan between April and May this year alone.

However, the landing of the policy has also had a significant impact on fiscal revenue: in January-February, January-March and January-April this year, domestic VAT revenue increased by 11.3%, 10.7% and 12.4% respectively. With the formal declaration of enterprise value-added tax under the preferential tax policy in May, the growth rate of domestic value-added tax revenue fell to 6.8% from January to May and further fell to 5.9% from January to June.

"The large-scale tax reduction reflects that fiscal policy is increasing its effectiveness." In an interview with Times Weekly, Yang Zhiyong said that although tax cuts and fees will affect fiscal revenue in the short term, they will play a role in broadening the tax base in the medium and long term, boosting the release of economic vitality, and in the long term they will enhance fiscal revenue and high-quality development capability.
The U.S. under President Reagan slashed taxes and there was no dip in revenue, in part because the U.S was coming out of a recession. China is supposedly growing its economy faster than 6 percent in real terms, let alone nominal. Revenues should be slowing less than the tax cuts, not more than the tax cuts.
Some provinces and local governments report falling fiscal revenue.

Yicai: 首个地方上半年财报公布,北京财政收入同比降2.5%
In the first half of this year, Beijing's general public budget revenue was 317.09 billion yuan, down 2.5% year-on-year, with rare negative growth, hitting a new low in recent years.

The main reason for the negative growth of Beijing's fiscal revenue is the impact of large-scale tax cuts and tax reductions.

In terms of major taxes, Beijing’s first-largest tax value-added tax in the first half of the year was 98.82 billion yuan, up 6.1%, an increase of 5.2 percentage points from the same period of the previous year. This is mainly because the new VAT rate policy entered the first in May. During the tax period, the effect of tax cuts began to appear gradually.

...However, it is worth noting that the general public budget revenue in the first five months of Beijing fell by 4.4% year-on-year, while the decline in the half-year data has narrowed. According to the budget report at the beginning of the year, Beijing expects that the general public budget revenue for the whole year is expected to increase by 4%.
The annual target of tax reduction and reduction of nearly 2 trillion yuan has been completed more than half. However, the growth rate of fiscal revenue has slowed down markedly. Some provinces have even experienced negative growth in fiscal revenues. The financial impact of grassroots governments has been even greater. Some regions in the less developed regions of the central and western regions have even had large financial gaps.
What must China do to generate positive growth? Only what it has failed to do for a decade: reform.
The rationale for tax reduction and fee reduction is the famous “Laffer curve”: tax cuts can stimulate corporate investment and promote economic development. After the tax base is expanded, even if the tax rate is low, government revenue can increase. However, tax cuts can reduce the burden on enterprises, but they do not necessarily activate the economy. The effect depends on a series of deep institutional factors. If structural reforms fail to keep up, tax cuts may lead to the most unsatisfactory situation: the economy continues to decline, fiscal revenues and expenditures are further unbalanced, and business operations have not improved fundamentally. In order to make the tax reduction and fee reduction measures effective, the Chinese government should spend more energy to comprehensively deepen the system reform, accelerate the pace of state-owned enterprise reform, break the administrative monopoly, expand market access, improve the business environment, and effectively strengthen the entrepreneurial and innovative activities of private enterprises. stand by. The potential growth rate of China's GDP is declining. This is not only a problem in the development stage, but also a consequence of institutional constraints. This is an insurmountable "iron gate" for tax reduction and fee reduction.
财新: 减收缺口如何补
In the first half of this year, the national tax reduction and fee reduction was 1,170.9 billion yuan, making fiscal revenue only increase by 3.4% year-on-year, lower than the expected growth rate of 5%. Provinces such as Beijing, Chongqing, Guizhou, Xinjiang, Gansu, Qinghai, and Jilin even experienced negative growth.

  This situation is expected. Shortly after the end of the "two sessions" in the country, the Ministry of Finance issued a document requesting all localities to do a good job in budget management of revenues and expenditures, multi-channel open source to make up for revenue reduction, and hardening budget expenditure constraints to ensure the implementation of tax reduction and fee reduction policies.

  “Just like living at home, what should I do when I am in trouble? I have to sell valuable things, but I have to tighten my pockets.” A local financial department told the Caixin reporter.

For local governments, the easiest way is to make a fuss about state-owned assets, or sell state-owned assets such as factories and administrative institutions, or increase the profits taken from state-owned financial institutions and state-owned enterprises. The second is to recover the balance carryover funds and increase the coordination of various funds.

The problem is that the decline in fiscal revenue caused by tax cuts and reductions is long-term, and the measures commonly used to fill the gaps in the localities are mainly concentrated on the income side, and some of the income is one-off and not sustainable.

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