Full Text: Report on China's central and local budgets

The following is the full text of the Report on the Implementation of the Central and Local Budgets for 2006 and on the Draft Central and Local Budgets for 2007, which was submitted for review on March 5 and approved on March 16by the Fifth Session of the Tenth National People's Congress:

REPORT ON THE IMPLEMENTATION OF THE CENTRAL AND LOCAL BUDGETSFOR 2006 AND ON THE DRAFT CENTRAL AND LOCAL BUDGETS FOR 2007

Fifth Session of the Tenth National People's Congress

March 5, 2007

Ministry of Finance

Fellow Deputies,

The Ministry of Finance has been entrusted by the State Council to report on the implementation of the central and local budgets for 2006 and on the draft central and local budgets for 2007 for your deliberation and approval at the Fifth Session of the Tenth National People's Congress (NPC), and also for comments and suggestions from the members of the National Committee of the Chinese People's Political Consultation Conference (CPPCC).

I. Implementation of the Central and Local Budgets for 2006

Under the firm leadership of the Central Committee of the Communist Party of China and the State Council, and guided by the Scientific Outlook on Development, all localities and departments in 2006 conscientiously followed the principles and policies set by the central authorities and relevant decisions and resolutions passed at the Fourth Session of the Tenth NPC. This resulted in an excellent beginning for the Eleventh Five-Year Plan period, great new achievements in development of the economy and all social programs, and further improvement in people's lives. The central and local budgets were also satisfactorily implemented.

National revenue reached 3.934362 trillion yuan (excluding revenue generated through debt, both here and below), up 769.433 billion yuan or 24.3% from 2005. Total revenue exceeded the budget target by 392.024 billion yuan, consisting of 254.247 billion yuan at the level of the central government and 137.777 billion yuan at the local level. National revenue totaled 3.873062 trillion yuan (not including the 61.3 billion yuan that was used to clear up longstanding arrears in export tax rebates in accordance with regulations), a year-on-year increase of 708.133 billion yuan or 22.4%. This was 330.724 billion yuan or 9.3% over the budget target. National expenditures amounted to 4.021316 trillion yuan, a year-on-year increase of 628.288 billion yuan or 18.5%, representing 104.8% of the budgeted figure.

The separate figures for the central and local budgets are as follows: Total revenue in the central budget came to 2.123231 trillion yuan (not including the 61.3 billion yuan that was used to clear up longstanding arrears in export tax rebates in accordance with regulations), an increase of 397.182 billion yuan or 23% over the figure for 2005. This amount was 196.027 billion yuan or 10.2% over the budgeted figure. It included 2.044977 trillion yuan collected by the central government, 390.124 billion yuan or 23.6% more than the amount for 2005 and 192.947 billion yuan or 10.4% over the budgeted figure. Total revenue turned over from the local budgets was 78.254 billion yuan, an increase of 7.058 billion yuan or 9.9% over the total for 2005. This was 3.08 billion yuan or 4.1% over the budget target. Total expenditures in the central budget amounted to 2.348226 trillion yuan, 322.227 billion yuan or 15.9% more than that for 2005, representing 105.7%of the budgeted figure. Total expenditures included 999.156 billion yuan incurred at the central government level, an in crease of 121.559 billion yuan or 13.9% over the amount for 2005, representing 104.9% of the budgeted figure. Expenditures for tax rebates and transfer payments for local governments totaled 1.34907 trillion yuan, 200.668 billion yuan or 17.5% more than the amount in 2005, representing 106.3% of the budgeted figure. Fifty billion yuan was set aside to establish a new central budget stability and regulation fund. The deficit in the central budget for 2006 was 274.995 billion yuan, 20.005 billion yuan less than the 295 billion yuan approved at the Fourth Session of the Tenth NPC, dropping to 1.3% of GDP. At the end of 2006 the outstanding national debt in the central budget was under the set limit of 3.538168 trillion yuan. Revenue from funds controlled by the central government amounted to 170.687 billion yuan and expenditures from the above funds also amounted to 170.687 billion yuan. Total revenue in local budgets amounted to 3.177155 trillion yuan, an increase of 518.677 billion yuan or 19.5% more than the figure for 2005, representing 107.3% of the budgeted figure. This included 1.828085 trillion yuan collected at the local level, an increase of 318.009 billion yuan or 21.1% more than the amount for2005, representing 108.2% of the budgeted figure. Expenditures in local budgets totaled 3.100414 trillion yuan, a year-on-year increase of 513.787 billion yuan or 19.9%, and 104.7% of the budgeted figure. Total expenditures included 3.02216 trillion yuan spent at the local level, a year-on-year increase of 506.729 billion yuan or 20.1%, representing 104.8% of the budgeted figure, and 78.254 billion yuan turned over to the central government, 7.058 billion yuan or 9.9% more than the previous year, representing 104.1% of the budgeted figure. Local revenue exceeded expenditures by 76.741 billion yuan and this surplus will be rolled over into the budget for this year. These figures may change slightly when the final accounts are prepared.

The overall situation in the implementation of the central budget in 2006 is as follows:

1. Collection and management of revenue was improved in accordance with the law and a high rate of revenue growth was maintained. The Chinese economy enjoyed rapid growth, achieved good performance and maintained relatively low prices in 2006. Based on this, financial, tax, and customs authorities at all levels improved revenue collection and management, actively applied scientific management methods, made a full review of preferential tax policies and standardized them, stringently controlled tax reductions and exemptions and worked hard to collect all taxes due, resulting in rapid growth of revenue of the central and local governments. The increase in revenue is mainly a reflection of China's vibrant economy, but it also demonstrates that the country's revenue collection system is gradually improving and that China's revenue development is stable and balanced to some extent. However, it should be noted that although the key factor behind the rapid increase in revenue is the vibrant state of the Chinese economy with its improved efficiency, other factors, including one-time factors, government polices and non-regular factors also contributed to the increase. These other factors mainly consist of the following: The corporate tax paid by state-owned commercial banks such as the Bank of China and the China Construction Bank increased by a large margin due to increased profits after they became publicly traded companies. A special surcharge was instituted on oil sales. Income from the transfer of mineral exploration and mining rights was incorporated into revenue. Due to the effect of rapid growth in fixed asset investment and industrial production, as well as increases in the prices of resource products, the increase in tax payments from affected industries was also greater than normal. Deducting the increase in revenue due to these factors would result in a growth rate for revenue basically in line with the economic growth rate.

Revenue in the central budget for 2006 exceeded the projected figure by 257.3 billion yuan (before deducting the amount applied to resolve unpaid export tax rebates). Disposal of this surplus amount was carried out according to the uniform planning and arrangement of the Central Committee and the State Council and in accordance with the Budget Law, the Decision of the NPC Standing Committee on Improving Examination and Oversight of the Central Budget and relevant resolutions passed at the Fourth Session of the Tenth NPC. In addition to spending 23.1 billion yuan of the surplus to increase tax rebates and transfer payments for local governments and 1.6 billion yuan to increase spending on education as required by relevant laws, statutes and financial regulations, the central government mainly used the surplus to strengthen weak links in economic and social development, clear up overdue payments and reduce the budget deficit to make financial and economic development more sustainable. Specifically, an additional24.1 billion yuan was spent on the social safety net and an additional 37.2 billion yuan from special surcharge on oil sales was spent to subsidize increased expenditures in agriculture, fishery and forestry due to price increases in oil and to fund major projects in energy development and conservation and in environmental protection. Another 10 billion yuan was spent to increase regular investment in the central budget, which was mainly used to support the building of a new socialist countryside, and an additional 13.5 billion yuan in special expenditures went toward building roads, purchasing oil reserves and providing further aid to residents relocated to make way for the construction of large and medium-sized reservoirs. An additional 3.5 billion yuan was spent to increase funding for the "three rewards and one subsidy" policy, subsidies for farmers and herdsmen in Tibet and for the fight against smuggling, and transfer payments to ports. The additional 61.3 billion yuan that was earmarked for export tax rebate payments was used to clear up the remaining overdue payments. A total of 20 billion yuan was spent to reduce the deficit in the central budget. Another 13 billion yuan was reserved for funding reform of the salary system and related expenses in 2007. In addition, 50 billion yuan was allocated to establish a central budget stability and regulation fund to make compilation of the budget more scientific and appropriate and maintain the stability of the central budget and the continuity of the fiscal policy. Funding and use of the stability and regulation fund come under the scope of budgetary management and are subject to the oversight of the NPC and its Standing Committee. The State Council has reported the above arrangements for the use of the surplus to the NPC Standing Committee.

2. A combination of fiscal and tax tools was used to promote steady and rapid development of the economy. On the basis of the prudent fiscal policy, we in 2006 revised and enhanced policy tools in response to economic developments and changes, relaxing control in some areas and tightening it in others, to make the regulatory function of public finance more effective and better focused. First, we adjusted and improved relevant tax policies. On April 1, 2006, we began making the biggest adjustment in the items and rates of the consumption tax seen since 1994, increasing some items and rates and lowering others. We raised the salary threshold for the personal income tax and increased the deductible amount for the personal income tax for employees of domestic enterprises from 800 yuan per month to 1,600 yuan per month. We adjusted the policy on the natural resources tax. We also adjusted export rebate rates for some products, eliminating or reducing export rebates for more products whose production is high in energy consumption or is highly polluting. In addition, more commodities were added to the list of those not eligible for the processing trade. We introduced export tariffs on some products whose production is high in energy consumption or is highly polluting while lowering import tariffs on some resource products. Tax reforms such as the trial VAT reform in northeast China made steady progress. Adjusting and improving tax policies played a positive role in conserving resources, protecting the environment, guiding consumption in the right direction and indirectly improving income distribution.

Second, we made necessary adjustments in the scale of central government allocations and improved the utilization structure. Central government allocations in 2006 totaled 125.4 billion yuan (including 10 billion yuan from surplus revenue). These funds were mainly used to fund items such as the building of a new socialist countryside, social programs, environmental and ecological protection and the large-scale development of the western region and to fund an appropriate number of major new projects with overall bearing on development. Moreover, the pace of implementation of the budget was regulated to keep it in line with the overall situation in economic development, and the performance of government funds was improved by strictly managing investment and tightening oversight.

Third, we adjusted and standardized fiscal and tax policies for managing housing and real estate revenue and expenditures. The required length of ownership when resale of privately owned housing is exempt from business tax was raised to five years from the two-year requirement stipulated in 2005. We improved the system for managing public accumulation funds for housing, further clarified the source of funding for building low-rent housing in urban areas and ensured that the funding was available. We also adjusted standards for fees for using land for new construction projects, revised land-use policies and formulated policies to standardize the use of revenue derived from the transfer of state land-use rights, yielding initial results in curbing speculation in the housing market. We made further progress in implementing the strictest possible system for protecting farmland and promoted more efficient and intensive use of land.

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