4. Key expenditures were guaranteed in order to accelerate the development of all social programs. We directed more government spending toward social programs to shore up weak links in social development and balance economic and social development in order to truly reflect the public nature and public welfare nature of public finance, which represent its essential character.

First, we supported employment and reemployment work and development of the social safety net. Government spending in the country for employment and the social safety net in 2006 was 433.765 billion yuan, up 17.3% compared to the figure for 2005, representing 109.1% of the budgeted figure. Allocations from the central budget totaled 201.002 billion yuan, an increase of 22.9%.On the basis of the trials in the three northeastern provinces to fully fund individual retirement accounts for the basic pensions of workers retiring from state-owned enterprises (SOEs), the trial was extended to eight more provincial-level localities. We worked to ensure appropriate linkage between the urban minimum cost of living allowance system and employment and reemployment policies. We strongly supported the development of a rural medical assistance system in the central and western regions, the pilot program to provide medical assistance to urban residents in poor areas and the work of providing food, clothing, medical care, housing, and burial expenses for childless and infirm rural residents. We conscientiously carried out a strong employment policy and improved implementation measures to help SOEs in financial straits find appropriate solutions to their longstanding problems. We worked hard to assist in solving the problems of demobilized military personnel, including those working in enterprises as cadres, to help them adjust to civilian life. It is particularly worth noting that the central government promptly appropriated relief funds amounting to 11.2 billion yuan to vigorously support relief efforts in response to serious natural disasters, complemented by funds from local governments.

Second, we supported the development of education. Government spending on education in 2006 totaled 475.27 billion yuan, up 19.6% compared to the figure for 2005, representing 103.8% of the budgeted figure. The central government's contribution to this amount was 53.6 billion yuan, a year-on-year rise of 39.4%. In addition to giving priority to rural compulsory education, we also launched an initiative to build national vocational colleges as a showcase for vocational higher education and to support the efforts to build hands-on training centers for these colleges. We continued to support the implementation of the May 1998 Project to improve the quality of education in universities. We improved the system of financial assistance policies consisting of government student loans, grants and scholarships as the main forms of aid for students of colleges and secondary vocational schools from financially strapped families to help them complete their education.

Third, we supported the development of public health. Budget allocations from governments at all levels for medical care and public health in 2006 reached 131.158 billion yuan, a year-on-year increase of 26.5%, or 110.7% of the budgeted figure. Of this amount, 13.8 billion yuan was from the central budget, up 65.4%. The increased spending was mainly used to finance public health programs such as prevention and control of major communicable and endemic diseases like AIDS, tuberculosis and snail fever, to help pay the medical bills of poor women having babies in hospital, to equip and staff community health centers and rural health clinics and to fund the placement of a large number of doctors to rural areas to help develop local healthcare systems.

Fourth, we supported innovation in science and technology. In2006 we set up a system for ensuring stable growth of government funding for science and technology, and central and local governments spent 126.038 billion yuan on science and technology, a year-on-year rise of 26.2%, or 110.2% of the budgeted figure. Of this amount, allocations from the central budget totaled 77.4 billion yuan, up 29.2%. We further improved the structure of this funding by increasing spending on basic research, on applied research, and for nonprofit research institutes. We encouraged independent innovation in enterprises by creating a system of incentives and by adopting preferential fiscal and tax policies toward innovative enterprises such as granting tax breaks and awarding government procurement contracts.

Fifth, we supported the development of public cultural programs as well as the culture industry. Expenditures of governments at all levels on culture, sports and radio in 2006 amounted to 83.453 billion yuan, 18.6% more than the previous year, or 108.5% of the budgeted figure. Of this amount, allocations from the central government totaled 12.3 billion yuan, up 23.9%. These expenditures were mainly used to proceed with the reform of the cultural management system and also improve the system of public cultural services. The focus of this spending was on funding efforts to extend radio and TV coverage to every village, to bring digital film projection to the countryside, to share cultural information across the country, to reward and assist some rural families that observe the family planning policy and to carry out the "fewer children equals faster prosperity" project in the western region.

Sixth, we supported ecological improvement and environmental protection. We improved the policy on the virgin forest protection program. We adjusted the follow-up policies on returning cultivated land to forests and improved the system to fund ecological conservation in forests. We supported the pilot reform of the management system of state forestry farms and the ownership system of state forests. Government funds were allocated to fund efforts to reforest 266,667 hectares of farmland and return 10 million hectares of grazing land to grassland in 2006. We pressed ahead with a reform to introduce a system of royalties paid to the government by coalmining companies. This pilot reform has been carried out throughout eight provincial-level localities, beginning in 2006. These measures indicate that China's social undertakings are in a new period of rapid development.

5. Resources were concentrated to ease the financial difficulties of counties and townships and make basic public services more uniform. We conscientiously implemented preferential fiscal and tax policies to promote balanced development among regions. We also continued to increase transfer payments to help township- and county-level governments overcome their financial difficulties.

First, we stepped up efforts to implement the "three rewards and one subsidy" policy. We allocated 23.5 billion yuan for this purpose in 2006, an increase of 8.5 billion yuan over the amount for 2005 and improved the mechanism for granting rewards and subsidies. Progress in alleviating financial difficulties of counties and townships was consolidated and expanded, with reduction in the number of counties identified by the government with financial difficulties from the 791 of early 2005 to the current 200 or so, and continued progress will be made in this regard. Innovations were made in the way public finance is managed at and below the provincial level. The reform to put township finance under county administration was carried out in 28 provincial-level localities, and the reform to put county finance under direct provincial administration was carried out in 18 provincial-level localities, thus providing institutional and structural guarantees for funding to alleviate the financial difficulties of counties and townships. Stronger encouragement was given to major grain-producing counties to grow crops, thus helping safeguard food security for the country. Improvement in the governance capacity of county and township governments has helped maintain social stability.

Second, we improved the permanent mechanism for ensuring a stable increase in general transfer payments. The central government allocated 152.7 billion yuan in 2006 for general transfer payments to local governments, mainly those in the central and western regions. This is an increase of 40.7 billion yuan over the 2005 figure.

Third, we improved the rules on transfer payments to ethnic minority areas. These transfer payments totaled 15.563 billion yuan in 2006 and ethnic autonomous counties that are not located in an ethnic autonomous region or prefecture were included in the scope of these payments. We improved the rules on transfer payments to financially strapped areas such as old revolutionary areas, border areas, and Tibet.

Fourth, we supported the strengthening of government authority at the county and township levels. Funds totaling 5.93 billion yuan were set aside in the central budget in 2006 to help lower-level procuratorial, judicial and public security departments to further improve conditions for processing cases. Funds totaling 925 million yuan were earmarked to reform the prison system. The central government will start a two-year campaign beginning in 2006 to help solve the problem of 98,086 villager committees in the country without meeting facilities, for which 490 million yuan has been set aside in the 2006 budget. In addition, follow-up policies were united for the first time to support people relocated to make way for large or medium-sized reservoirs and strong support was given to economic development in areas around the reservoirs and areas where displaced people have been resettled. These measures improved the ability of local authorities, especially at the county and township levels, to provide basic public services.

6. All reforms were strongly supported and constant improvement was made in the socialist market economy. Significant progress was made in the reform of the budgetary management system and in support for reforms in other key areas and crucial links.

First, salary reform and standardization of income distribution for civil servants progressed smoothly. Reform of the salary system for civil servants, military personnel, embassy and consulate personnel working overseas and personnel assigned to work in Hong Kong and Macao was implemented. The salaries and benefits were raised accordingly for people who have retired from government departments, public service institutions and enterprises and personnel sent abroad to participate in foreign-aid programs. The level of benefits and living allowances was raised for entitled groups and recipients of urban basic cost of living allowances. Special consideration was given to personnel retired from enterprises who hold senior professional titles and some retirees who retired early or whose basic retirement pension is relatively small. This represents the highest increase and the largest total amount ever spent by the central government for social welfare programs in history. In addition, we reviewed all allowances and subsidies for civil servants and set up and gradually improved oversight and constraint mechanisms.