China announced on Thursday a fiscal deficit budget of 950 billion yuan (US$139 billion) for 2009, a record high in six decades, as the country boosts spending to cushion the impact of the global financial crisis.

The total deficit accounts for less than 3 percent of China's gross domestic product (GDP), said Premier Wen Jiabao at the opening of the parliament's annual session.

Despite the deficit surge, China's constant deficit drops in previous years provide room to issue more bonds this year, said Wen in his government work report to the second session of the 11th National People's Congress (NPC).

"The ratio of the cumulative balance of outstanding government bonds to GDP, which is around 20 percent, is within the acceptable range of what our overall national strength can bear and is therefore safe," he told the country's legislators.

China set this year's central government deficit at 750 billion yuan, 570 billion yuan more than last year, he said.

In addition, the State Council, or Cabinet, will allow local governments to issue 200 billion yuan worth of government bonds through the Ministry of Finance (MOF), which will go into provincial budgets, said Wen.

The total 950 billion-yuan deficit budget was nearly three times over the last record of 319.8 billion yuan set in 2003.

The surging deficit is part of China's proactive fiscal policy, which was adopted in November in response to a slowing economy and diminishing jobs under the pressure of the world financial turmoil.

"We will significantly increase government spending," said Wen. "This is the most active, direct and efficient way we can expand domestic demand."

Wen also attributed the large deficit to decline in government revenues as a result of slower economic growth and reduction of tax burdens on enterprises and individuals.

China's GDP growth slowed to a seven-year low of 9 percent year on year in 2008 as the global financial crisis took a toll on the world's fastest-expanding economy.

A comprehensive implementation of the value-added tax (VAT) reform will cut the burdens on enterprises and individuals by approximately 500 billion yuan this year, as preliminary calculations indicate, he said.

A variety of means such as tax cuts, rebates and exemptions will be adopted to encourage enterprise investment and consumer spending and invigorate the micro-economy.

Altogether 100 administrative charges will be rescinded or suspended this year, said Wen.

He noted while continuing to increase investment in key areas, the government will "strictly control regular expenditures and do everything we can to reduce administrative costs."

Concerns remain

"It (the 950 billion-yuan deficit) remains an expansion in the safe range," said Jia Kang, president of the MOF Institute of Fiscal Science and also a member of the 11th National Committee of the Chinese People's Political Consultative Conference (CPPCC), China's top political advisory body.

It will be necessary to spend even more if China's economic growth further weakens in the second quarter of this year, said Jia, adding that the government still has room to do that.

The MOF figures show China's deficit-GDP ratio saw consecutive drops to 0.6 percent last year from 2.6 percent in 2002, as the government's pockets bulged on years of double-digit economic growth.

A country's fiscal conditions will be viewed as risky if the deficit accounts for more than 3 percent of GDP or the outstanding government bonds exceed 60 percent of GDP, according to the usual international practice.

The safety line was not a universal standard and could vary in different countries, said Vivek Arora, International Monetary Fund Senior Resident Representative in China.

However, by running prudent and careful fiscal policy in previous years -- reflected in low deficits and debt -- China has created fiscal space that it can now use to fight the downturn, said Arora.

"In this sense, China is in a relatively strong position," he told Xinhua.

Jia predicted a period of "tight days" ahead but said it wouldn't cause problems to China even if its deficit slightly surpasses 3 percent of GDP.

In comparison to other countries, China's deficit-GDP ratio was "at the higher end of the middle range", said Gao Peiyong, deputy head of the CASS Institute of Finance and Trade Economics.

The United States set its budgeted deficit at 12.3 percent of its GDP for fiscal year ending Sept. 30, 2009, while the 27-nation European Union forecast 12 of its members will see their deficit-GDP ratios exceed 3 percent this year.

"The 950 billion-yuan deficit won't threaten China's fiscal and economic safety," said Gao.

However, the biggest challenge for China's fiscal authorities will be how to sustain a continuous deficit expansion in the coming two to three years, he said.

Besides, hefty government bonds may draw out fund from the bond and stock market and crowd out private investment, warned NPC deputy Ai Honde, president of the Dongbei University of Finance and Economics.

NPC deputy Bing Zhigang, who is also head of the Department of Finance of Liaoning Province, suggested the government investment be strictly directed at only public work and infrastructure construction.

The threshold for private capital to enter those projects should also be lowered, said Bing.

(Xinhua News Agency March 5, 2009)