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Importance of fiscal thrift

(China Daily)
Updated: 2008-11-05 11:23

China is in need of a large fiscal package to cushion the national economy against the double whammy of a domestic slowdown and shrinking external demand.

But that does not mean the government can thus turn itself into a big spender.

Instead, stricter budgetary discipline will be crucial to the success of the coming fiscal expansion designed to stimulate short-term growth as well as smooth transformation of the development model.

The Beijing News reported that the Ministry of Finance had required zero-growth in the budget of administrative expenditure for the next year for all central government departments.

This is good news. It shows that the fiscal authorities are fully aware of the potential risk of a surge in administrative costs that can undermine the government's fiscal efforts to boost economic growth.

By preempting unnecessary increases in departments' basic expenditure, the government has made clear its determination to improve its own efficiency. And a more efficient government is in itself a precondition for the coming fiscal package to work its best in serving the Chinese economy.

Though its economic growth has slowed significantly in the past quarter and is poised to fall further in coming months, China is much better positioned than most other countries to survive the global financial crisis and economic downturn. The country has accumulated a fiscal surplus of more than 1.2 trillion yuan in the first three quarters, leaving the government a deep pocket to tap into when fiscal incentives are needed.

Yet, while more and more recent signs indicate that the country's overall growth is heading sharply lower, Chinese policymakers have so far not come up with a strong and comprehensive fiscal package.

The need for more fiscal incentives to improve healthcare, infrastructure and rural development is all too obvious. By various measures, it is estimated that the Chinese government needs to spend trillions of yuan to maintain economic growth at a desirable level.

However, the more fiscal expansion is needed, the more prudent the fiscal authorities should be.

According the top auditor's annual report to the National People's Congress Standing Committee, central government departments and their subordinate units misused or embezzled about 4.52 billion yuan ($660 million) last year. A huge fiscal package to stimulate economic growth will put to test the government's ability to continue to reduce misuse of public funds.

While emphasizing more efficient government work, the blanket requirement of zero-growth in the budget of administrative expenditure also makes it easy to identify irresponsible spenders.