There are two recent news that are quite interesting. First, the State Council executive meeting announced that the “tax reform†of corporate taxation will be expanded from Shanghai to ten provinces and cities such as Beijing, Tianjin and Jiangsu, and will continue to expand the scale of the pilot next year.
Second, Changsha has planned 195 projects this year, with a total investment of 830 billion yuan, while Changsha's total GDP last year was 570 billion yuan. Even if these investments will occur in the next five years, their scale will be quite amazing.
Against the backdrop of the current slowdown in economic growth and the accelerated launch of steady growth measures, these two news reflect the two choices the government faces in fiscal policy: one is public investment and the other is tax cuts. The author believes that it is time to avoid adopting a fiscal policy similar to government investment from 2008 to 2009, but should speed up the reform of the fiscal and taxation system, increase tax cuts, and encourage open private sector investment.
Although the last large-scale economic stimulus policy helped the Chinese economy to quickly emerge from the gloom of the global economic crisis, it also deepened some structural problems of the Chinese economy, such as excessive dependence on investment, “national advancement and retreat†and the accumulation of risk in the property market bubble. . In the current economic growth continues to slow down, the balance between steady growth and restructuring has once again become a major problem facing the Chinese government.
The biggest difficulty facing the current economy is the sharp decline in corporate profits and low investment willingness, which has led to a downturn in domestic demand. Increasing public investment can effectively restore domestic demand growth in the short term, and tax cuts can increase corporate profitability and restore confidence in corporate investment. The key to the problem lies in the choice of policy focus.
In the short run, both policies contribute to the steady growth of the Chinese economy. In the medium and long term, tax cuts and incentives for private sector investment are undoubtedly better choices, balancing the dual goals of stabilizing growth and restructuring. The benefits of increased public sector investment are the directness and effectiveness of the policy. But this faces two challenges.
The first is how to control the investment impulses of local governments and avoid repeating the mistakes of excessive financial lending (including various forms such as local financing platforms). The large-scale investment plan introduced by Changsha is just an example. According to reports, Guizhou proposed an eco-cultural tourism development plan with a total amount of about 3 trillion yuan. This is undoubtedly an astronomical figure for the total GDP of Guizhou Province in 2011 (570 billion yuan) and total fixed assets investment (349 billion yuan). It is hard to imagine that these plans were put forward after a rigorous feasibility analysis.
The second is the financing issue. The rapid development of the Chinese economy in recent years has mainly relied on real estate and investment. Specifically, rising house prices are accompanied by rising land prices. This aspect has increased the local government's land transfer income; on the other hand, local governments use land as a guarantee to obtain more loans from the banking system through the financing platform model. This gives local governments the financial resources to invest in building local infrastructure and the economy. Infrastructure improvements and economic growth have in turn pushed up house prices and land prices, driving real estate and related industries.
How to increase public investment while maintaining the regulation of the property market has become a big problem for policy makers. With the deepening of the property market regulation, the land sales area in the first half of this year has dropped by about 20% compared with the same period of last year, and the growth rate of fiscal revenue has also slowed down significantly. If we still focus on increasing public investment, financing pressure will lead to a stronger game between the central and local governments in terms of real estate policies, which will force the property market to relax. The signs of recovery in the property market in the past one or two months show that the market is expected to see this situation.
In contrast, reducing corporate tax burdens and encouraging private sector investment is more effective in improving investment efficiency and improving economic structure in the medium and long term.
First, encouraging investment through tax cuts is based on market-based decision-making, which can reduce inefficient investment and redundant construction, and improve the efficiency of capital use. At the same time, it can also prevent corruption and other problems in public investment and avoid the resulting social contradictions.
Second, raising household sector income and encouraging consumption are the core of China's steady growth. However, while increasing the proportion of household sector income to GDP, ensuring a stable profit margin for the corporate sector is key. This means that the proportion of government departments in income distribution should be moderately reduced, and “returning to the market†and “reinforcing wealth in the people†should be realized. The main function of the government should be to provide better public services, and its role in the economy and investment should be limited to areas where the market is not fully functioning (such as sectors with low direct returns but positive spillover effects on the real economy). . Even in these areas, the government should provide support in the form of tax cuts or financial subsidies, rather than as a direct investment subject.
Third, tax cuts can be combined with industrial restructuring, such as energy-saving environmental protection, new energy, new materials and other emerging industries or services to give more active tax reduction policies. At the same time, industries that the government wants to regulate can be constrained by tax leverage (such as environmental taxes, energy taxes, and property taxes).
Since the beginning of this year, the Chinese government has made gratifying efforts in tax reduction and encouragement of private investment, such as the promotion of the “VAT reform†pilot, the tax reduction policy for small and micro enterprises and the introduction of “new 36 rulesâ€. But overall, there is still a need to change the government's investment-based thinking, increase tax cuts and encourage private sector investment. We expect the pace of relevant reforms to be bigger and faster.
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