Jul 05, 2013 05:42 PM

Closer Look: What to Do about the Huge Shortfall in Tax Revenue

(Beijing) – Disappointing tax income figures have forced Beijing to shore up its fiscal position by dipping into government savings in the central bank, a move that will undoubtedly unsettle many bureaucrats.

In a meeting on July 3, the State Council emphatically said it will push to use the current pool of fiscal revenue and make better use of government money that has been sitting idle.

Efforts will be focused on ensuring budgets are efficiently implemented and loopholes are closed, the cabinet also said. It added that limited capital resources must be used on areas crucial to maintaining growth, transforming the structure of the economy and improving people's livelihoods.

This comes shortly after Finance Minister Lou Jiwei reported to the Standing Committee of the National People's Congress, the country's top legislature, that there will be "tremendous pressures on meeting the budget target for central government fiscal income this year."

In the first five months, the central government's income was up by only 0.1 percent year on year. Meeting the annual target of 7 percent means that monthly growth rates for the rest of the year must average at least 13.3 percent, Lou said.

The income of the central and local governments combined for the five months also fell short of the target. It increased by 6.6 percent from the same period last year. The goal was 8 percent.

But expenditure has continued rising. A large chunk of it will be spent on renovating shantytowns across the country for about 10 million households.

Meanwhile, government deposits in the central bank reached 3.23 trillion yuan by the end of May. A recent report by the National Audit Office (NAO) argued that many governments were not making good use of this money.

The Ministry of Finance, for example, has for years set aside more cash for retirement benefits than it actually needed. The residue at the end of every fiscal year was rolled over to the next, and its amount increased from 8.2 million yuan in 2010 to 13 million yuan in 2012.

The accumulated carry-over for some of the State Administration of Taxation's digitalization programs has exceeded 2.4 billion yuan by the end of 2012.

Other forms of waste are easy to identify.

In February, the Ministry of Transport canceled two port projects on the grounds that their feasibility studies were not carefully done. A total of 25.7 million yuan that had been spent on the projects went for nothing, and another 18.6 million yuan pre-paid to the construction firm has not been recovered yet.

In its 2012 budget, the former Ministry of Railways set aside 1.13 billion yuan for unspecified purposes. It came up with a detailed plan for using 130 million yuan of it in September 2012, but the remainder was unaccounted for.

These are not unique problems. Many previous NAO reports have exposed local governments and government agencies wasting money or leaving funds unused.

In 2000, the monthly average of government deposits in the central bank was 262.4 billion yuan. The figure in 2012 was more than 10 times that amount.

Government revenue essentially comes from taxes levied on businesses and individuals, the most vigorous and most competitive entities of the economy.

Taking away funds that could have been put to efficient use and letting them sit idle in the central bank not only has no effect on improving social welfare but also inhibits market efficiency.

Fiscal revenue deposits, unlike the foreign exchange reserve, are the government's disposable income. The central government should thoroughly review the huge amount of deposits, identify their nature and owners, and make targeted plans to use the money.

It should speed up the payment of government payables to businesses and individuals and set up a deadline so local governments will have no excuse for holding up funds that should be transferred to lower levels.

Most of the government deposits in the central bank are accumulated carry-overs. Clearing this up will inevitably annoy vested interests.

However, if the central government is bold enough to use one-third of the more than 3 trillion yuan in government deposits in the central bank, this will be more than enough to meet this year's national fiscal revenue target of 942 billion yuan.

Such a move would be better than 4 trillion yuan stimulus package rolled out after the 2008 global financial crisis, and the country's economy could turn a new page.

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