China May Lift Fiscal Revenue Growth Target for First Time in Five Years

(Beijing) — China may raise its target for fiscal revenue growth this year for the first time in five years, an official document shows, although the goal remains fairly conservative in the face of slowing economy growth.

The central government has “estimated preliminarily” that national fiscal revenue will increase 5% this year, according to the annual budget report of the Finance Department of the central province of Hunan, published on its website this week.

Beijing normally establishes key economic goals for the coming year at the Central Economic Work Conference in December. These then must be approved by the National People’s Congress, the country’s top legislature, at its annual meeting in March before being officially announced. But occasionally the figure appears earlier on provincial documents.

The 5% target for this year’s national fiscal revenue increase, if approved next month, would be higher than 2016’s goal of 3% and will mark the first time the government has raised the figure since 2012.

Growing inflationary pressures in the country since late last year may have provided conditions for such an increase, since the lion’s share of China’s tax revenues is generated from indirect taxes that are typically based on prices. And as prices go up, so does government income from these taxes.

The producer price index, a key gauge of wholesale prices, rose for the fourth straight month in December to hit the highest level in more than five years after having previously lingered in negative territory for 54 months in a row on sluggish domestic demand.

Chinese manufacturers were also reporting soaring input costs, which will eventually trickle down to drive up the prices — and taxes — consumers pay.

However, the projected 2017 fiscal revenue target was below last year’s economic expansion of 6.7%, indicating policymakers might have remained conservative about the prospects of this year’s government income.

Beijing set its national fiscal revenue increase goal in line with or slightly stronger than the preceding year’s economic growth rate between 2012 and 2015.

Actual fiscal revenue gains have continued to weaken since 2012. The figure slowed to 4.5% last year from 8.4% in 2015, marking the sharpest slowdown in terms of percentage change in three years.

The Finance Ministry blamed the tepid revenue gain last year in part on declining economic growth and cuts in taxes and other fees, such as the conversion of business tax to value-added tax, which was aimed at reducing the financial burden on companies and boosting the service industry.

Many analysts expect the rise in government income to continue to lag behind spending this year. That’s because Beijing is likely to rely on tax cuts and higher infrastructure investment to drive expansion, since the property market, which underpinned growth last year, is set to slow.

The central government predicted local government fiscal revenues will jump by 6% on average, the Hunan Finance Department’s report said.

Among the 29 provinces and regions that have announced their income increase targets for this year, only nine set theirs below the 6% mark.

Contact reporter Fran Wang (fangwang@caixin.com)