Commentary: Defusing Local Government Debt Is Key to China’s Proactive Fiscal Policy

China’s annual government work report and budget report released this month underscored a proactive approach to fiscal policy, where, in my view, attention should be paid to new spending and tackling risks from existing local government debt.

New spending

The government has vowed to enhance the intensity of its proactive fiscal policy as appropriate while improving its quality and effectiveness.

The government work report proposed a 3% target for this year’s budget deficit-to-GDP ratio. The central government’s deficit target was set at 3.34 trillion yuan ($471 billion), an increase of 180 billion yuan from the 2023 budget. Meanwhile, the budget deficit for local governments was projected at 720 billion yuan, unchanged from 2023.