China targets 2011 budget deficit of 2% of GDP

China will target a budget deficit of 900 billion yuan (USD 137 billion) this year, or 2.0% of GDP, the finance ministry said on Saturday, aiming to continue to shrink its deficit even as it steps up social spending.

The budgeted deficit for this year compares with an actual gap of 1 trillion yuan in 2010, which accounted for 2.5% of gross domestic product. In 2009, the deficit came in at 2.8% of GDP, as Beijing primed the pump of the economy through fiscal spending.

The ministry had originally reported a deficit of about 650 billion yuan for 2010, well below its original target of 1.05 trillion yuan, but contributions to the budget stabilisation fund and bringing forward some local government expenditures for 2011 enabled it to come in close to the original target.

In its 2011 budget, unveiled at the opening of the annual session of parliament, the finance ministry said China's central and local governments would together aim for revenue growth of 8.0% and expenditure growth of 11.9% this year, both slowing from 2010.

Last year, revenues increased 21.3% and expenditures rose 17.4%, the ministry said, easily outstripping the original targets of 8% and 11.4%, respectively.

Tax revenue has grown rapidly in the past few years as the economy has boomed, and authorities intensified efforts to collect taxes.

The ministry is looking for domestic VAT to rise 11% this year to 2.3 trillion yuan, while property taxes are expected to bring in 11% more than a year ago and resource taxes are seen rising 22%.

Spending

On the expenditure side, the ministry plans to increase spending on education, social security and employment by 14%, while that on low-income housing will rise 35%.

Spending on police and domestic surveillance will also hit new heights, with "public security" outlays planned to reach 624 billion yuan - 23 billion yuan more than the defence budget.

While the central government's finances are seen as being in good shape, provincial and other local governments could continue to face a tougher time raising the money they would like to spend to help fuel local economic growth, analysts said.

The finance ministry said it was planning to sell 200 billion yuan in debt on behalf of local governments this year - the same as last year.

At the same time, local governments could see income from the sale of land use rights, which make up a large portion of their revenue, take a hit as authorities try to cool the property market through limits on the purchase of property for investment purposes, analysts said.

That in turn could prompt local authorities to raise more funds via the financing vehicles through which they have racked up significant amounts of debt, which some experts say risks leading to a mountain of defaults down the road.

"Two hundred billion yuan in local government debt is a relatively moderate amount," said an analyst with a large securities firm in Beijing.

"If it were up to local governments, that number would be higher, because they face more pressure than the central government."