Deficit-to-GDP ratio may need to be lifted to ease financing burdens

Ramped-up fiscal spending is likely to play a key role in expanding domestic demand and powering China's economic recovery in the new year amid a rise in external headwinds, experts said.

It is necessary to further tap into government spending for growth stabilization as a global economic slowdown could weigh on the country's export growth while the real estate sector is still in the process of bottoming out, said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International.

As downward economic pressure could peak early this year, the country is expected to front-load fiscal support and help achieve double-digit growth in infrastructure investment in the first quarter, funded by local government special bonds and lending from policy banks, Wang said.

His views echo the commitment made by the Ministry of Finance to "appropriately expand fiscal spending" this year as it aims to provide "more direct and effective" fiscal support for economic recovery.

"We will appropriately expand fiscal spending by optimizing the tool kit including fiscal deficit, local government special bonds and interest subsidies to ensure funding support for major national strategic tasks," the ministry said in a statement on Thursday after holding a meeting to discuss fiscal work for 2023.

The ministry aims to strengthen the role of government investment in driving and guiding social investment, the statement said, with spending to be focused on the key areas of science and technology, rural vitalization, major regional strategies, education, people's basic living needs and green development.

Experts said the commitment to properly expand fiscal spending signals that the country might raise this year's deficit-to-GDP ratio while leveraging innovative policy tools to gain more policy leeway.

It might be sensible for the country to set this year's deficit-to-GDP ratio at about 3.0 percent, up by 0.2 percentage point from last year, to strengthen support for the recovery in domestic demand, analysts at Chasing International Economic Institute said in a note.

Meanwhile, policy-based financial instruments and interest subsidies — which feature higher flexibility and more coordination with monetary policy compared to traditional fiscal tools — are expected to see wider utilization and play a bigger role in boosting investment and economic restructuring, they said.

Apart from stressing the role of government spending, the ministry also vowed in the statement to improve the policy on tax and fee cuts to alleviate difficulties facing enterprises, continuously expand transfer payments to local governments and step up efforts to stabilize foreign trade and investment while promoting a recovery in domestic consumption.

Corporate governance of local government financing vehicles will be improved to better resolve the risk of implicit debt, the ministry added.

Monetary policy is also poised to strengthen support for economic recovery as the People's Bank of China, the country's central bank, said it will step up the implementation of prudent monetary policy to stabilize economic growth, employment and price levels.

In the face of a volatile external environment and a foundation of domestic economic recovery that is not yet firm, the PBOC said it will strengthen cross-cycle and countercyclical adjustments and give play to the function of monetary policy tools on both the aggregate and structural fronts.

Efforts will be made to keep price levels generally stable amid the favorable conditions of the country's stable food output and energy market, the PBOC said on Friday in a statement after holding its fourth-quarter monetary policy committee meeting.