China’s higher fiscal deficit target is likely to hamper economic growth this year, given less hope for a further sizeable stimulus, says Standard Life Investments emerging markets economist Alex Wolf.
According to the Ministry of Finance, China’s official deficit is calculated as the difference between total usable funds and total official expenditure, but not as the gap between budget revenue and budget expenditure, which more accurately reflects the actual impact and implementation of fiscal policy, he said.
Wolf added: “The 2015 official fiscal deficit was 2.3% but the effective gap between expenditure and revenue was approximately 3.5% of GDP. As a result, even though the official deficit estimate was raised to 3% for this year, consensus expects closer to a 4% actual deficit. “
There are two key things, he said. First, the major reason growth was not substantially lower last year was due to significant fiscal expansion. Second, a further large stimulus boost is highly unlikely this year.
“The primary instrument to stimulate the economy will be expansionary fiscal expenditure, both on- and off-balance sheet. The true amount of fiscal stimulus this year will be guided by a few key variables, including how the property sector performs, which affects both local government tax revenues and land sales revenues,” he said.
He added that the ability of local entities to finance off-balance sheet activity will be challenged, as the central government slowly implements local government financing reform.