General Characteristics of the Proactive Fiscal Policy in 2022

China’s economic development faces the triple pressures of demand contraction，supply shocks，and weakening expectations. On March 5，2022，at the Fifth Session of the 13th National People’s Congress，Premier Li Keqiang of the State Council put forth in the Report on the Work of the Government the goals of China’s social and economic development in 2022，setting the tone and fundamentals for the fiscal policy of the year.

Improved Effectiveness and Accuracy

The general principle of the proactive fiscal policy in 2022 is being “more effectual，more targeted，and more sustainable” .

“Enhance the effectiveness of policy” means coordinating financial resources in a prudent and effective way as required by the macro policy. It means strengthening management on budget preparation，audit，expenditure，and performance，linking performance results and budgetary arrangements，and coordinating actions with monetary policy.

“More emphasis on precision” means putting efforts on the high-quality development of the manufacturing industry，the support for micro，small and medium-sized enterprises (SMEs)，and financial support and protection to science and technology innovation，people’s basic living needs，and key industries. Measures include stabilizing employment and the operations of market entities through tax refunds，tax cuts，and fee reductions，improving the structure of expenditures，maintaining expenditures in some areas while reducing them in others，and ensuring continued increases in spending to meet basic living needs.

“Sustainability” means enhancing fiscal sustainability. The proactive fiscal policy，which has been implemented since 2020 in response to the COVID-19 pandemic，has delivered a stable performance of people’s basic living needs and economic growth，but also high government leverage with large fiscal risks. Therefore，the proactive fiscal policy in 2022 needs to prevent risks and deliver fiscal sustainability，while ensuring a stable macroeconomy. This requires a comprehensive arrangement of fiscal expenditure on the consideration of what is needed and what is possible，an appropriate reduction in the deficit rate，a reasonable size of the debt，and effective prevention of risks.

Targeted Measures Against the Triple Pressures

The basic framework of the proactive fiscal policy deals precisely with the triple pressures，i.e. “demand contraction，supply shocks，and weakening expectations”.

The new package of tax-and-fee reduction policies will provide more support to enterprises and enhance the vitality of market players. To stabilize the operations of market entities，the market expectations，and employment，policymakers，taking a comprehensive view of the landscape，will focus on policy goals such as providing cash flow support for enterprises，driving consumption and investment，encouraging enterprises to increase investment in innovation，and accelerating technological transformation and equipment updates. Centering on SMEs and the manufacturing industry，policymakers will implement the largest package of tax-and-fee policies. Measures include，first，extending some of the tax and fee reduction policies that were supposed to mature in 2021 to consolidate policy effectiveness; second，introducing new policy initiatives，with a special focus on the tax and fee reductions for SMEs and individual entrepreneurs; third，significantly increasing the scale of VAT credit refund，and providing precision support to increase the cash flow of SMEs and the manufacturing industry. The expected annual tax refunds and tax reductions will be about 2.5 trillion yuan，of which about 1.5 trillion yuan will be VAT credit refunds that will go directly to enterprises.

This year，the scale of tax and fee reductions is more than two times that of 2021，causing the macro tax burden to drop from 15.1% last year. In the established tax system，tax cuts and fee reductions are actually infusion yielded from governments to enterprises. By doing so，it can enhance the sense of gain of enterprises，while relatively reducing government revenues but increasing the difficulty of governments’ financial guarantee. It means putting more pressure on primary-level financial work in terms of providing the “three guarantees”. To this end，the central government will increase financial support to the local economy，and subsidies will go directly to cities and counties.

The general public budget expenditure will be significantly increased，guiding and expanding effective domestic demands. In 2022，the national general public budget expenditure is scheduled to increase by 26.7 trillion yuan，an expansion of more than 2 trillion yuan over the previous year. This has registered an increase of 8.4 percent，2.9 percentage points higher than the expected GDP growth，contributing the largest increase in recent years. It is worth noting that such an increase is achieved on the basis of a 3.8% year-on-year increase in national general public budget revenue (budget revenue of 210,140 billion yuan)，a decline in the fiscal deficit rate，and a 200-billion-yuan reduction in the size of the fiscal deficit.

In the case of a large gap between budget revenue and expenditure，additional available financial resources are deemed necess