Ex-finance minister: Expansion in fiscal deficit should support small businesses

Expanding this year's fiscal deficit to support smaller businesses and removing restrictions on homebuying should be feasible policy options for China to adopt in order to bring economic recovery back on a more solid track, a former finance minister has said.

However, authorities should refrain from issuing new government debt to substitute for implicit debt, Lou Jiwei, president of the Society of Public Finance of China and former finance minister, told China Daily over the weekend. Implicit debt refers to liabilities that are not explicitly recorded in a local government's financial statements.

According to Lou, it is advisable for the Chinese government, especially the central government, to expand this year's fiscal deficit by a range from 1.5 trillion yuan ($208 billion) to 2 trillion yuan, as the economy is yet to reach its potential growth rate. A potential growth rate would result in more employment and encourage job growth.

Speaking at the Global Forum of Finance and Economics in Beijing on Saturday, Lou said that the increase in fiscal deficit should mainly be used for providing temporary subsidies to small and medium-sized enterprises to meet expenses such as rent, utilities and interest payment.

"The most important focus remains on small, medium-sized and micro enterprises — ensuring their normal operation and their ability to expand and provide job opportunities," Lou said in an exclusive interview with China Daily on the sidelines of the forum.

If Lou's suggestion is adopted, the country's annual deficit-to-GDP ratio would reach roughly 4.16 percent to 4.55 percent, compared with the 3 percent target set earlier this year.

Lou's remarks come as the market closely waits and watches for the next move by Chinese policymakers to reinforce the country's economic recovery, which has slowed recently, amid increasing talk about the possibility of issuing special treasury bonds.

Lou, in the interview, ruled out any near-term issuance of special treasury bonds, as it would necessitate a slew of investment projects with sufficient return potential for bond repayment as well as special circumstances similar to 2020, when the COVID-19 pandemic severely hit the economy.

He also frowned upon the idea of substituting implicit local government debt with statutory government debt, as it could unintentionally encourage local governments to scale up their implicit debt in anticipation of the problem being resolved easily.

The Ministry of Finance, in a report published on Tuesday, urged local governments to make full use of their own resources and policies to resolve implicit debt risks.

To ensure a soft landing for the country's property market, Lou said it was sensible to remove the restrictions related to homebuying, mortgages and housing prices, and announce plans that property tax would be levied in due course with a clear threshold of tax exemption based on the property area owned by a household.