Proactive fiscal policy will help build a dynamic economy

The Central Economic Work Conference in December 2024 to assess the economic landscape and set priorities and targets for 2025, signaled a more proactive fiscal policy. To do so, the government will take a series of measures including raising the fiscal deficit ratio, increasing government spending, and issuing ultra-long-term special bonds and local government special bonds.

The work conference's decision highlights the government's determination to support economic recovery and growth.

With 2024 proving to be a pivotal year in achieving the goals of the 14th Five-Year Plan (2021-25), the economy has not only become more resilient but also made steady progress toward realizing all-round high-quality development. But China still faces various challenges: economic and geopolitical uncertainties on the global front, and weak demand, unemployment, slower growth and pressures on businesses at home. Addressing these challenges requires a recalibrated fiscal approach that balances short-term responses with long-term objectives.

Fiscal policy is a critical tool for stabilizing the economy, particularly when aggregate demand is weak. While China has long adhered to an "active fiscal policy", the decision to adopt a "more proactive" stance underscores a shift to counter-cyclical measures that reflect the current economic reality.

The move is aimed at stimulating demand through increased public spending, optimizing supply structures to foster innovation and productivity, and mitigating economic risks, dealing with external uncertainties, and stabilizing the real estate, equities and other key markets. Importantly, it also seeks to boost market confidence and create an environment conducive to sustained growth.

A more proactive fiscal policy means greater emphasis on implementing fiscal measures of higher scale and structure to ensure maximum impact. On the scale side, increased fiscal deficit ratios and expanded public spending are key to boosting domestic demand, which has remained weak. In this regard, special bonds will play a critical role, with plans to broaden issuance, diversify investment channels, and increase their use as project capital.

Besides, additional measures, such as issuing ultra-long-term special bonds, supporting "new infrastructure" projects, and increasing central-to-local transfer payments, will provide further momentum for economic growth and public welfare.

On the structural side, precision allocation of budgets is crucial. More resources should be allocated for improving people's livelihoods, boosting consumption, and supporting long-term development and other critical programs, while grassroots social programs should be safeguarded and measures taken to ensure government departments practice frugality by cutting non-essential expenditure. This will ensure fiscal resources are directed toward initiatives that yield the greatest economic and social benefit.

The shift to a more proactive fiscal policy shows the government is determined to address both the domestic and global challenges. While consistent measures need to be taken to address the global economic volatility and geopolitical uncertainties, targeted solutions are needed to resolve domestic issues such as uneven regional development and industrial upgrading.

By taking these measures, China can position itself as a stabilizing force in an unpredictable world. The policy's emphasis on expanding demand and optimizing supply structures seeks to meet the immediate needs while laying the groundwork for long-term modernization. The policy is expected to stabilize market expectations, stimulate economic activity, and promote innovation and industrial upgrading. By improving public welfare and supporting key industries, the policy will contribute to both social stability and economic resilience.

To achieve these results, the government must ensure fiscal policy is forward-looking and effectively implemented, and government departments coordinate their programs and align the national goals with local realities.

Amid the advancement of Chinese modernization, the policy shift highlights the importance of adaptability and precision in addressing complex challenges. By balancing immediate economic needs with long-term development goals, the government is well-positioned to navigate uncertainties and sustain high-quality development. This approach will reinforce China's commitment to foster resilience, promote shared prosperity and build a dynamic economy.

Feng Chen is a professor at the School of Economics and Finance, Xi'an Jiaotong University; and Mou Silu is a research associate at the same institute. The views don't necessarily represent those of China Daily.

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