Finance Minister says govt to practice austerity

In forthcoming year, the government will have to practice austerity in coping with the gap between a slowdown in revenue income and a rise in fiscal spending obligations, said the Finance Minister.

"Some expenditures that are unreasonable or unnecessary due to changing policy environments should be cut or scaled down, which could make spending on social welfare more sustainable," Lou Jiwei told a national fiscal conference on Monday.

Government operating expenses would be squeezed, in particular spending on government receptions, overseas visits and car purchases, which could ensure spending on social welfare such as social insurance and pension funds, Lou said.

Even for welfare, Lou cautioned, spending should be in a "sustainable" and "prudent" manner.

The message carries ramifications for China's 8 million civil servants, as well as the many more jobs dependent on public spending, which has been under strict scrutiny in recent years.

The economic slowdown has weighed on revenues, which saw 5.7 percent growth in the first 11 months, while expenditures surged 17.4 percent over the same period. Lou concluded that the "potential growth rate of revenue has declined, while there is little room for spending cuts. Conflicts between income and spending have intensified".

There are three ways to maintain balance: curb public spending, expand revenue or widen the fiscal deficit. Lou said he will try making adjustments on those three fronts, though none has much room to maneuver, analysts said.

For example, after a top economic meeting called for reducing the burden of corporate taxes and fees, there were heightened expectations for cuts, leaving little hope that the ministry could boost revenue next year.

"Once in place, the public invariably hopes the various social policies will rise. Any plan to cut them will face fierce opposition. For example, even though China's retirement age is lower than in many countries and there is already a huge deficit in pension funds, any proposal to raise the age still draws public complaints," said Gao Peiyong, a researcher at the Chinese Academy of Social Sciences.

On tax cuts, Lou stopped short of vowing to significantly slash taxes, instead pledging to "streamline various administrative fees". He vowed to extend the value-added tax reforms to the finance, real estate and construction and consumer services sectors.

China launched a pilot program to replace business taxes with a VAT in 2012, in a bid to reduce duplicate taxation and corporate costs. The pilot program is planned to expand to the above three sectors this year.

Gao said the reason behind the slow progress is the government can't afford the possible losses that would arise from expanding the scope of VAT reform.

He said Beijing had originally hoped the all-round conversion to VAT would cut society's tax burden of as much as 1 trillion yuan ($161 billion). But the reform halted after it cut only 200 billion yuan of taxes. China can only cut more business taxes when it can in the meantime increase its revenue from property tax and income tax.