China's local governments are facing serious challenges to their "pockets"-the epidemic has made their already difficult days worse on the one hand, and finances may have to contribute to boosting the economy on the other. Several economists have called for the red line of 3% deficit to be loosened in due course.

Bloomberg combed local government work reports and budget reports in 2020 and found that more than half of the provinces and cities that have published information expect general public budget revenue growth of 3% or less this year, of which Hubei and Anhui are expected to experience double-digit negative growth. These data were predicted before the large-scale outbreak of the COVID-19 epidemic. By comparison, national general public budget revenue growth slowed to 3.8% year-on-year last year, the lowest since Bloomberg had data in 1992, with local revenue growing at 3.2%.

The budget revenue of government funds is even less optimistic, with 14 of the 17 provinces and cities with clear growth targets expected to show negative growth this year. In view of the long way to go back to work, the negative impact of the epidemic on local finance will continue to emerge in the future. A report released by S & P earlier this month said that local governments' sources of income could be reduced as a result, and their credit qualifications would be weakened.

"on the one hand, the epidemic requires more fiscal spending, and on the other hand, it will lead to a slowdown in the economy, resulting in a reduction in tax revenue, which will put serious pressure on this year's fiscal deficit. "Louis Kuijs, chief Asia economist at the Oxford Institute for Economics, said that given the current downward pressure on economic growth, it would be very difficult and unreasonable to meet the fiscal targets set before the outbreak.

He further said"the outbreak will lead to some adjustments in the fiscal position and make people accept a slightly higher fiscal deficit than originally thought. "

According to local reports this year, even regions such as Beijing and Shanghai, which are generally considered financially secure, are only expected to have incomes roughly the same as last year, reflecting the pressure on local incomes.

CITIC's research shows that the reduction in value-added tax and income tax rates, which account for a large proportion of tax revenue, will have a great impact on fiscal revenue this year. Since the superimposed epidemic, there has been a large area of work stoppage and a phased decline in revenue from catering, tourism, transportation, and other industries, and tax revenue may face certain pressure, especially in the first half of the year.

S & P said in its report that fewer real estate transactions during the outbreak could affect taxes and revenue from land sales. With reference to the fiscal impact of previous SARS, revenue was hit immediately in the first quarter of 2003, and then continued to decline that year.

The deficit rate is over 3%?

China's deficit rate was set at 2.8 per cent last year, having reached 3 per cent only in individual years such as 2016 and 2017, but has never crossed the red line of 3 per cent.

"everyone used to think that the 3% deficit ratio was an insurmountable red line, but now it may not be so important. "Said Liu Peiqian, China economist at Natwest Markets in Singapore."although simply increasing the deficit ratio may not pay much more in the end, it is more likely to give the market a signal, a confidence. "

She pointed out that just like the RMB breaking 7, when the red line is broken, it will affect the market in the short term, but later found that it does not seem to be much, on the contrary, people are more confident.

Xu Gao, chief economist of Bank of China International, also said in an interview that in the face of the impact of the epidemic, the deficit ratio could appropriately exceed 3%. CITIC's chief fixed income research director Mingming also expects a 3% probability to be the lower limit.

Limited room for tax reduction

In fact, the increase in tolerance for fiscal deficits is partly due to the fact that there is little room for tax cuts.

Ding Shuang, chief economist of Standard Chartered Greater China and North Asia, believes that spending increases tend to have a higher fiscal multiplier than tax cuts; although the government has announced tax breaks to help small and medium-sized enterprises cope with the impact of the coronavirus, but the chances of extensive tax cuts similar to those in 2019 seem slim.

China's full-year tax revenue grew by just 1% in 2019, down sharply from 8.3% a year earlier and the lowest since Bloomberg began recording data in 1992. The Ministry of Finance explained that the lower tax increase was mainly due to the implementation of larger tax cuts.

CITIC's Mingming said in the report that the pressure on the revenue side caused by the fiscal policy based on tax cuts will also weaken the space for fiscal expenditure and the ability to support the economy. He further pointed out that monetary easing is also essential if fiscal space is to be opened up.

However, in a recent article in Qiushi magazine, Chinese Finance Minister Liu Kun still said that the central government should take the lead in substantially reducing expenditure on non-rigid and non-key projects, further reducing taxes and fees, and by reducing the burden on enterprises and individuals, we will promote epidemic prevention and control and stimulate economic growth.

The policy has been put into force

The annual meeting of the National people's Congress in early March will decide on the national budget for that year. Affected by the epidemic, it is not known whether it will be held as scheduled this year. Although the general government budget deficit is uncertain, there are signs that the Ministry of Finance intends to stabilize growth by encouraging local governments to actively issue bonds.

The Ministry of Finance announced last week that the second round of the new local government debt limit for 2020 will be set ahead of schedule, totaling 1.848 trillion yuan, which has been used up.

Xu Gao of Bank of China International believes that this also sends a signal that fiscal policy is fine-tuned in a more positive direction.Fiscal policy should be countercyclical in the first place, and the contradiction between revenue and expenditure should not become a constraint on the development of fiscal policy. To hedge against the impact of the epidemic, more bonds should be issued to ease pressure and support growth. "