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China’s zero-Covid policy is weighing on the economy, and the latest hit was taken by the country’s budget as the deficit has widened by a trillion yuan ($149.17 bn) for the first five months of 2022, the worst yet on record. China’s budget deficit has peaked as government spending rose due to Covid outbreaks, whereas tax breaks to keep businesses afloat have caused a drop in income.
Beijing collected a combined 10.9 tn yuan ($1.6 tn) in government revenues from January to May. However, government spending during this period stood at 13.8 tn yuan ($2 tn), reflecting a deficit of 2.9 tn yuan ($432.60 bn). In 2021, China had a nominal budget surplus for the same period, whereas the 2.9 tn yuan deficit for the first five months of 2022 is almost 43% bigger than in 2020.
China budget woes
China’s economy has been reeling under the Covid-19 pandemic and the recent surge in cases was the worst on record in the past two years. The country went into a lockdown, owing to its zero-Covid policy, which shut off major industrial hubs and reduced production.
Beijing’s general fiscal revenue for the month of May contracted 33% from a year before to 1.24 tn yuan, after falling 41% in the month of April. Income from taxes and fees for the first five months of 2022 was 8.7 tn yuan, down 10% year-on-year.
China’s finance ministry said government revenue during the said period would have increased by 2.9% year-on-year if not for tax rebates. The government expanded the 1.5 tn yuan value-added tax refund plan by another 140 bn yuan in May. However, 1.34 tn yuan has already been paid out in May and the loss of income will reduce in the coming months.
Meanwhile, the weakness in the property market is also weighing on the government treasury, as government revenue from selling land fell 28.7% year-on-year between January 2022 to May 2022. The country’s consumer spending has also taken a hit with tax revenues from vehicle purchases slumping 28.9% during the first five months.
Local governments in China are now facing a dilemma of whether to boost debt or suffice with weak economic growth. Local government spending increased drastically this year as they had to conduct regular mass testing, set up quarantine hospitals, and pay for food provision and other services during the lockdown.
Picking up more debt will be a major setback for China’s efforts to deleverage. If local governments don’t increase their borrowing, they will be forced to cut back spending on other things apart from Covid relief, which will then negatively impact Beijing’s 5.5% growth target.
