China Faces Bigger Deficit as Covid Costs Soar and Income Dips

  • In Business
  • 2022-05-18 05:38:33Z
  • By Bloomberg

(Bloomberg) -- China's government finances worsened measurably in April as Covid spread, with government spending rising to help pay for the cost of Covid Zero policies and income slumping due to tax breaks to help affected businesses.

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Government income from taxes and fees was 1.23 trillion yuan ($182 billion) in April, according to a Bloomberg calculations based on official data, 41% down on April 2021. For the first four months of the year income was 7.43 trillion yuan, down 4.8% from the same period last year, the Ministry of Finance said in a statement.

General fiscal spending, which includes areas like education or healthcare, increased 5.9% during the same period to 8.1 trillion yuan, the ministry said.

The outlook for government finances this year was already weak before the recent Covid outbreak and the cost of efforts to contain it have begun to raise the pressure on the finances of all levels of government across China, both by cutting into revenue and by increasing demands to spend. Slowing company profitability and slumping retail sales mean less tax revenue, while the Covid Zero policy means a massive increase in testing, quarantine and other healthcare costs -- all of which are paid for by the government.

Read More: China's Provinces Brace for Weak Revenues in Hit to Economy

In early March, the government said it would provide tax relief this year worth about 2.5 trillion yuan, including 1.5 trillion yuan in rebates. That amount -- more than double that of 2021 -- was announced as Beijing sought to shore up an economy facing a housing market slump and an expected slowdown in export growth.

Since that support was announced, however, the spike in Covid cases and the lockdown of Shanghai and other cities has made financial aid even more necessary for businesses that are struggling with a massive dropoff in consumer spending and the disruption of supply chains.

Read More: China's Economic Activity Collapses Under Xi's Covid Zero Policy

In Jilin province, which was in lockdown for much of March and April, fiscal revenue slumped almost 75% in April from a year ago, while healthcare expenditure rose 79%, according to a Bloomberg calculation based on a government statement this week. The pandemic and tax breaks were the main reasons behind the income drop, the government said.

Testing Times

Regular mass testing of much of the nation's 1.4 billion people could cost 1.8% of gross domestic product and take money away from other government expenditure in areas such as infrastructure, Nomura economists led by Lu Ting wrote in a recent report. That would be about the same size as the official defense budget, according to estimates from the Stockholm International Peace Research Institute.

General fiscal revenue dropped in April in at least 10 cities and provinces across China which have reported data, with income for some localities halving or worse. Wenzhou, a port and industrial city in Zhejiang province known for its vibrant small businesses, saw revenue drop by about 75% after a 2% increase in March.

Technology hub Shenzhen saw a 44% decline, while major manufacturing base Suzhou was down by about 50%. For Shenzhen, the main reason for the decline was a combination of tax and fee cuts, including refunds of value-added taxes and tax deferrals for smaller manufacturers, the city's finance bureau said last week.

The drop in general revenue in April was due to the "active fiscal policy" needed to tackle downward pressure on the economy, Xu Hongcai, a deputy finance minister, said at a briefing on Tuesday. Around 800 billion yuan in value-added taxes that had been collected previously were returned to taxpayers, exceeding the government's expectations, he said.

"It's meant to benefit companies and boost market vitality at the cost fiscal income," Xu said. "With the effects of measures coordinating Covid control and economic development kicking in, fiscal income will rebound steadily."

Revenue for the first four months of this year would have increased 5% from a year earlier had it not been for the tax rebates, the finance ministry said.

Economic Slowdown

However, there's also evidence that slowing economic activity and the property downturn is denting the government's coffers. The income from deed taxes, which are paid when a property is bought or sold, fell 27.4%, and the income from land sales tumbled nearly 30% in the first four months of 2022 compared to a year earlier, according to the MOF statement. That revenue dropped almost 38% in April alone to the lowest since 2017.

Many provinces were already forecasting double-digit declines in land sale revenue this year, including rich areas like Beijing, Shanghai and Zhejiang. Total revenue from the sale of government land rose 3.5% last year and 16% in 2020.

Read More: Rare China Mortgage Rate Cut May Do Little to Stop Housing Slump

Tax income from vehicle purchases plummeted 28.3% in the first four months of 2022 from a year ago. The lockdown of Shanghai meant not a single car was sold there last month, and nationwide car sales fell the most in two years in April, down almost 36% from a year earlier to 1.06 million units, China Passenger Car Association data released last week showed.

Some analysts have started calling for the government to sell more bonds this year to pay for extra spending and make up for falling income. The government sold 1 trillion yuan of "special sovereign bonds" in 2020 to pay for measures to fight the pandemic, but didn't sell any last year or include them in this year's plan.

(Updates throughout with additional context and data.)

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