Free Essay. Fiscal Policy in China: Revenue and Expenditure Nexus

Price stability and sustaining the growth in output as well as employment requires a sound budgetary policy. Monetary policy lessens short-run fluctuations bringing the economy to its dormant state. It is, therefore, of importance that policymakers know the relationship between government spending and taxation. The link ensures progressive government deficits are avoided. Generally, the relationship impacts the budget deficit as it enacts approaches that stimulate government taxation (Narayan & Narayan, 2006). The other reason regarding the importance of this relationship is if, in an instance, the bi-directional cause does not hold. Then the government taxation decisions are made self-sufficient from the government spending decision.it eventually causes a high budget deficit rising faster the government spending, unlike its taxation. Also, if the spend-revenue theory holds, the government then first spends then pays later by increasing taxation.it leads in the future to more taxes encouraging the capital outflow. The paper will give insights on the fiscal policy in China, exploring the relationship between revenue and expenditure.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

Studies of the Relationship Between Revenue and Expenditure in China

The nexus between government taxation and spending has been investigated in various countries; however, a consensus is yet to be attained. Here is a review of some of the studies on the relationship between government taxation and spending in China. In the period between1977 to 1999, Chang and Ho studied the nexus and discovered a fiscal synchronization proposition (Chang & Yuan-Hong, 2002). Ho and Huang, later using panel information covering 1999 to 2005, tested the plan of spend-tax, tax-spend, and fiscal synchronization and found it was relevant to 31 of the provinces in China. The outcomes built on a multivariate panel error-correction approach and indicated no notable causality between taxes and spending. However, bidirectional causality was evident between revenues and spending, thus contributing to the fiscal synchronization proposition for the provinces in China. Alternatively, Yan and Gong also surveyed the impact of budgetary policy for China from 1997 to 2007 using panel information of the 31 regions (Adnan & Jalil, 2010). The conclusion was that the structure of revenue and government spending could affect in the long run the growth rate. It happens through labor-leisure choice and the choice to save, and on the other hand, growth rate and income revenue rate have an inverted-U association that is not always in existence.

What makes the Chinese case interesting?

The fiscal decentralization is what makes Chinese case particularly interesting. It is an essential component that has since seen the Chinese market economy transitioning and contributing remarkably to its economic performance (Jia, Guo, & Zhang, 2014). China has made notable efforts to break down the fiscal management system by use of commercial contracting systems and policy of tax sharing. Besides, this year, Chinas' fiscal spending has seen to contribute to the economy. It has focused on further cutting on taxes, mainly to small firms. The government also has unveiled more significant tax cuts and on infrastructure projects ensured more spending. According to economists, China saw its fiscal spending rise to 22.1 trillion Yuan in 2018. On the other hand, the revenue rose to 81.3 trillion Yuan (Naito, 2015). It is an indication that China, in 2018, achieved its fiscal revenue goal even with the presence of extensive cuts on taxes.

Fiscal spending, revenues, and debt in China.

For the fiscal year 2013, china's national fiscal revenues had gone to up to 10.1% to reach 12.9143 trillion Yuan, unlike the previous year (Naito, 2015). Of all the fiscal taxes, an estimate of 6 trillion and 6.9 trillion Yuan was owned respectively by the central and local governments. On the contrary, the fiscal expenditures of China rose to reach 13.9744 trillion Yuan compared to the previous year. In this case, approximately 2 trillion and 11.9 trillion were owned by the central and local governments.in the period 2000-2012, China's fiscal scale has shown growth together with the growth of the economy (Naito, 2015). However, in 2000, the fiscal revenue with the GDP ratio was 14%, and in 2012 it became 23%, as was the case for South Korea and Thailand (Naito, 2015). In looking at the ratios, fiscal revenues happen to be evenly presented, whereas the expenditures 15% and 85% by the central and local governments are well accounted for. For the last few years, the ratios have not changed; they happen to be on the same level.

On the contrary, in 2013, the fiscal deficit of China rose to 1.6 trillion. It resulted, therefore, in 2012, the debt to GDP ratio that was 1.6%, to rise to 2% (Naito, 2015).In 2013 compared to 2012, the issuance of bonds by local governments was 250 billion Yuan; it increased to 350 billion Yuan from 100 billion Yuan (Naito, 2015). In 2014, the debt of China was to be at the same level. Still, it illustrated there would an increase in the amount of bond issuance to 400 billion Yuan, an indication that it is an additional 50 billion.

Fiscal and debt management challenges in China

In China, the rampant growth in debt has indicated to introduce financial crisis. China opted to change from unsustainable investment-led growth, but it, in turn, led to an extraordinary high GDP from an investment rate of 41%. In 2010-2011 the investment rate was 47%; it had soared following the unleashing of real estate and boom of infrastructure construction that aimed to cancel threats to arising employment and exports. It worked efficiently with employment construction firms increasing to 45 million in 2013 from 28 million in 2007 (Naito, 2015). However, much investment was wasted with industrial sectors suffering acute overcapacity. Average returns on investment fell as well from 2007-2013, the incremental capital-to-output ratio in China was to attain an additional GDP, but it was a challenge.

Ultimately, the study on fiscal policy in China will resolve such issues of fiscal spending, revenues, debt, and problems in management. In that, the nature of the nexus between government taxation and expenditure will ensure it supports the tax-spend proposition, thus avoiding policy implementation that triggers the government revenue. Consequently, the fiscal policy will ensure bi-directional cause holds, meaning decisions regarding government revenue will be built independently away from decisions of spending (Narayan & Narayan, 2006). In a case, it does not that can cause high budget debts and government spending to rise higher than government taxation. Also, in instances of a spend-tax proposition means the government pays the revenue after raising taxes. It will eventually lead to an outflow of capital following fear of incurring more fees in the future.

It is widely acknowledged that by improving the economic efficiency that achieves to reduce remarkably activities of the government. China is a country with extremely high government spending creating notably inefficiencies in its operation of the economy like huge public deficits, unemployment, and high inflation (Naito, 2015). Therefore in holding on, the nature of the nexus between the government's spending and revenue is high of significance. As of now, the hypothesis of public expenditures is mainly literate by empirical studies. It is by quoting more evidence on the nexus between government taxation and spending in China that will enhance the theory of fiscal policy.

References

Adnan, Q. M., & Jalil, M. A. (2010). Revenue and Expenditure Nexus: A Case Study of Romania. Romanian Journal of Fiscal Policy, 1(1), 23-24. Retrieved from https://mpra.ub.uni-muenchen.de/32132/

Chang, T., & Yuan-Hong, H. (2002). A Note on Testing "Tax-and-spend, spend-and-tax, or fiscal synchronization": The Case of China. Journal of Economic Development, 27(1), 151-160. Retrieved from http://www.jed.or.kr/full-text/27-1/chang.PDF

Jia, J., Guo, Q., & Zhang, J. (2014). Fiscal decentralization and local expenditure policy in China. China Economic Review, 28, 107-122. Doi:10.1016/j.chieco.2014.01.002

Naito, J. (2015). China's Fiscal Position and Policy: Current Status of Local Government Debt Problems and Challenges. Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, 11(1), 68-70. Retrieved from https://www.mof.go.jp/english/pri/publication/pp_review/ppr027/ppr027c.pdf

Narayan, P. K., & Narayan, S. (2006). Government revenue and government expenditure nexus: evidence from developing countries. Applied Economics, 38(3), 285-291. Doi: 10.1080/00036840500369209