At present, China’s economic strength is facing challenges created by uncertainties from outside, especially the escalation of trade frictions.

Due to these uncertainties, an economic downturn appears to be inevitable in 2019 and for a few years ahead. In the second half of 2018, the slowdown of economic growth became apparent; the growth rate in the first two quarters stood at 6.9 percent and 6.8 percent but declined to 6.5 percent in the third quarter and 6.4 percent in the fourth quarter. But the average growth rate for the overall year will stand at 6.5 percent, a modest figure -- by China's standards -- that was confirmed by the 2018 Two Sessions.

In 2019, faced with the unstoppable slowdown, what we need to do is to manage the certainties, things over which we have control and with which we have a successful record of managing. In this regard, China’s huge market potential serves us well.

Currently, there’s an urgent need to expand China’s domestic demand, which hinges on investment and consumption and is exactly where our great potential as an emerging economy lies. As far as I am concerned, effective investment should be the top priority, as it is needed everywhere from urban areas to rural ones in China’s industrialization drive.

Of course, a balance should be maintained between investment and consumption. I am not in favor of only putting consumption expansion first, as I believe that sustainable consumption is the result of effective and robust investment.

In addition, when handling certainties, we need to make sure that we combine our short-term needs for the “six stabilities” (stable employment, financial stability, stable foreign trade, stable investment, stable foreign investment and stable expectations) with the basic and long-term goals that we must unswervingly master in our efforts to achieve modernization by 2035.

In line with such a strategic vision, the current fiscal policy inevitably needs to be more proactive, which is also a clear requirement at the decision-making level. In 2019 and for a few years ahead, our fiscal policy needs to be proactive from the following three angles.

First, it is necessary to further increase the deficit rate.

According to official data, the deficit rate for 2018 stands at a modest 2.6 percent. In 2019, considering every possible factor, I think the rate can be at least lifted to 3 percent as that number represents a positive indicator. In 1991, when the Treaty of Maastricht was signed, the European Union member states agreed to a round number threshold of 3 percent as a control line or an early warning line for fiscal deficits. It is not recognized internationally, though - the United States and Japan refused to accept it. Later, when the global financial crisis broke out, smaller economies such as Greece and Portugal went over this line, and EU leaders such as Germany and France also got over it for some time. In spite of this, 3 percent still plays a role of wind vane effects on risk prevention.

I don’t think there’s any problem in risk control if China lifts the figure to 3 percent in 2019 and I think the rate could even go a little bit bolder in the next year or two, if necessary.

With the increase in the deficit rate, China’s current mechanism for deficit coverage requires us to properly increase the amount of debt. China already has a standard framework for public debt, which includes national debt and local government bonds. The public debt-to-GDP ratio released by the government is less than 40 percent, which is a modest figure. But a lot of attention has been paid to local governments’ implicit liabilities.

In my opinion, we must be alert to local governments’ implicit liabilities, and to analyze how it comes into being at this stage. Like many, I also don’t think China’s local implicit liabilities is so high as to pose severe systemic risks, but still, preventive measures are necessary.

Second, there should be a strong emphasis on tax reduction.

China’s tax reduction is characterized by using comprehensive tax cuts to reduce the tax burden on businesses and individuals, which is also an indispensable policy tool we use in our supply-side structural reform.

Besides tax reduction, we should also take into consideration China’s taxation reform - how China moves towards a modern society and forms a modern taxation system. From this perspective, we need to be especially careful not to simply copy US President Donald Trump’s tax reduction measures. The tax structures of China and the United States are totally different, with indirect tax at the center of the former and direct tax at the center of the latter. Of China’s indirect taxes, the most influential is the value-added tax or VAT, which is the largest now that the country replaced the business tax with it. We need to lower the standard rate of VAT further. These are all things that we should actively consider this year and in the next year.

Third, could the standard rate of 25 percent for corporate income tax be reduced to some degree? To small- and medium-sized enterprises, half the tax will be exempted, which will last through the end of the 13th Five-Year Plan (2016-2020). But after 2020, we need to consider whether to continue with such a tax exemption method or not during the 14th Five-Year Plan (2021-2025).

Jia Kang is former director of Research Institute of Fiscal Science, Ministry of Finance, and head of China Academy of New-supply Side Economics. The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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