China Swings Into Deficit

The surge in government spending late last year to counter the economy’s slowdown has swung China into deficit for the full year.

Finance ministry preliminary data published February 1 showed that central and local governments entered December with a combined surplus of 1.2 trillion yuan ($175 billion) but ended the month with a deficit of 110 billion yuan.

The ministry said spending was up 30% in December on the same month a year ago, at 1.7 trillion yuan, though there was no breakdown of where the extra spending went. Meanwhile, revenue fell due to lower corporate profit tax payments and a range of tax cuts and rebates.

For 2008 as a whole, government spending rose 25.4% to 6.2 trillion yuan, while revenue increased 19.5% to 6.1 trillion yuan.  China ran a surplus the previous year equivalent to 0.7% of GDP.

At 0.4% of GDP, the 2008 deficit is no great burden and still leaves plenty of scope for more pubic stimulus spending and/or tax cuts. With the government warning that 2009 looks like being the toughest year for the economy since 2000, both are likely.

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