With nearly 10 billion yuan paid for anti-SARS endeavors and the most extensive tax incentives since 1949 in place, Minister of Finance Jin Renqing confessed that achieving fiscal targets for the year would be "more difficult."

Fiscal deficit has been on the rise since China implemented a pro-active fiscal policy in 1998. The budget deficit grew to 319.8 billion yuan (US$38.7 billion) in 2003, the second straight annual deficit in excess of 300 billion yuan.

As the treasury bonds issued five years ago began to mature this year and social security costs surged under increasing employment pressure, the sudden outbreak of severe acute respiratory syndrome (SARS) further strained the budget.

But local economists said the Chinese government had gained valuable experience in dealing with inflation and deflation over the past decade. Now it was exploring ways to handle sudden natural disasters.

Unsurprisingly, China maintained the continuity of its pro-active fiscal policy with the aim of retaining strong economic growth. It is hoped that fast economic growth will bring increased fiscal revenue.

The policy proved effective over the past five years. Fiscal revenue maintained double-digit growth over the past few years and its proportion of gross domestic product (GDP) increased. The target growth for fiscal revenue this year was 10 percent.

However, some economists said that if the SARS epidemic could not be controlled promptly and the economy lost speed, the Chinese government would have little choice but to step up the scale of its fiscal policy, which could lead to further increase in government debts and the budget deficit.

The ratios of Chinese government debt to the GDP and its budget deficit to the GDP are currently below internationally recognized danger levels.

But the Chinese government took preemptive measures as it pushed ahead with the pro-active fiscal policy.

The measures included promptly readjusting the direction of government investment, funded by issuing treasury bonds and sacrificing short-term interest in exchange for long-term growth.

The government announced earlier this month plans to allocate 2.3 billion yuan from the proceeds of treasury bond issues for the development of a disease control network around the country.

Local analysts said that in the past five years the government had gradually shifted the focus of investment from building infrastructure to improving people's living conditions and consumption environment.

The shift reflected the government's priority of improving the quality of economic growth.

In the past month, the Chinese government has adopted a series of tax incentives for industries most severely affected by SARS. The measures included reducing or exempting 18 types of administration fees, waiving enterprise contributions to 15 items of government fund, reducing or exempting taxes and giving reimbursements on loan interest to civil aviation and tourism companies.

The beneficiaries of this policy are mainly enterprises in the civil aviation, tourism, restaurant, hotel and transport sectors. Since their tax payments accounted for just 4 percent of the total tax revenue, the incentives did not have a major impact on government revenue.

Over the same period, tax revenue from the automobile, medicine and medical equipment industries surged. As a result, China's tax revenue grew 25.8 percent year-on-year in the first four months of the year.

The tax incentives proved effective in helping SARS-hit industries overcome difficulties. For every 100 million yuan that the government gave to civil aviation and tourist companies to cover the cost of interest on short-term loans, the companies benefited by an extra 5 billion yuan in operating funds.

Finance Minister Jin Renqing said the methods were low in risk and effective in stimulating economic activity.

After the Chinese government began allocating more money for tax rebates to companies that exported their products overseas, exports increased. The country managed to reverse a trade deficit in the first quarter and achieved a trade surplus of US$1.02 billion in April. This helped consolidate the country's fiscal and financial security.

"The current reduction of fiscal income and increase of expenditure are the cost we have to pay for promoting healthy development of the national economy," Jin said.

"We will definitely gain more fiscal revenue through promoting economic growth," he said.

The impact of SARS on China's economy has already been and will continue to be felt in the fiscal sector. The Chinese government has shown increased flexibility in dealing with such impacts. As the Ministry of Finance issued an additional 35 billion yuan worth of treasury bonds this week, it stated that fiscal and taxation policy decisions would be made depending on how the situation developed.

As a result of strong government input, the economy grew 8.9 percent in the first four months of the year.

(Xinhua News Agency May 22, 2003)