This year is the first year of the decisive stage in finishing building a moderately prosperous society in all respects and an important year for surmounting difficulties in the push towards structural reform. China's economic fundamentals remain favorable for long-term growth, its economy remains resilient with strong potential and ample room for growth, the foundation and conditions for supporting sustained growth remain intact, and the momentum for economic structural adjustment has not slackened. Yet at the same time, China must simultaneously deal with the slowdown in economic growth, make difficult structural adjustments, and absorb the effects of previous economic stimulus policies. Structural issues are pulling down total factor productivity growth, and the economy still faces considerable downward pressure.

On the fiscal front, China receives most of its tax revenue from taxes related to goods and services, so as economic growth slows down and the PPI continues to fall, fiscal revenue growth is slowing at a rate greater than that of GDP growth. Additionally, the greater reductions in taxes and fees aimed at maintaining steady economic growth and pushing forward structural reform, and the substantial loss in revenue from across-the-board implementation of the reform to replace business tax with VAT in particular, are further pulling down growth in fiscal revenue. On the other hand, government expenditures are rather inflexible and will be driven up by the efforts to transform the growth model, strengthen points of weakness, and guard against risks. On the whole, the fiscal situation in 2016 will present a more challenging environment in which to achieve a balance of payments.

In light of the fiscal and economic landscape, in preparing the budgets for 2016 and carrying out public finance work, we need to thoroughly put into practice the guiding principles from the 18th National Congress of the CPC, the third, fourth, and fifth plenary sessions of its 18th Central Committee, the Central Economic Work Conference, and General Secretary Xi Jinping's major policy addresses. Acting in accordance with the decisions and plans of the CPC Central Committee and the State Council, the overall plan for promoting all-round economic, political, cultural, social, and ecological progress, as well as the Four-Pronged Comprehensive Strategy,*(1) we must firmly establish and put into practice the philosophy of innovative, coordinated, green, open, and shared development, adapt to the new normal in economic development, adhere to the policy of reform and opening up as well as the general principle of making progress while keeping performance stable, and follow the general guidelines that macro policies should be stable, industrial policies targeted, micro policies flexible, reform policies practical, and that social policies should ensure basic living needs. We will continue to implement proactive fiscal policy and increase its intensity. We will accelerate reform of the fiscal and tax systems, promote supply-side structural reform while moderately expanding aggregate demand, support efforts to cut overcapacity and excess inventory, deleverage, reduce costs, and strengthen points of weakness, and facilitate adjustments to the industrial structure and the emergence of new drivers of growth. We need to continue to manage public finances on the basis of law and fulfill all of the requirements of the Budget Law. We need to increase overall coordination in the use of government funds, put both idle and additional funds to work, and optimize the structure of budgetary expenditures to improve the performance of fiscal spending. We need to tighten our belts, practice thrift, and prioritize expenditures towards ensuring the basic living standards of the people while strictly controlling general expenditures and reducing other expenditures. We need to strengthen government debt management, effectively guard against fiscal risks, and work hard to ensure a good beginning for economic and social development in the 13th Five-Year Plan period.

(1)* The Four-Pronged Comprehensive Strategy is to make comprehensive moves to finish building a moderately prosperous society, deepen reform, advance the law-based governance of China, and strengthen Party self-conduct.

We will continue to implement proactive fiscal policy in 2016 and increase its intensity. This will be mainly reflected in the following four areas.

First, we will further reduce taxes and fees.

We will implement the trials for replacing business tax with VAT in all sectors, extending it to the construction, real estate, financial, and consumer service industries, and allowing businesses to deduct the VAT on their new real estate purchases or on their payments for real estate rentals. We will step up efforts to clear up and reform administrative charges and government-managed funds by expanding the scope of exemptions for 18 types of administrative charges from only small and micro businesses to all enterprises and individuals, reducing required payments into new vegetable land development funds and forestry maintenance funds to zero, suspending the collection of payments into price adjustment funds, and increasing the body of tax payers eligible for exemption from educational surcharges, local educational surcharges, and water conservancy development fund payments by raising the cutoff for eligibility from a monthly sales or turnover figure of 30,000 yuan to 100,000 yuan. It is projected that the above tax and fee reduction policies will save businesses and individuals more than 500 billion yuan over the course of 2016.

Second, we will allow the deficit to increase.

Government deficit for 2016 is projected to be 2.18 trillion yuan nationwide, an increase of 560 billion yuan over 2015, and the deficit to GDP ratio is projected to be 3%, 0.6 percentage points higher than 2015. While appropriately increasing mandatory government expenditures, we will ensure the expanded deficit goes mainly towards filling the gap in government revenue left by tax and fee reductions, enabling the government to meet its expenditure responsibilities.

In addition, we will also allow a considerable rise in the special debt of local governments that is included in the budgets of government-managed funds, and we will put into use more carryover and surplus funds so as to ensure sufficient levels of both total spending and key area spending.

Third, we will adjust and optimize the structure of expenditures.

We will make the proper arrangements for expenditures aimed at promoting the wellbeing of the people in line with the principles of sustainability and ensuring basic needs. We will strictly control budgets for spending on official overseas visits, official vehicles, and official hospitality, while also reducing general expenditures such as those related to meetings. We will carry out rational assessments of policy-linked expenditures and unsustainable expenses, such as those made on overly ambitious commitments or on overly high expenditure standards during times of high revenue growth, and make prompt reductions on the basis of these assessments. We will improve the structure of transfer payments, focusing on cutting the number of special transfer payment items while making corresponding increases to general transfer payments aimed at creating more equitable access to basic public services as well as to transfer payments for old revolutionary base areas, areas with concentrations of ethnic minorities, border areas, and poor areas. Infrastructure investment by the central government will be more focused on basic public welfare projects within its purview, and less on small or miscellaneous projects. This investment is projected to be 500 billion yuan in 2016, which is an increase of 22.4 billion yuan over 2015.

Fourth, we will increase overall coordination in the use of fiscal funds.

We will appropriately trim the 2016 budgets for regions and departments that had a significant amount of government funds left over at the end of 2015. We will promptly reallocate funds that are no longer being used into key spending areas and reduce carryover expenditures produced by accrual accounting. We will move the carryover and surplus funds of government-managed fund budgets that exceed stipulated ratios into general public budgets so that they can be utilized in a coordinated way. We will also raise the proportion of funds transferred from the budgets for state capital operations into general public budgets. At the same time, we will make innovations in the way the government carries out its expenditures with a view towards increasing efficiency.

Education

We will further improve the mechanisms for ensuring funding for urban and rural compulsory education and set a unified benchmark for public funding per student in compulsory education schools. We will continue to carry out major projects such as the initiative for improving conditions in badly built or poorly operated rural schools providing compulsory education, and eligible students from families with financial difficulties will be the first to be exempted from tuition and miscellaneous fees at regular senior high schools. We will continue to implement the quality improvement plan to develop modern vocational education, encouraging local governments to establish sound systems for allocating funds to vocational colleges based on student enrollment, improving conditions in secondary vocational schools, training a contingent of teachers strong in both theory and practice, and promoting the integration of vocational education with industry work as well as cooperation between colleges and businesses. We will support the development of kindergartens open to all children. We will improve the budgetary appropriation system for institutions of higher learning and guide these institutions in improving their quality, optimizing their structure, and developing their own unique characteristics. We will improve the system of policies for providing financial aid to students from poor families and make such aid more targeted.

Science and technology

We will complete the optimization and integration of science and technology programs financed by the central government, finish building an open and unified national science and technology management platform, and establish a mechanism for entrusting the management of research programs to specialized agencies. We will give a high level of support to the National Natural Science Foundation of China, major science and technology projects, and key research and development programs. We will accelerate the implementation of the national seed fund for encouraging the application of scientific and technological advances and put in place loan default compensation mechanisms for banks in order to encourage them to provide loans to medium, small, and micro businesses. We will promote the establishment of a number of national laboratories in important innovation fields. We will facilitate the reform and development of research institutions by improving the mechanisms for providing them with consistent support. We will put in place management mechanisms for post-research program subsidies.

Social security and employment

In 2016, the central government will subsidize local governments in raising the level of subsistence allowances by 5% in urban areas and 8% in rural areas. We will conduct research on the establishment of a sound system for providing basic necessities to extreme poverty groups as well as mechanisms for guaranteeing funding for these efforts. We will support localities in comprehensively establishing systems for providing living allowances to needy persons with disabilities and for providing care service subsidies to people with serious disabilities. We will ensure the implementation of benefits for entitled groups and support the proper settlement of demobilized military personnel.

Health care

We will set up sound, sustainable mechanisms for various parties to reasonably share the costs of health insurance. We will raise the annual government subsidies for basic health insurance for rural and non-working urban residents from 380 yuan to 420 yuan per person, and increase annual personal contributions from 120 yuan to 150 yuan per person, with the increases to be mainly used to provide better basic medical insurance and boost support for the major disease insurance scheme for rural and urban non-working residents. We will increase government subsidies for basic public health services from 40 yuan to 45 yuan per person per year. We will integrate the basic health insurance systems and their management systems for rural and non-working urban residents. We will comprehensively advance the reform of health insurance payouts to help control medical expenses and regulate medical treatment practices. We will press ahead with the reform of public hospitals and community-level health care institutions, adjust and optimize the distribution of medical resources in conjunction with the new type of urbanization, and put in place a tiered diagnosis and treatment system. We will work to reduce the burden of medical expenses on low-income patients suffering from major or critical diseases by providing them with assistance and ensuring such assistance is better linked with other health insurance programs.

Fighting poverty

In 2016, the central government will increase all expenditures relating to poverty alleviation efforts; this includes the appropriation of an additional 20.1 billion yuan of funds earmarked specifically for poverty reduction, which is an increase of 43.4% over last year. We will further expand the pilot scheme for helping those living in poverty realize returns on their asset investments, work hard to relocate those living in inhospitable areas, support poor counties in integrating the use of government funds for rural development, and concentrate our efforts on tackling severe poverty. We will continue to provide assistance to ethnic minorities living in poverty and to poor state-owned agricultural farms and forestry farms, and we will also provide poverty-relief employment programs. We will put into effect programs to use public welfare funds financed by lottery proceeds in support of old revolutionary base areas facing poverty. While delegating powers for the review and approval of programs supported by poverty-relief funds, we will strengthen supervision over such funds to ensure their secure and effective use. With targeted measures for reducing poverty, we will work to help poor areas tap into their potential for development and make their development sustainable so that both poor areas and poverty groups can lift themselves out of poverty at an even faster pace.

Agriculture

We will make adjustments to the structure of agricultural expenditures, increasing support to efforts to promote sustainable agricultural development. We will work to discourage the excessive use of insecticides and fertilizers and explore conducting trials on the implementation of systems of crop rotation and fallow land. We will introduce policies to promote adjustments to the agricultural production mix and support comprehensive price reform of water used for agricultural purposes. We will continue to move ahead with trials for restoring and improving cultivated land contaminated by heavy metals as well as trials for comprehensively dealing with the over-abstraction of groundwater.

Ecological conservation and environmental protection

We will go further in supporting efforts to control air pollution. We will promote the implementation of the action plan for water pollution prevention and control. We will carry out trials for the restoration and improvement of mountain, water, forest, and farmland ecosystems. We will implement a new round of policies for providing subsidies and awards to efforts to return marginal farmland back into forest or grassland and to preserve the ecology of grasslands. We will put in place nationwide coverage of protective policies for all natural forests, and appropriately increase subsidies for natural forest protection projects as well as the levels of compensation for forest management and conservation efforts that produce a positive ecological impact. We will strengthen wetlands protection efforts and expand the scope of work to return cultivated land back into wetlands. We will increase efforts to promote the use of new-energy vehicles and accelerate the construction of battery-charging facilities. We will work to ensure the cleaner use of resources by promoting more efficient, centralized coal operations and utilizing pollutant-capturing equipment while restricting less efficient, dispersed coal operations. We will improve the mechanism for subsidizing the use of renewable energy for electricity generation and work to see that electricity generated from renewable energy can come on the grid at a price comparable to that of conventional electricity generation methods as soon as possible. We will expand the comprehensive demonstrations of achieving energy conservation and emissions reductions through fiscal policy as well as the scope of trials for having provinces situated on the upper and lower reaches of river basins compensate each other for their impact on water quality. We will promote reform of environmental monitoring systems so as to step up the pace of establishing a monitoring system in which the central and local governments assume separate responsibilities.

Government-subsidized housing projects

We will continue to carry out the trials of developing and operating public rental housing through PPP models. We will put in place preferential tax and fee policies and loan interest subsidy policies for projects to renovate run-down urban areas, promote efforts to grant direct monetary housing subsidies to people displaced by the redevelopment of such areas, and actively encourage government procurement of renovation services. This year we plan to start renovating 6 million housing units in run-down urban areas and 3.14 million dilapidated houses in rural areas.

Culture and sports

We will work hard to ensure that access to basic public cultural services becomes increasingly standardized and equitable, and that both quality and efficiency are increased in the provision of public cultural services. We will support efforts to help socialist art and literature thrive while promoting cultural exchanges and communication. We will improve the systems for providing policy support to cultural industries. We will continue to promote public fitness programs and support the reform and development of soccer in China. We will work to ensure adequate funding for China's preparation for and participation in the 2016 Olympic Games in Rio de Janeiro.

National defense and armed forces development

We will support efforts to deepen the reform of national defense and the armed forces and strengthen the military in all respects so that it is more revolutionary, modern, and standardized. We will promote integrated development of the economy and national defense. We will work hard to ensure that the capabilities of the armed forces are constantly improving, and that they are able to safeguard the sovereignty, security, and development interests of China.

Overcapacity reductions and the resettlement of workers

We will urge local governments and enterprises directly under the central government to accelerate their efforts to cut overcapacity in the steel and coal industries through the use of a combination of methods such as mergers, reorganizations, debt restructurings, and bankruptcy liquidations. In this process, the market should serve as a check, enterprises should be the major actors, local governments should play a coordinating role, and the central government should provide due support, while the responsibility for making sure that overcapacity reductions happen in a locality will be on the relevant provincial-level government. We will allocate a total of 100 billion yuan from the central government budget, including 50 billion yuan to be used in 2016, for setting up tiered awards and subsidies for eligible worker resettlement projects by local governments and central government enterprises. These awards and subsidies will be provided on the basis of levels of performance (linked mainly to overcapacity reductions), the number of workers that require resettlement, the level of hardships faced by the local government, and other factors. At the same time, local governments should also allocate funds on the basis of their task requirements to ensure that adequate financing is available during overcapacity reductions and work together with the central government to carry out this work successfully.

Figure 2

Projected Revenue and Expenditures in the General Public Budget of the Central Government for 2016

In accordance with the Budget Law, after the beginning of a new financial year and prior to the approval of the drafts of the central and local government budgets by the National People's Congress, arrangements may be made for the following expenditures:

-- carryover expenditures from the previous financial year

-- basic expenditures and program expenditures of government departments and transfer payments to lower-level governments that must be made in the current year, after referring to the amount of budgetary expenditures for the corresponding period of the previous year

-- expenditures mandated by law

-- expenditures for dealing with natural disasters and other emergencies

In accordance with the above stipulations, in January 2016, expenditures in the central government's general public budget totaled 838.7 billion yuan, which includes 153.7 billion yuan spent at the central level and 685 billion yuan in tax rebates and transfer payments made to local governments.