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China's fiscal deficit follows Evergrande, power crunch as next worry

Beijing's budget shortfall set to double to over $150 billion in 2025

China's baby-boom generation is set to begin hitting the statutory retirement age next year.   © Reuters

BEIJING -- Already grappling with the twin trouble of the Evergrande crisis and a crippling power shortage, China also faces the long-term problem of a rapidly rising fiscal deficit -- a challenge that could force Beijing to tackle unpopular reform.

China's fiscal deficit is on track to more than double to over $150 billion in 2025, as a slowing rise in tax intake and impending mass retirements among the baby boom generation further weight on government finances.

The Chinese Academy of Fiscal Sciences, a government-affiliated think tank, forecasts fiscal revenue in 2025 at 24.64 trillion yuan ($3.8 trillion), up 14% from the projected tally for this year, with fiscal spending jumping 34% over the same period to 35.29 trillion yuan. That puts the deficit at 10.65 trillion yuan, 2.3 times the estimate for 2021.

The prospect of a fast-widening shortfall in government finances that have been considered solid puts Beijing in a tough position. China Evergrande Group's troubles have already shone a light on the state of the country's real estate market and looming corporate debt risks. Government efforts to cut down on energy consumption -- which have already forced Apple and Tesla suppliers to halt production -- also risk rattling the world's second-largest economy.  

Estimates released in August 2020 by another government-linked think tank, the Development Research Center of the State Council, showed the deficit climbing to 7% of nominal gross domestic product in 2025 from 4.2% in 2021. That would break the record of 6.2% set last year, when economic damage from the coronavirus pandemic dented tax intake.

The deficit is projected to expand roughly 30% a year from 2023 on, as slowing economic growth keeps tax income stagnant.

The Academy of Fiscal Sciences projection likely follows this estimate and the People's Bank of China in assuming a gradual economic slowdown in the coming years. The Development Research Center assumes real GDP growth will remain around 5% annually, while the central bank forecasts the potential growth rate slowing to 5.1% in 2025 from 5.7% this year.

Meanwhile, expenditures are set to keep expanding 7% to 8% a year, as the aging population drives up spending in areas the government has little control over, such as the social safety net.

After the Great Leap Forward, China saw a 60% surge in births between 1962 and 1966 compared with the preceding five years. The oldest members of this group will begin reaching the government-mandated male retirement age of 60 next year, and state pension and medical spending obligations are likely to mount quickly thereafter.

This is in addition to rising public spending on health and hygiene measures in response to the pandemic.

Beijing's attempt to raise the retirement age faces protests from parents who count on their parents to look after children.    © Reuters

Deteriorating fiscal health could affect budgeting for the military and public security -- spending that has helped the Chinese Communist Party maintain control.

The warnings of a difficult fiscal future come as authorities try to make the case for urgent reform to rein in spending on social programs, but doing so would risk public anger.

The government is considering raising the retirement age to mitigate the impact of an aging population. Many local authorities held roundtable meetings this past summer to get input from a range of fields, and Chinese media have carried numerous articles from academics and others explaining the need to change the system.

But these do not appear to have swayed much of the public. Posts objecting to policies aimed at "just reducing pension payments" have cropped up on microblogging service Weibo.

Young people already struggling to find jobs fear that raising the retirement age would make it even harder for them to find employment. Middle-aged and older people with a deep-rooted view that families are responsible for caring for children wonder who will look after their grandchildren.

Unpopular measures to rein in welfare spending risk a public backlash that could prove problematic for President Xi Jinping as he seeks a third term at the twice-a-decade party congress next fall.

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