The following is the full text of the Report on the Implementation of the Central and Local Budgets for 2004 and on the Draft Central and Local Budgets for 2005, submitted to the Third Session of the Tenth National People's Congress on March 5, 2005.
REPORT ON THE IMPLEMENTATION OF
THE CENTRAL AND LOCAL BUDGETS FOR 2004 AND
ON THE DRAFT CENTRAL AND LOCAL BUDGETS FOR 2005
(Third Session of the Tenth National People's Congress, March 5, 2005)
The Ministry of Finance has been entrusted by the State Council to submit this report to the Third Session of the Tenth National People's Congress (NPC) on the implementation of the central and local budgets for 2004 and on the draft central and local budgets for 2005 for your examination and approval and also for comments and suggestions from the members of the National Committee of the Chinese People's Political Consultative Conference (CPPCC).
I. Implementation of the Central and Local Budgets for 2004
All local authorities and departments conscientiously implemented the principles and policies set by the central authorities and the related decisions and resolutions passed at the Second Session of the Tenth NPC in 2004. There was continued progress in economic development and in all social undertakings and people's lives improved. The central and local budgets were implemented well.
From a base of just over 2 trillion yuan for 2003, national revenue rose to 2.635588 trillion yuan (excluding revenue from generation of debt, both here and below), 464.063 billion yuan or 21.4% more than the previous year and representing 111.8% of the budgeted figure. National expenditures totaled 2.836079 trillion yuan, an increase of 371.084 billion yuan or 15.1% year-on-year and representing 105.9% of the budgeted figure. Expenditures exceeded revenue by 200.491 billion yuan.
Total revenue in the central budget amounted to 1.508154 trillion yuan, up 215.071 billion yuan (after deducting the additional 127.532 billion yuan used for export tax rebates), or 16.6% over the previous year and representing 109.1% of the budgeted figure. Total expenditures in the central budget came to 1.827439 trillion yuan (including 1.037877 trillion yuan in tax rebates and subsidies for local authorities), 214.588 billion yuan or 13.3% more than the previous year and representing 107.4% of the budgeted figure. The deficit in the central budget was 319.285 billion yuan, 545 million yuan less than the 319.83 billion yuan approved at the Second Session of the Tenth NPC. Total revenue in local budgets amounted to 2.225853 trillion yuan (including tax rebates and subsidies granted by the central government), an increase of 414.714 billion yuan or 22.9% year-on-year and representing 112.6% of the budgeted figure. Total expenditures in local budgets came to 2.107059 trillion yuan (including 60.542 billion yuan turned over to the central government), 322.218 billion yuan or 18.1% more than the previous year and representing 106.6% of the budgeted figure. Local revenue exceeded expenditures by 118.794 billion yuan and this surplus is to be rolled over into the budget for this year. These figures may change a little when the final accounts are prepared.
The main situation during the implementation of the central budget and financial work in 2004 is as follows.
1. Implementing the central budget in accordance with the law and properly utilizing revenue in excess of the projected figure.
Under the correct leadership of the Party Central Committee and the State Council, the people of all our ethnic groups worked hard to carry out the principles and policies set by the central authorities. As a result, major national economic indexes were noticeably better than expected. The sustained, rapid and sound development of the national economy and greatly improved performance of enterprises laid a solid foundation for the large increase in revenue. Taxpayers paid their taxes honestly and in accordance with the law, and financial, tax and customs departments tightened management. All this effectively guaranteed good revenue growth. National revenue increased by 464.063 billion yuan. If the additional 127.532 billion yuan used to clear up overdue payments on export tax rebates is included, national revenue would increase by 591.595 billion yuan, a 27.2% year-on-year increase. The main taxes collected in 2004 are as follows. Domestic value added tax (VAT) increased by 178.118 billion yuan over the previous year, or 100.231 billion yuan over the projected figure. Import tax collected by customs agencies was 90.079 billion yuan more than last year's figure, all of which is in excess of the projected figure. Corporate income tax grew by 103.078 billion yuan, 71.03 billion yuan more than the projected figure. Personal income tax increased by 31.787 billion yuan, 11.591 billion yuan over the projected figure. Domestic consumption tax rose by 31.905 billion yuan or 25.131 billion yuan in excess of the projected figure; business tax, 73.616 billion yuan, or 35.061 billion yuan more than the projected figure. The revenue increase resulted from the collection of these six taxes totaled 508.583 billion yuan, accounting for 86% of the total revenue increase of 591.595 billion yuan.
At the same time, it should be noted that around 200 billion yuan of the surplus was due to special and one-time factors. First, part of the revenue increase for 2004 occurred due to overheated investment in some industries and price rises. A total of 70 to 80 billion yuan more was collected in the form of VAT than in most years due to the introduction of the "production-side VAT," which increased in line with the overheated growth of investment and added value of industry, where the new VAT is mainly collected. Second, the reform of the export tax rebate mechanism resulted in the loss of a quarter from the fiscal year of 2004 and reduction of export tax rebates by 3 percentage points on average, thereby cutting expenditures by nearly 100 billion yuan in the budget. Third, nearly 30 billion yuan in additional revenue was generated when the tax departments cleared up transitional accounts.
The revenue in the central budget was 253.771 billion yuan (including the additional amount used to pay export tax rebates) in excess of the figure projected for 2004. We acted in accordance with the directive of the Central Committee and the State Council to adopt a scientific outlook on development, with the Decision of the NPC Standing Committee on Strengthening Examination and Oversight of the Central Budget and with related resolutions formulated at the Second Session of the Tenth NPC. Moreover, since a large part of the surplus was due to special and one-time factors, we deemed it inappropriate to use the surplus to increase regular expenditures. The surplus was therefore mainly used to clear up payments in arrears and to increase spending to balance economic and social development. Specifically, the additional 127.532 billion yuan that was to be spent on export tax rebate payments was used to clear up overdue payments. The 3.57 billion yuan from increased collection of the vehicle purchase tax was used for special purposes as required by relevant regulations. An additional 32.103 billion yuan was spent on education and science, on tax rebates and general transfer payments for local authorities and on transfer payments for ethnic minority regions as required by relevant laws and regulations and by the regulations governing the system of public finance. Another 15.604 billion yuan was used to support the reform of rural taxes and administrative charges as well as grain production. A total of 40.485 billion yuan was spent to pay overdue grain compensation for returning cultivated land to forests. A further 3.25 billion yuan was used to pay basic old-age pensions for workers retiring from state-owned enterprises and fund subsistence allowances for urban residents. A total of 14.856 billion yuan was paid into the national social security fund, 3 billion yuan was used for subsidies to support the closing down or bankruptcy of enterprises, and an additional 13.371 billion yuan was spent to fight disasters and provide relief. In making these arrangements, we looked in all directions to prevent risks and adhered to a scientific outlook on development that requires putting people first and striving for well-rounded, balanced and sustainable development. We brought general expenditures under control and supported macroregulation and balanced economic and social development. The State Council has reported these arrangements and uses for the surplus in the central budget to the NPC Standing Committee. The revenue in excess of the projected figures in local budgets was used by local authorities mainly to alleviate financial difficulties in counties and townships, fund expenses for science, education, culture and health, support agriculture and clear up overdue debts.
2. Following a scientific outlook on development while taking all issues into consideration.
1) Adopting a series of policies and measures to promote increases in grain production and rural incomes.When compiling its budget for 2004, the central government gave top priority to supporting agriculture, rural areas and farmers through increased investment and preferential policies. Responding to new developments in macroeconomic operation, particularly changes in grain production, the Central Committee and the State Council in late March decided to intensify efforts to solve the problems facing agriculture, rural areas and farmers by adopting more effective measures. Taking into consideration the overall interests of the country, the Ministry of Finance did everything possible to secure funding for this effort in spite of all the difficulties and increased spending to support agriculture by 15.604 billion yuan. Financial authorities at all levels adopted concrete measures on their own initiative to fully implement the policy of "two reductions or exemptions, and three subsidies" [exempting all taxes on native agricultural products except for tobacco, exempting or basically exempting the agricultural tax, directly subsidizing grain producers and subsidizing the purchase of improved crop strains and large agricultural machinery and tools, tr.]. Besides repealing all taxes on native agricultural products except for tobacco, the central government exempted or basically exempted Jilin and seven other provinces from paying the agricultural tax. In addition, the tax rate was reduced by three percentage points in Henan and ten other major grain-producing provinces as well as Guangdong Province, in some cases through local initiative, and the rate was reduced by one percentage point in another 11 provinces, including Shanxi. Subsidies were given directly to grain producers in 29 provinces, autonomous regions and municipalities directly under the central government; the purchase of improved strains of rice, wheat, corn and soybeans was subsidized in Hebei and 12 other major grain-producing provinces; and the purchase of large agricultural machinery and tools was subsidized in 66 major grain-producing counties and in the land reclamation zones under the jurisdiction of the central government. A total of 31.32 billion yuan was allocated from the central budget to fund this policy. In addition, the central government also adopted the following policies and measures to support agriculture. First, funding for bond-financed agriculture projects was increased by 38 billion yuan in 2004, representing 34.5% of the total increase in funds for bond-financed projects. Second, to ease the impact on social security recipients of price rises for grain and other basic foodstuffs, beginning in the second half of 2004, an additional 2.25 billion yuan was spent to increase basic old-age pensions for workers retiring from state-owned enterprises and 1 billion yuan more was allotted to fund subsistence allowances for urban residents. Third, increased funding for overall agricultural development mainly went to major grain-producing areas, and the 6.316 billion yuan for improving agricultural production conditions was changed from interest-bearing loans to non-interest-bearing loans. Fourth, we conscientiously implemented the preferential policy requiring that increased spending on education, health and culture be concentrated on rural areas and on the effort to stabilize prices for the means of agricultural production. Fifth, around a dozen agriculture-related administrative and institutional charges were cancelled, exempted or reduced. Sixth, we funded the training of more than 2 million rural workers in urban areas, about 80% of whom have found jobs. All in all, support for agriculture, rural areas and farmers from the central budget in 2004 was the largest in many years. Thanks to these sound policies, favorable weather and our hard work, grain output was good, farmers benefited, and the rising trend in prices was weakened. All this has laid a solid foundation for the central authorities to improve macroregulation by starting with support for agriculture, rural areas and farmers.
2) Effectively slowing the overheated growth of investment in some industries by adjusting the orientation and strength of government investment. Taking into consideration the necessity of maintaining the "five balances" [balancing urban and rural development, development among regions, economic and social development, development of man and nature, and domestic development and opening wider to the outside world, tr.], we took the initiative to adjust the orientation of funds for bond-financed projects, expanding investment in some sectors and reducing it in others. The focus of our efforts was to ensure adequate funding for key ongoing projects and projects in agriculture, forestry, water conservancy, science and education, culture and health, energy and road building in counties and townships. We put off other investment projects where possible, and in particular, suspended funding for projects in certain overheated industries. These changes allowed us to strengthen the management of budgets for bond-financed projects by improving the examination and approval process and allocating funds in strict accordance with construction progress. A total of 45.692 billion yuan was left over for use in bond-financed projects in 2005. In addition, we adjusted some policies related to tax reduction or exemption in the real estate industry as needed and increased support for agriculture while controlling the pace of urban expansion through measures such as adjustment of the structure of funds from land-use fees to use some of them to develop agricultural land. These measures played an active role in ensuring effective macroregulation and balancing economic and social development.
3) Energetically supporting work related to employment, reemployment and social security to promote harmonious social development. We conscientiously carried out the fiscal and tax preferential policies formulated by the central authorities to promote employment and reemployment and continued to support implementation of the program for college student volunteers to serve in the western region. The central government increased funding for reemployment subsidies by 2.225 billion yuan, up 54.6% year-on-year. Local authorities also made corresponding allocations for employment subsidies, effectively contributing to employment and reemployment efforts. We continued to successfully maintain the "two guarantees" [guarantee of a basic living allowance for workers laid off from state-owned enterprises and guarantee that the pensions of retirees are paid on time and in full, tr.] and work to ensure that the urban poor receive subsistence allowances. The central government spent 14.4 billion yuan on basic living allowances for laid-off workers to ensure they were paid on time and in full and took concrete measures to incorporate the allowances into the unemployment insurance system. The central government paid 52.4 billion yuan in transfer payments for old-age insurance, guaranteeing that basic pensions for workers retiring from state-owned enterprises were paid on time and in full. In addition, allocations from the central budget were used to support pilot programs to improve urban social security systems in Jilin and Heilongjiang provinces.
The central government earmarked 296 million yuan to subsidize local governments in steadily implementing a new system for rural cooperative medical and health care services on a trial basis. In addition, 300 million yuan was taken from lottery funds for public welfare to develop the rural medical assistance system. A financial guarantee mechanism was set up with 1.5 billion yuan in special transfer payments from the central budget plus corresponding funding from local budgets to improve the living standards of economically disadvantaged demobilized servicemen working as cadres in some enterprises. The central government appropriated 1.701 billion yuan in subsidies to prevent and control major floods and droughts and respond to major flooding, plus 4 billion yuan as relief for people in areas stricken by catastrophic natural disasters. Local governments also allotted funds for these purposes. All this not only helped to promptly resolve the difficulties of disaster victims in their work and lives, but also put in place a contingency funding mechanism for responding to natural disasters to make relief supplies and equipment readily available.
4) Increasing investment in education, science, culture and health to promote the development of all social undertakings. Educational expenditures for the whole country in 2004 increased by 42.189 billion yuan, or 14.4%. Of this amount, expenditures for education from the central budget grew by 4.323 billion yuan, or 15%. Vigorous efforts were made to improve conditions for elementary education in rural areas. Continued support was given to major programs such as the project to renovate or rebuild dangerous primary and secondary school buildings across the country, the plan to make nine-year compulsory education basically universal and basically eliminate illiteracy among young and middle-aged adults in the western region, and projects to support modern distance education in rural primary and secondary schools and make adjustments in the geographic distribution of these schools. The basic shape of a state investment system for assisting poor students through public finance has been put in place. The system provides poor students in rural primary and secondary schools with free textbooks, pays for miscellaneous education-related fees, and gives poor students staying on campus a living allowance. It also grants state student loans to college students and provides a living allowance to students from destitute families. The system provided more than 24 million poor students receiving compulsory education in rural areas in the central and western regions with free textbooks and was widely praised by students, their parents and the general public. We increased investment in institutions engaged in basic research, hi-tech research, research for public benefit and non-profit research and continued to support development of a national platform to supply the basic conditions for science and technology and the knowledge innovation pilot program of the Chinese Academy of Sciences. Expenditures for science and technology for the whole country in 2004 increased by 9.85 billion yuan, or 13.7%. Of this amount, expenditures from the central budget grew by 5.234 billion yuan, or 11.9%. Support was continued for the national programs to share cultural information and send books to the countryside to promote cultural undertakings at lower levels. Four billion yuan was earmarked for public health to support the systems for disease prevention and control, medical treatment, monitoring enforcement of health laws and rural health services, as well as efforts to prevent, control and treat serious diseases such as AIDS, tuberculosis, snail fever and endemic diseases. Nearly 200 million yuan in subsidies was spent on trials of a system for rewarding and supporting some rural families that observe the state's family planning policy, thereby encouraging rural people to follow the policy. A total of 848 million yuan, 275 million yuan of which was from the central budget, was used as a strong guarantee to prevent and control the highly pathogenic avian flu, and a number of supporting fiscal and tax policies were adopted to effectively lessen the impact of the disease on poultry producers and related enterprises.
5) Increasing investment in administrative, procuratorial, judicial and public security organs to support the development of political power. Subsidies totaling 3.13 billion yuan were allocated from the central budget in 2004 for procuratorial, judicial and public security organs to help improve conditions for processing cases at the lower levels in poverty-stricken areas. A total of 400 million yuan was earmarked to simplify customs clearance procedures in Shenzhen, Zhuhai, Guangdong, Beijing, Tianjin and Shanghai. Another 250 million yuan was allocated to support China's first economic census. A total of 920 million yuan was earmarked for trial reforms of the prison system in 14 provinces and municipalities directly under the central government. A policy of granting allowances and other benefits to families of policemen and policewomen who die on duty was introduced to promote a spirit of justice and encourage the police to work selflessly to safeguard social stability and people's personal safety. The central government also explored ways to establish an effective incentive and restraint mechanism to support and promote the establishment and improvement of mechanisms to ensure adequate funding for procuratorial, judicial and public security organs in local budgets at all levels and increase funding for them. The central government supported and participated in the work of establishing a system for responding to emergencies that involve other countries to meet the need to protect the security of Chinese institutions and citizens abroad and fight terrorism.
3. Making steady progress in reforms to promote enterprise development and improve the economic structure.
1) Progress was made in the current stage of the reform of the export tax rebate mechanism. Following a principle of "preventing new arrears, clearing up old arrears, improving the mechanism, sharing the financial burden, accelerating reform and intensifying development," financial departments at all levels and concerned government departments closely followed progress of the reform. They allocated adequate funding for export tax rebates, worked hard to coordinate actions and improved corresponding measures as needed, thus ensuring smooth implementation of the reform. A total of 218.774 billion yuan of export tax was rebated or exempted on schedule to ensure normal demand level and prevent new arrears. Export tax rebates due to enterprises and local governments that had accumulated over a number of years were cleared up using the amount of revenue over the budgeted figure and the increase in the balance in the central treasury resulting from the reform to set up a centralized treasury payment system. The successful implementation of this reform improved the reputation of the country and safeguarded the image of the government. It effectively helped alleviate the tight funding problems for export enterprises and local governments, reduce overhead for financial operations and improve the competitiveness and development potential for export enterprises, spurring a substantial increase in the volume of exports. It also promoted improvement in the revenue system and made local governments more willing to participate in the management of export tax rebates.
2) The trial reform of VAT proceeded smoothly. The reform to change "production-side VAT" to "consumption-side VAT" on a trial basis in some industries in Northeast China represents an important policy measure in the strategy of the central authorities to revitalize Northeast China and other old industrial bases. It is also necessary to improve the competitiveness of enterprises, accelerate technological upgrading, and update and upgrade their products. There were two challenges facing efforts to introduce the reform in 2004, i.e. reduction in some items of revenue and pressure to expand investment. Starting from a strategy of boosting long-term economic and financial development, financial departments worked together with other departments concerned, made careful calculations and analyses, formulated scientific plans, temporarily excluded industries with overheated investment from the reform and offset and discounted the increase in VAT, which mitigated the two challenges fairly well. With the approval of the State Council, trial changes in the VAT were made in the equipment manufacturing industry and seven other industries in Northeast China beginning July 1, 2004. The changes allow the enterprises taking part in the trials to offset and discount the increased amount of VAT on their new purchases of machinery and equipment. At the same time, industrial enterprises in Northeast China were allowed to shorten depreciation and amortization periods for fixed and intangible assets by up to 40% from those currently prescribed, and the deductible amount for personal income tax was raised to 1,200 yuan per month for all domestic enterprises. The provincial people's governments in Northeast China are now entitled to adjust the amount of taxes on resources for some mines and oilfields within the range set by the central government. The prompt introduction and smooth implementation of the VAT reform and other reforms effectively promoted revitalization of the old industrial base of Northeast China, laid the foundation for extending the reform throughout the country and for boosting economic and financial development, and gave us valuable experience in giving full play to the regulatory function of public finance.
3) Vigorous support was provided for reforms of state-owned enterprises and financial institutions. A total of 19.947 billion yuan was promptly earmarked in the central budget to subsidize policy-based closure and bankruptcy of state-owned enterprises, and arrangements were made for 537,500 laid-off employees. We completed the first trials to relieve enterprises owned by the central government of the obligation to operate social programs. We adjusted the real estate tax and urban land-use tax policies for the railway system to accelerate reform of the system. We supported the financial reorganization and restructuring of the Bank of China, the China Construction Bank and the Bank of Communications to convert them to publicly listed companies. A policy of income tax rebates was implemented for China's two listed insurance companies, the People's Insurance Company of China and the China Life Insurance Company. A preferential tax policy and a policy of granting subsidies to compensate for interest adjustments in inflation-proof deposits were implemented in some areas to deepen trial reforms of rural credit cooperatives. All this effectively promoted constant deepening of the reforms of state-owned enterprises and financial institutions.
4. Strengthening management and improving the legal framework for the administration of public finance.
We continued to deepen the reform requiring government departments to prepare individual budgets and improved the system of allowable amounts. We carried out trials to set the allowable amounts for in-kind expenditures in the Ministry of Personnel and four other departments of the central government, and selected some large items of expenditures that carry over to the next year to evaluate their performance on a trial basis. The trial reform to separate the management of revenue from the management of expenditures and comprehensive budget reform was expanded to the Ministry of Information Industry and six other central government departments. Local authorities also worked hard to implement this reform. A reform was carried out to introduce a centralized treasury payment system in 140 central government departments and over 2,600 of their subsidiary units responsible for preparing their own budgets. Total government procurement exceeded 200 billion yuan in 2004, resulting in a saving of about 10% in the use of funds. We formulated the Regulations on Penalties and Sanctions for Illegal Fiscal Acts, which were then promulgated by the State Council before implementation. The Ministry of Finance thoroughly reviewed all items requiring administrative examination and approval, eliminating 38 items and streamlining the process for 6 items in three groups. Moreover, the ministry formulated detailed regulations governing the requirements, procedures, periods of validity, and oversight and inspection for all items requiring fiscal approval. We strengthened financial oversight, particularly oversight of the performance of budgetary funds for key projects, resulting in discovery of irregularities in funds totaling 89.52 billion yuan. Expenditures in the central budget were reduced by 3.98 billion yuan, and revenue was increased by 7.63 billion yuan.
In general, implementation of the budget for 2004 went better than anticipated and some achievements were scored in the process. But we are fully aware that there are still some problems that cannot be ignored in the implementation of the budget. First of all, authorities at the lower levels in some areas are still experiencing financial difficulties and more funds are urgently needed to safeguard government authority at those levels and strengthen their ability to serve the public. Second, problems related to economic development are beginning to accumulate and affect budget implementation. In particular, potential risks to financial institutions and local governments due to debt levels have increased, making it very difficult for us to prevent and defuse financial risks. Third, the amount of funding provided to weak links in urgent need of strengthening in economic and social development is not enough to meet the requirements of a scientific outlook on development. The State Council is paying close attention to these problems. The Ministry of Finance, relevant departments and local governments have adopted effective measures in a great effort to deepen reform, restructure expenditures and intensify their work. As a result, some of these problems will be solved in preparing the 2005 budgets and relevant work, and solutions for others are being actively sought. In addition, the State Auditing Administration's audits of the implementation of the 2003 central budget and other revenue and expenditure situations showed that the problem of loss and waste of budgetary funds is still serious and that the performance of budgetary funds still urgently needs to be improved. Management and oversight need to be strengthened. Accordingly, the State Council has instructed all concerned departments and local governments to heed the requirements of relevant NPC resolutions and the opinions contained in the above audits to address problems discovered in the audits. Moreover, they should handle financial affairs in accordance with the law and in the interest of the people, tighten oversight and management for the entire process of utilizing government funds, improve the internal control mechanism, continue standardizing budgetary and financial management and strengthen mechanisms and systems to prevent all types of violations of related laws and regulations. According to statistics, 87 systems and regulations have now been revised and 754 persons have been subjected to disciplinary action by the Party or the government or had their cases sent to judicial organs for prosecution. The Ministry of Finance has set up a system for submitting budgets for items not included in departmental budgets prepared by the ministry at the beginning of the year to the State Council and the NPC. It also requires that these funds be made available as soon as possible for the departments concerned during implementation in accordance with relevant regulations. The State Council has reported the results of the rectification effort to the 13th meeting of the NPC Standing Committee.
II. The Draft Central and Local Budgets for 2005
In light of the plan made by the central authorities for this year's economic work, our general philosophy for formulating the budgets and arranging financial work for 2005 is as follows. We will take Deng Xiaoping Theory and the important thought of Three Represents as our guide and conscientiously implement the guiding principles of the Sixteenth National Congress of the Party, the Third and Fourth Plenary Sessions of its Sixteenth Central Committee and the Central Economic Work Conference. We will be guided overall by a scientific outlook on development and concentrate on promoting economic development and increasing financial strength. We will continue to put people first and take the development of the public finance system as the foundation, successfully implement a prudent fiscal policy and pursue reform. We will focus on standardizing the use of budgetary funds and improving their security and performance to promote sustained, rapid, balanced and sound development of the national economy and all-round social progress.
1. Implementing a prudent fiscal policy.
The prudent fiscal policy to be implemented in 2005 represents a major policy decision made by the central government that takes into account economic changes. Implementation of a proactive fiscal policy over the last seven years since 1998 played an important role in coping with problems arising from the Asian financial crisis and weak effective domestic demand and in promoting steady economic growth. Changes have taken place in supply and demand in China and the task of economic restructuring is arduous. On the one hand, more effort is needed to strengthen agriculture, science, education, culture, health, environmental protection, social security and the infrastructure. On the other hand, overheated investment and redundancy in certain industries constitute a conspicuous problem. In addition, the investment level from all of society is already very high, the amount of funds in the hands of society has grown considerably and inflationary pressure is still present. All these new developments clearly show that it is necessary and possible for us to shift from an expansionary proactive fiscal policy to an appropriately tighter policy of steady development. This mainly means that we will appropriately reduce the deficit and the volume of long-term treasury bonds for development and focus on restructuring expenditures and the pattern of bond use. The deficit in the central budget for 2005 will thereby be confined to 300 billion yuan, 19.83 billion yuan less than that of last year. A total of 80 billion yuan of long-term treasury bonds for development will be issued in 2005, 30 billion yuan less than last year. In addition, allocations from the central budget for investment in regular development projects will be increased by 10 billion yuan. The level of the deficit and volume of long-term treasury bonds in the central budget for 2005 were determined by taking into consideration the following major factors. We need to fully implement a scientific outlook on development. Weak links, including agriculture; science, education, culture and health; social security; and environmental protection and ecological conservation need to be strengthened to meet the requirements of the "five balances." In particular, there is still no good mechanism in place to effectively ensure long-term increase in grain production and rural incomes, and greater financial support is required to resolve the problem. A great number of bond-financed projects now under construction still need more investment. Treasury bonds also have to be issued to finance projects to support development of the western region, revitalize Northeast China and other old industrial bases, stimulate development of the central region and promote balanced regional development. There are many uncertainties in the domestic and foreign situations that require us to accelerate development and maintain a necessary reserve of financial resources. In addition, as the economy and GDP grow, the 2005 budget deficit will drop to 2% of GDP, 0.5 percentage points less than the 2.5% for 2004.
2. Major budgetary targets for 2005.
The targets are as follows. Total revenue in the central budget should be 1.666208 trillion yuan, an increase of 158.054 billion yuan or 10.5% over 2004. Expenditures in the central budget should total 1.966208 trillion yuan, a rise of 138.769 billion yuan or 7.6%. Expenditures should exceed revenue in the central budget, leaving a deficit of 300 billion yuan, 19.83 billion yuan less than that for 2004. Funds in the central budget for bond-financed projects in 2005 should total 80 billion yuan, 30 billion yuan less than last year. This total consists of 70 billion yuan listed in the central budget and 10 billion yuan of treasury bonds to be issued by the central government for local governments. In addition, allocations from the central budget for investment in regular development projects should increase by 10 billion yuan. The value of treasury bonds to be issued in 2005 should total 692.34 billion yuan, 392.34 billion yuan of which is to be used by the central government to repay the principal on domestic and foreign debts due in 2005 and 300 billion yuan of which will be used to cover this year's deficit. In addition, 10 billion yuan will be issued by the central government for local governments. Total revenue in the draft central and local budgets for 2005 is set at 2.925503 trillion yuan, 289.915 billion yuan or 11% more than in 2004. Total expenditures in the draft central and local budgets should amount to 3.225503 trillion yuan, an increase of 389.424 billion yuan or 13.7%.
The projected revenue growth for the whole country is 11% in 2005. We set this target by taking into account both the macroeconomic targets set at the Central Economic Work Conference and all factors that may reduce revenue this year. We will continue implementing or introducing a range of preferential fiscal and tax policies in 2005 to maintain the "five balances," support economic restructuring efforts, promote development and safeguard social stability. We will take further steps to reduce or exempt the agricultural tax, continue to lower tariff rates and carry out the regional or bilateral preferential tariff arrangements such as those relating to the ASEAN-China free trade zone. We will implement tax and other policies to support employment and reemployment, develop the western region, reinvigorate Northeast China and other old industrial bases, facilitate rapid development of the central region and encourage the development of new and high technology industries. We will also allocate adequate funding for export tax rebates and arrange funds as needed to clear up arrears in the rebates. These policies will reduce government revenue. In addition, some special and one-time factors contributing to revenue growth last year will be noticeably smaller or disappear as the situation changes. Finally, the continued increase in recent years in the base figure for revenue growth will make it even harder in the future to increase revenue significantly. Therefore, total revenue projected for 2005 is prudent and proactive.
3. Focus of expenditures in the central budget for 2005.
Expenditures will focus on balanced and long-range development, be increased in some areas and brought under control in others in conformity with the requirements of a prudent fiscal policy. Priority will be given to efforts to shore up weak links in economic and social development to promote optimization of the economic structure; to areas, groups of people and lower-level government authorities that have financial difficulties in the effort to develop a harmonious society; and to reforms and innovations to change the pattern of economic growth. Expenditures will be principally focused on the following areas.
1) Continuing to increase financial and policy-related support for agriculture, rural areas and farmers. First, the reform of rural taxes and administrative charges will be deepened. The agricultural tax will be exempted or greatly reduced throughout the country in 2005. The tax will be exempted in 592 counties given priority in the country's program to combat poverty through development. Provinces that cut the agricultural tax rate by 1 percentage point last year will cut the rate by another 4 percentage points this year, and provinces that cut the rate by 3 percentage points in 2004 will reduce it by another 2 percentage points. The livestock tax will be exempted throughout the country. Additional expenditures of 14 billion yuan from the central budget will be needed in the form of transfer payments to support implementation of these policies by local governments. The agricultural tax will be rescinded throughout the country in 2006, and transfer payments from the central budget will be used as required to subsidize local governments for loss of the tax revenue. Last year, the reform of rural taxes and administrative charges in the whole country entered a new stage of development. Past efforts were directed at standardizing taxes and administrative charges to lighten the burden on farmers. Now the agricultural tax will be phased out. Only by vigorously accelerating reforms in county and township government institutions, the rural compulsory education system and fiscal systems at county and township levels can we truly consolidate the achievements of the reform to rescind the agricultural tax. Second, we need to maintain and improve the policies that support grain production. On the one hand, we will increase subsidies to grain producers and ensure that the current level of 10 billion yuan in direct subsidies in the major grain-producing areas is not reduced. Provinces where conditions permit may appropriately increase subsidies. The central government will appropriate 3.7 billion yuan to help farmers purchase improved crop strains, 850 million yuan or 29.8% more than was budgeted last year, and 300 million yuan for the purchase of agricultural machinery and tools, 230 million yuan or 328.6% more than last year's figure. On the other hand, special funds have been earmarked to support major grain-producing counties as part of efforts to implement the policy to alleviate financial difficulties of some counties and townships. Third, we will greatly increase investment in agricultural science and technology, enhance our ability to make innovations in this field, further improve the system for spreading modern agricultural technology and grant more subsidies to spread the application ofmajor technologies. Fourth, investment will be increased for agricultural and rural infrastructure development, ecological conservation, overall agricultural development and poverty alleviation through development. Fifth, we will continue implementing the policy of focusing increased expenditures from the central budget for education, culture and health on rural areas. Sixth, we will continue support for the transfer of rural laborers to non-agricultural jobs and for technical training programs for them.
2) Alleviating the financial difficulties of some counties and townships. The central government will continue to increase transfer payments to areas with weak financial resources to consolidate and build on achievements in the reform of rural taxes and administrative charges, safeguard the authority of lower-level governments and strengthen their ability to govern, maintain social stability, promote balanced development and develop a harmonious society. Additionally, incentive and restraint mechanisms will be introduced in 2005 on the basis of "giving rewards in place of subsidies." The central government will allocate 15 billion yuan to local governments to implement the policy of "three rewards and one subsidy." Under this policy, county and township governments with financial difficulties are rewarded for increasing their tax revenue, and provincial- and municipal-level authorities are rewarded for increasing fiscal transfer payments to counties in financial straits (including fiscal transfer payments from the central budget for this purpose) to strongly encourage local governments at those levels to join in the effort to alleviate financial difficulties at the county and township levels. The second "reward" of the policy calls for rewarding county and township governments for streamlining their agencies and workforces to encourage them to raise the efficiency of administrative services and reduce administrative costs. This policy also calls for rewarding major grain-producing counties to encourage them to produce more grain to safeguard the security of grain supply. Finally, under this policy, local governments that have successfully alleviated the financial difficulties of counties and townships in their jurisdiction will receive subsidies in the interest of fairness to avoid "whipping the ox that works fast." At the same time, we will strengthen oversight and management to ensure that these rewards and subsidies are distributed and used in a standardized, safe and effective manner. We will adopt supporting measures to increase fiscal transfer payments, make innovations in the model of financial management of county governments on the part of provincial governments and financial management of township governments on the part of county governments, and improve the internal financial management of counties and townships, to bring the entire system of public finance under control and ensure smooth realization of policy goals. We will strive for a significant turnaround in the financial situations of counties and townships within three years or so through the concerted efforts of both the central and local governments.
3) Increasing investment for weak links in social development. A total of 129.709 billion yuan in the central budget has been earmarked for education; science and technology; health; culture, sports and radio; family planning; and courts and public security, procuratorial and judicial organs, a year-on-year increase of 17.876 billion yuan. Regulations call for the increased investment in education to be used mainly in rural areas. It will therefore be used to strengthen compulsory education, particularly in rural areas, to continue the plan to make nine-year compulsory education basically universal and basically eliminate illiteracy among young and middle-aged adults in the western region; and the projects to renovate and rebuild dangerous primary and secondary school buildings and promote modern distance learning in rural areas. We will speed up implementation of the "two exemptions and one allowance" policy in key counties included in the national program for poverty alleviation through development. Starting this spring semester, about 14 million students from poor families receiving compulsory education in primary and secondary schools in 592 key counties included in the program are being given free textbooks and are exempt from paying miscellaneous education-related fees. In addition, the number of students staying on campus that receive living allowances will gradually be increased. To finance this move, 1.3 billion yuan has been earmarked in the central budget and 2.81 billion yuan in the local budgets. Around 30 million primary and secondary school students from poor families in the central and western regions will receive free textbooks in 2005. The financial aid system for college students from poor families will be improved. We will allocate 1 billion yuan for trials to develop a new system for rural cooperative medical care and health services, an increase of 704 million yuan year-on-year. A total of 4.2 billion yuan will be allocated for development of the public health care system and control of AIDS, snail fever, endemic diseases and other major diseases, a year-on-year increase of 200 million yuan. Another 400 million yuan will be allocated for trials of the system for rewarding and supporting some rural families that observe the family planning policy, 200 million yuan more than last year. In addition, some anti-poverty funds from the central budget will be allocated to support the "have fewer children and prosper faster" pilot project. A total of 4.81 billion yuan in subsidies will be allocated from the central budget to finance courts and public security, procuratorial and judicial organs in poor areas, a rise of 1.68 billion yuan over last year. Finally, exchanges and economic cooperation with other countries will make it necessary to spend 6.92 billion yuan from the central budget for foreign aid, an increase of 850 million yuan year-on-year.
4) Strongly supporting employment and reemployment work and social security work. First, we will continue to support employment and reemployment work. The preferential fiscal and tax policies formulated by the central authorities must be carefully implemented to ensure increased investment for reemployment work. We plan to allocate 10.9 billion yuan for reemployment work from the central budget, 2.6 billion yuan more than the projected figure in 2004. Second, we will continue to support improvement of the social security system in urban areas. We will support the work of providing basic living allowances for workers laid off from state-owned enterprises and basically complete the incorporation of these allowances into the unemployment insurance system. Third, we will improve and carry out all social security policies. This includes supporting and improving the system of subsistence allowances for urban residents, resolving the difficulties experienced by demobilized servicemen working as cadres in some enterprises, carrying out all preferential job placement policies for demobilized servicemen, successfully carrying out work to provide food, clothing, medical care, housing and burial expenses for childless and infirm elderly rural residents and improving medical assistance services in both urban and rural areas. In addition, we will mount vigorous relief efforts for people affected by natural disasters and provide support and assistance to other people experiencing special difficulties.
5) Continuing to increase transfer payments to local governments. The central government will again increase transfer payments to local governments in 2005, especially to governments in the central and western regions, in order to make the level of basic public services more even among different areas and promote balanced regional development. In addition to 449.921 billion yuan in tax rebates and structural subsidies, the central government plans to grant local governments 672.487 billion yuan in transfer payments, an increase of 72.531 billion yuan over last year. Of this amount, 309.343 billion yuan will come in the form of fiscal transfer payments, a year-on-year increase of 50.898 billion yuan. Expenditures for tax rebates and subsidies will total 1.122408 trillion yuan in 2005, accounting for 57.1% of total expenditures in the central budget.
6) Actively promoting all reforms. First, we will increase support for the reforms in state-owned enterprises and in the system for managing state assets, promote innovation in the financial and investment systems, accelerate the reform of the railway and postal systems, promote reform and reorganization of the power, telecommunications, civil aviation and other industries, and continue to reform the distribution system for major commodities such as cotton, fertilizer and table sugar to make their distribution subject to market forces. We will allocate 17 billion yuan of funds for policy-based closures and bankruptcies of state-owned enterprises. Second, we will consolidate and develop the results of the reform of the export tax rebate mechanism. In accordance with the regulations defining the new mechanism for sharing export tax rebates, the target for export tax rebates has been set in the 2005 central budget at 289.14 billion yuan. Local governments must also set appropriate targets to ensure tax rebates are delivered on time and not allowed to fall into arrears. In addition, we will actively study and address new issues arising in operation of the new mechanism, such as the imposition of export taxes not corresponding to the tax rebates in some areas, to improve the mechanism and methods. Third, we will energetically yet prudently move forward with the VAT reform. After analyzing the performance of pilot projects set up in selected areas and improving measures, we will formulate a plan for implementing the transformation in all areas. We will carefully carry out studies and preparatory work before combining the laws on corporate income tax for Chinese and foreign enterprises and continue to improve policies governing personal income tax and consumption tax. To fulfill the commitments we made when we joined the World Trade Organization (WTO), we again lowered import tariffs on January 1, 2005. The overall tariff level has been lowered from 10.4% to 9.9%. We will improve the import tax policy and actively participate in the latest round of negotiations at the WTO and formulation of international trade rules. Fourth, we will devote more effort to support small and medium-sized enterprises. We will gradually set up and improve a series of fiscal and tax policies to support development of these enterprises to create an external policy environment that ensures fair competition in the market, increases their economic vitality and allows them to create more jobs.
Additionally, expenditures for national defense will total 244.656 billion yuan, 12.6% more than last year, in order to improve the defensive combat readiness and ability to respond to emergencies of the armed forces under hi-tech conditions and safeguard national sovereignty and territorial integrity. The central budget will also ensure adequate funding for other key expenditures related to adherence to a scientific outlook on development and efforts to ensure overall stable reform and development.
III. Working Diligently to EnsureSatisfactory Implementation of the 2005 Budgets
In accordance with the general requirements for the work of the government in 2005, we will concentrate on the following tasks.
1. Organizing revenue in strict accordance with the law to ensure steady increase.
We will strongly support authorities responsible for collecting and managing revenue, such as tax and customs agencies, in cracking down on smuggling, tax evasion and fraud and all other tax-related crime in accordance with the law. Tax reduction and exemption should be brought under tight control, and a review should be promptly made to screen out preferential tax policies that have expired. We will resolutely stop introduction of unauthorized tax reduction and exemption policies in the guise of refunds of collected taxes and correct all such current policies. While continuing to review and rectify administrative charges and government funds and resolutely straightening out and prosecuting cases of collection of arbitrary charges, we will rationally tap the potential of lotteries, payments for use of state-owned resources or assets, government capital and other non-tax sources of revenue. We will intensify efforts to include non-tax revenue within the scope of "separate management of revenue and expenditures" and to compile comprehensive budgets. We will plug all types of loopholes to ensure a steady increase in revenue. Coordination in the allocation of tax and non-tax revenue will be gradually strengthened to give government at all levels better fiscal control.
2. Taking measures to better utilize funds for key projects.
The central and local governments must not only provide adequate funding for key expenditure items such as agriculture; social security; education, science, culture and health; and environmental protection. They must also improve methods for managing funds and intensify efforts to integrate them. We should review past experience, make corresponding improvements, and expand the practice of using budgetary funds to directly subsidize agriculture. In addition, we should make the implementation of policies more standardized and transparent and reduce the number of intermediate links and management costs to more directly, more truly and more fully benefit regions, industries and target groups in society. We will further standardize the system of transfer payments to tighten supervision over transferred funds. Great efforts should be made to implement the systematic project to alleviate financial difficulties at the county and township levels. Provincial-level finance departments should formulate truly feasible, concrete implementation methods and support measures and pay particularly close and careful attention to this when compiling their budgets for 2005. Each local department of finance must present an annual report to the people's congress or its standing committee at the same level on the measures they have taken to alleviate the financial difficulties of counties and townships, on the use of the rewards and subsidies from the central government, and on the results of their work in this regard. The central government will strengthen its restraint mechanism to ensure that the use of these funds is examined annually for no less than 10% of all local authorities and organizations involved. Local authorities and organizations that go against regulations to obtain rewards or subsidies under false pretenses or use such funds in ways that violate regulations will not only have to return the funds, but will also be no longer eligible to receive them. In addition, the persons responsible for infractions will be prosecuted in accordance with the law and the circumstances.
3. Deepening the reform of the budgetary management system and putting management of financial affairs on a firmer legal footing.
We will work vigorously to set up a scientific and standardized system for classifying government revenue and expenditures. We will extend the scope of the reform requiring budgets for basic expenditures, steadily implement the reform to set the allowable amounts for in-kind expenditures for administrative bodies, and manage project budgets on a rolling basis. The reform to introduce the centralized treasury payment system should be extended to all central departments and departments at other levels. A pilot project will be implemented in which the central government's appropriations to local authorities will be paid directly through the central budget. The government procurement system will be expanded to include all government bodies, institutions and mass organizations at all levels. A pilot project will be implemented in which government procurement is financed through central government appropriations to local authorities, making sure to incorporate projects and services into the scope of government procurement. We will gradually strengthen the guiding role of government procurement policy and strive for total government procurement of 250 billion yuan in 2005. We will explore ways to establish a budgeting system for state capital. We will conscientiously implement the Administrative Permission Law, the Program for Comprehensively Implementing Government Administration in Accordance with the Law and the Regulations on Penalties and Sanctions for Illegal Fiscal Acts. Great efforts will be made to improve implementation of systems related to administrative permission in public finance and to standardize enforcement of laws governing its administration. We will support and promote revision of the Budget Law and the Law on Certified Public Accountants to further improve the legal framework for public finance work. We will accelerate the process of bringing China's corporate accounting standards in line with international practices, strengthen efforts to improve the integrity of certified public accountants, continue to rectify and standardize financial and economic order, tighten oversight and inspection of the entire process of collecting revenue and paying out expenditures and comprehensively promote the handling of financial affairs in accordance with the law.
4. Practicing strict economy and resolutely opposing extravagance and waste.
China has been experiencing sustained development of the economy and rapid increase in government revenue over the past few years. We must be fully aware that this situation could easily lead to the waste and loss of funds, making it all the more necessary to oppose and stop extravagant spending. We must keep in mind that China is still in the primary stage of efforts to build a moderately prosperous society in all respects. We still need to provide financial support and guarantees to promote development, support reform and maintain the "five balances." We still need to strengthen many weak links, provide aid to many needy groups in society and fund many endeavors. Just because the increase in government revenue has been relatively good does not mean we can neglect hard work, efforts to practice economy and oppose waste. In line with the "two musts" [we must always be modest, prudent and free from arrogance and rashness in our work and continue to hold to a principle of hard struggle and plain living, tr.] and the requirements for developing a conservation-minded society, we must continue to work hard, carefully make budget calculations and do everything in an economical manner. We must strictly control costs for meetings, entertainment, transportation related to official duties and other general expenditure items. We will energetically promote the trial evaluation of the performance of budgetary funds, improve evaluation measures, expand the scope of the trials, closely monitor their performance and save funds wherever possible. Funds should be used where they are needed most and can be put to best use. We will tighten financial discipline and severely deal with all kinds of waste and extravagance.
Implementing the budgets and carrying out the financial work for 2005 represent both an arduous task and a glorious mission. Under the leadership of the Party Central Committee with Comrade Hu Jintao as General Secretary, we will hold high the great banners of Deng Xiaoping Theory and the important thought of Three Represents, follow the various requirements for economic and financial work set at the Third Session of the Tenth NPC, consciously subject our financial work to the oversight and direction of the people's congresses, earnestly listen to the CPPCC's comments and suggestions, conscientiously carry out the Education Campaign to Preserve the Advanced Nature of Party Members, truly improve our style of work, strengthen our ability in financial work, explore new ways, work hard and make continued contributions to the effort to build a moderately prosperous society in all respects.