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II.The Draft Central and Local Budgets for 2004

The general guiding principles for formulating the budgets and arranging financial work for 2004 are as follows. We should take Deng Xiaoping Theory and the important thought of Three Represents as the guide, and thoroughly implement the guidelines of the Sixteenth National Congress of the Party, the Third Plenary Session of its Sixteenth Central Committee and the Central Conference on Economic Work. We should firmly establish a scientific approach for achieving all-round, well-balanced and sustainable development of the economy; properly balance reform, development and stability and do a better job of coordinating development in five areas (urban and rural development; development among different regions; economic and social development; development of man and nature; and domestic development and opening up to the outside world). We should continue implementing the proactive fiscal policy, effectively strengthen macro-control, deepen the fiscal and taxation reforms, improve the public finance system, and further promote institutional innovation. We should work hard to increase revenue and reduce expenditures, focus on solving outstanding problems in economic and social development, and constantly improve people's material and cultural lives and their health.

The major budgetary targets for 2004 are as follows. Total revenue in the central budget is 1.3819 trillion yuan, an increase of 90.7 billion yuan or 7% over 2003 (The performance figure of 2003 has been adjusted using comparable terms.). Expenditures in the central budget total 1.7017 trillion yuan, a rise of 90.7 billion yuan or 5.6%. Expenditures exceed revenue in the central budget, leaving a deficit of 319.8 billion yuan. Although the 2004 budget deficit is the same as for 2003, it drops to 2.5% of the GDP, or 0.4 percentage points less than the 2.9% for 2003. The central budget funds for bond-financed projects in 2004 total 110 billion yuan, 30 billion yuan less than last year. This total includes 95 billion yuan listed in the central budget and 15 billion yuan to be issued by the central government for local governments. In addition, allocations from the central budget for investment in regular construction projects increases by 5 billion yuan. The value of treasury bonds to be issued in 2004 totals 702.2 billion yuan, which breaks down into 367.4 billion yuan to be used by the central government to repay the principal on domestic and foreign debts due in 2004, 319.8 billion yuan to cover this year's deficit, and 15 billion yuan worth of bonds issued by the central government for local governments. Total revenue in the draft central and local budgets for 2004 is 2.357 trillion yuan, 187.9 billion yuan or 8.7% more than in 2003. Total expenditures in the draft central and local budgets amount to 2.6768 trillion yuan, an increase of 216.1 billion yuan or 8.8%.

The deficit in the central budget for 2004 remains the same as in 2003. Here are the main factors contributing to this decision. Uncertainties exist in global economic development. The foundation for sustained growth of the Chinese economy is not yet solid enough. Follow-up investment in ongoing bond-financed projects is needed. There are a large number of accounts in arrears in certain areas of social development. Keeping our proactive fiscal policy stable and consistent while working to improve it will help protect, consolidate and increase the current good momentum in economic development, increase everyone's confidence in accelerated development and stabilize overall reform and development. In addition, as sources of investment become more diversified and nongovernmental investment keeps increasing, efforts to appropriately reduce the funding for bond-financed projects and further improve the structure of bond fund utilization will help us improve the guidance and utilization of nongovernmental investment and release more financial resources to support institutional innovations such as the reform of the tax system. In using funds for bond-financed projects, we will give priorities to the following areas. We will develop rural infrastructure, public health, elementary education, primary-level governments, and infrastructure for people's courts and public security, procuratorial and judicial organs. We will support the development of the western region and the restructuring and transformation of northeast China and other old industrial bases. We will strengthen ecological conservation and environmental protection. We will accelerate the construction of major water control projects such as the project to harness the Huaihe River, and ensure the development of bond-funded projects that are under construction, especially such major projects as the Qinghai-Tibet railway line, the south-to-north water diversion and the west-to-east electricity transmission.

The projected revenue growth for the whole country in 2004 is slightly higher than the expected economic growth. Here are the main factors contributing to this decision. On the one hand, the sustained, rapid growth of the national economy and improved tax collection and management will lay a solid foundation for revenue growth. On the other hand, we will continue implementing or introducing a range of preferential fiscal and tax policies in 2004 to promote all-round, balanced and sustainable economic and social development, support restructuring efforts and safeguard social stability. We will further reduce the overall tariff level, increase the quotas for export tax rebates, and implement policies to support employment and reemployment, develop the western region, reinvigorate northeast China and other old industrial bases, encourage the development of new and high technology industries and reduce the burden on farmers. These policies will reduce revenue. In addition, the base figure for revenue growth keeps increasing and has been higher than the rate of economic growth for many years in succession. All this, plus possible difficulties in keeping imports growing at a rate as high as for 2003, will make it even harder for us to increase revenue significantly. Therefore, the revenue projected for 2004 is proactive, sound and realistic. .

Expenditures in the central budget for 2004 will give priority to the following areas 1. Investment will be increased for agriculture, rural areas and farmers. We must establish a mechanism that will effectively ensure a sustained increase in farmers' incomes for a long time to come and a mechanism for guaranteeing a steady increase in the budgetary funds for supporting agriculture and work hard to address the problems facing agriculture, rural areas and farmers; this is an important part of our financial work. Once again, investment has been substantially increased in the 2004 central budget to address these problems, with total expenditures increasing by around 30 billion yuan, or 20% over last year. First, the reform of rural taxes and administrative charges will be deepened and the agricultural tax system will be improved. Except for tobacco, the tax on special agricultural products will be rescinded in 2004 and the overall agricultural tax rate will be reduced by over 1 percentage point, with a greater reduction for major grain producing areas and grain producers. This may reduce the burden on farmers by as much as 11.8 billion yuan. Agricultural taxes will be rescinded in five years. In light of the specific difficulties in local budgets, the central government will provide appropriate transfer payments to offset revenue decreases in local budgets, especially in budgets of major grain producing areas and the central and western regions, brought about by eliminating the tax on agricultural specialty products and decreasing the agricultural tax rate. Funds totaling 39.6 billion yuan in the form of transfer payments from the 2004 central budget will be set aside for the reform of taxes and administrative charges in rural areas, a year-on-year increase of 9.1 billion yuan. In addition, more support will be given for efforts to reduce rural debts, promote institutional reforms in town and township governments and improve the system of compulsory education in rural areas. Second, we will promote the reform of the system of grain distribution to make it more commercial. We will give subsidies directly to grain producers in the major grain producing areas instead of subsidizing them indirectly through grain distribution links. Ten billion yuan from the grain risk fund will be given directly to grain producers in 13 major grain producing provinces in 2004. Third, more budgetary funds will be used to develop agricultural infrastructure, develop forests for ecological conservation, make advances in agricultural science and technology, train farmers, develop the system of quality and safety standards for agricultural products, expand overall grain production capacity, provide relief for agricultural disasters and fight poverty.

2. Investment will be increased for employment work and social security. Employment and social security affect the vital interests of the people, the stability of society and the country's overall development. More support will be given to employment work and social security in the 2004 central budget. First, employment and reemployment work will be strongly supported. While conscientiously carrying out the preferential fiscal and tax policies formulated by the central authorities to promote employment and reemployment, we plan to increase reemployment assistance funds by 3.6 billion yuan, 76.6% more than last year. Second, we will energetically support efforts to guarantee that living allowances for workers laid off from state-owned enterprises and basic old-age pensions for retirees from these enterprises are paid on time and in full and ensure that low-income urban residents receive their subsistence allowances. To achieve these goals, we plan to allocate 77.9 billion yuan from the 2004 central budget. In addition, we will continue to improve the social security system and raise funds for social security through diversified channels. We will better coordinate the implementation of the reemployment policy and social security programs, including the "three-stage guarantee" for laid-off workers. On the basis of a review of the pilot program to improve urban social security systems in Liaoning Province, we will improve its contents and methods and extend it to Jilin and Heilongjiang provinces. Third, in order to promote economic restructuring, a number of enterprises will be closed down or declared bankrupt in accordance with the law. We will work harder to free enterprises from the obligation to operate social programs and allocate 17 billion yuan in subsidies for enterprises that close or go bankrupt. We will also provide active support and assistance to people having special difficulties.

3. Investment will be increased for education, health, science and technology, culture and sports. We will improve compulsory education, especially in rural areas. We will accelerate the program to basically make nine-year compulsory education available throughout the western region and basically eliminate illiteracy among young and middle-aged people there. We will improve the system under which most responsibility for managing rural compulsory education goes to county governments, increase transfer payments to support compulsory education in poor counties, continue to carry out the second phase of the program to renovate dangerous primary and secondary school buildings in rural areas and the program to promote modern distance education, and distribute free textbooks in more areas. We will speed up the development of systems for disease prevention and control and for medical treatment in public health emergencies, raise the level of public health services and our ability to cope with public health emergencies, and improve medical and sanitation conditions in the countryside. We will support efforts to successfully carry out trials to develop a new type of system for rural cooperative medical care and health services. We will support the development of a state system for scientific and technological innovation and the formulation of the state medium- and long-range plan for developing science and technology. We will facilitate reform of the management system of science and technology, and promote innovation in mechanisms and the implementation of key science and technology projects and the application of scientific results in production. We will vigorously develop undertakings in advanced culture and develop culture-related industries. We plan to allocate 95.5 billion yuan from the 2004 central budget for education, health, science and technology, culture and sports, a year-on-year increase of 10 billion yuan, giving priority mainly to rural areas.

4. Transfer payments to local governments will be increased. The central government will again increase transfer payments to local governments in 2004, especially to governments in the central and western regions. In addition to 427.7 billion yuan in tax rebates and structural subsidies, the central government plans to grant local governments 513.3 billion yuan in transfer payments, an increase of 64.4 billion yuan over last year in comparable terms. Of this amount, 223.8 billion yuan will come in the form of general transfer payments, a rise of 32.6 billion yuan compared to last year. In addition, a special task force will be organized to thoroughly investigate and study the causes of financial difficulties at the lower levels of government, and propose specific measures to eliminate them as soon as possible on a type-by-type and step-by-step basis.

5. Support will be given to promote the reform of the tax and other systems. First, we must ensure that reform in the mechanism of export tax rebates is carried out smoothly. The target for export tax rebates set in the 2004 central budget is 210.8 billion yuan, and revenue from the increase in the VAT and the consumption tax on imported goods will be used first to pay export tax rebates. Local governments also need to set adequate targets for export tax rebates. Financial and taxation authorities at all levels must closely watch for any new developments and problems that may arise and promptly take appropriate steps to better manage export tax rebates to avoid the reoccurrence of arrears. The central government will first pay the interest on the amount of export tax rebates in arrears accumulated over the years before formulating measures to fundamentally eliminate them. Second, we will actively and appropriately work to change the "production VAT" to a "consumption VAT." We will work conscientiously to ensure success in the trials of this change currently under way in some industries in northeast China. The results of these trials will be promptly analyzed to improve the plan for the change and create the conditions for carrying it out throughout the country. Third, we will accelerate the formulation of policies and plans to make the corporate income tax the same for both Chinese and foreign enterprises and to reform other tax systems. Fourth, we will support the reform of the financial system to prevent and reduce financial risks, focusing on introducing a shareholding system in the Bank of China and the China Construction Bank and increasing subsidies for losses incurred by rural credit cooperatives due to inflation-proof deposits. Fifth, we will support reforms in the investment system and in power, telecommunications, civil aviation, railways, postal service and urban public utilities.

6. We will guarantee normal operation of governments at all levels. In order to strengthen government authority and ensure that government employees are paid on time and in full, we plan to allocate an extra 11.8 billion yuan to cover pay raises for employees of government organs and institutions. We will allocate an extra 3 billion yuan to increase benefits for retired army officers who are taken care of by governments at all levels and to cover the additional expenses resulting from policy changes involving those entitled to special government care and preferential treatment. An additional 1.58 billion yuan in subsidies will be allocated from the central budget to people's courts and local public security, procuratorial and judicial organs. Expenditures for national defense will rise by 21.83 billion yuan, 11.6% more than last year, in order to improve the defensive combat readiness of the armed forces under hi-tech conditions and to raise the salaries of army personnel and the pensions for ex-servicemen.

In addition, we must work hard to ensure adequate funding for other expenditures that have a direct overall bearing on reform, development and stability.

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