In the first half of this year, the general public budget revenue progress was slower than expected, lower than the average of the past five years, which also led to a slower fiscal expenditure progress. This was mainly influenced by a series of tax reduction measures, a slowdown in growth momentum, and adjustments in the accounting of the financial sector's added value. Looking at the past five years, the completion rate of public budget revenue was close to 100%. If the progress in the second half of the year (as a proportion of the annual budget) is similar to the same period in the past five years, there may still be a gap of several hundred billion yuan to achieve the annual budget revenue target. Considering that the intensity of tax collection and non-tax revenue has already increased in the first half of the year, the gap may be filled by tapping into potential sources (such as the difference between the remaining balance limit and the amount paid in profits, etc.).
The progress of fiscal revenue was slow. In the first half of 2024, fiscal revenue fell short of expectations, with the first account of public finance revenue declining by 2.8% year-on-year, and the progress was at a historically low level, accounting for only 51.8% of the fiscal budget revenue, lower than the average of 54.7% over the past five years, and only higher than the progress at the time of large-scale retention and refund of VAT and the East China epidemic in 2022 (50.1%). Under the principle of spending according to revenue, the progress of fiscal expenditure in the first half of the year was also slow, accounting for only 47.8% of the annual budget expenditure, lower than the average of 49.0% over the past five years. In addition, under the weak land revenue, the progress of the second account of government fund revenue was also relatively slow, accounting for only 28.1% of the annual budget revenue, setting a new low.
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We believe that the slow progress of general public budget revenue is mainly influenced by three factors:
► First, it was affected by a series of tax reduction measures introduced in the middle of 2023. In the middle of 2023, the Ministry of Finance and the State Taxation Administration introduced a series of tax preferential policies, covering 21 items of VAT, 9 items of corporate income tax, 8 items of personal income tax, and 8 items of other taxes [1]. The tax reduction policy led to a decline in corporate income tax and VAT revenue in the first half of this year. In addition, the high base brought by the non-tax reduction in the first half of last year, and the tax deferral policy for small and medium-sized enterprises in the manufacturing industry introduced by the Ministry of Finance in August 2022 [2], the tax deferral period will be automatically extended by 4 months after the expiration, and the deferral of taxes in the first half of 2023 further raised the base in the first half of this year, leading to a year-on-year decline of 5.5% and 5.6% in corporate income tax and VAT respectively in the first half of the year.
► Second, the slowdown in economic growth has put pressure on the growth of fiscal revenue. In the first half of 2024, after deducting the special factors such as the high base raised by the deferral of taxes by small and medium-sized enterprises last year and the tail reduction of revenue by the tax reduction policy introduced in the middle of last year, the public fiscal revenue increased by 1.5% year-on-year, lower than the same口径 year-on-year growth rate of 2.0% in the first five months [3], and also lower than the compound growth rate of 2.5% in the same period of the four years before the epidemic, reflecting the weak growth of the economy and the income and profit of the private sector [4].
► The above two factors have been expected, but the impact of the adjustment of the accounting of the added value of the financial industry on VAT may have been overlooked. In the past quarterly accounting of the added value of the financial industry, not only the profit but also the scale (such as the balance of loans and deposits in the banking industry, the transaction amount of securities in the securities industry, and the premium income in the insurance industry) were considered. Taking the banking industry as an example, the second economic census in 2008 introduced a reference interest rate in the indirect estimation method of the financial industry to reflect the risk and term structure of loans and deposits.
Banking industry quarterly added value = (loan interest rate - reference interest rate) × loan amount + (reference interest rate - deposit interest rate) × deposit amount
= (loan interest rate × loan amount - deposit interest rate × deposit amount) + reference interest rate × (deposit amount - loan amount)
The added value of the banking industry is divided into two parts: the former is the bank's profit, and the latter is the risk adjustment item (the higher the deposit, the lower the risk, and the higher the quality of the added value). The monetary policy execution report in the fourth quarter last year indicated that excessive attention should not be paid to the increase in credit, and the monetary policy report in the first quarter of this year emphasized that credit should avoid one-sided pursuit of scale and focus on quality over quantity. In the first quarter, the central bank and the Bureau of Statistics adjusted the accounting of the added value of the financial industry, removing the difference in the growth rate of loans and deposits, and only referring to bank profits. The added value of the financial industry fell sharply under the drag of the difference in loans and deposits, from 9.3% in the first half of last year to 3.9% in the first half of this year. The added value of the financial industry is the tax base of the financial industry VAT, and VAT also declined. According to our calculations, based on 2021 as the base period, the compound growth rate of VAT in the first half of this year fell by 3ppt compared to the first half of last year, of which the VAT of the financial industry may have dragged down 0.5ppt.
Looking at the past five years, the average annual completion rate of the first account of general public budget revenue is 99.9%, basically achieving the target. Under the principle of spending according to revenue, the completion rate of fiscal budget revenue will also affect the financial guarantee of local rigid expenditures such as the three guarantees and interest payment. If the completion rate of general public budget revenue this year reaches the average of the past five years, and the progress of fiscal revenue in the second half of the year is the same as the average of the past five years (accounting for 45.2% of the annual budget), there will be a gap of 661.3 billion yuan in the annual fiscal revenue. Considering that non-tax revenue has already increased in the first half of the year, the gap may need to be filled by tapping into potential or other ways. According to past experience, potential can be tapped from the difference between general debt balance and limit (currently 680 billion yuan), and the profits paid by state-owned institutions (the profits paid by specific state-owned financial institutions and specialized institutions amount to 1.65 trillion yuan). The completion rate of the second account of government fund budget revenue in the past two years is 80-90%. If the revenue in the second half of the year is similar to the seasonal proportion of the past five years, the completion rate of the annual budget revenue may not reach 80%. Considering the principle of spending according to revenue for both accounts, the demand for the completion rate of the budget revenue of the first account may be stronger.