China’s Plans for Economic Renewal Face Severe Fiscal Constraints

Commentary

China’s new five-year plan—the 15th of its kind—shows considerable ambition. With an ongoing property crisis, deflation at both consumer and producer levels, an unresponsive consumer sector, and questions about the ability to sustain export growth to the Global South, the country’s economy certainly needs help.

Indeed, there is reason to believe that the five-year plan, for all its ambition, lacks sufficient support to deal with the country’s economic needs, especially since fiscal constraints—both at the central and local government levels—will limit what Beijing can do.

Much media attention on the new five-year plan focuses on its stimulative efforts. The revenue side of the central government’s ledger has received almost no media attention, but it nonetheless exists and is constraining.

For years now, outlays—at both the central and local government levels—have surpassed revenues, and ever-widening deficits have accumulated. Although this is true of many other counties (certainly the United States), China’s problem is different and most telling. The budget deficits have arisen less because of lavish spending than because revenue growth has slowed, and markedly so.

The not-too-distant past looked very different. Government revenues had soared in the 2010s, when China’s economy was growing fast and both businesses and people were becoming increasingly prosperous. Between 2009 and 2019, overall revenues across all government levels grew by 12 percent annually, effectively doubling every six years.

Both Beijing and local governments had ample resources to fund all sorts of development and growth-enhancing projects. It is little wonder that during those years, Beijing seemed to have the power to advance in several directions at once.

But since 2020, things have turned darker. Of course, revenues suffered during the COVID-19 pandemic of 2020, but afterward they never came back. Between 2021 and 2024, government revenues grew at only about a 4 percent average annual rate, slower than the 5 percent yearly growth rate Beijing claimed for the overall economy.

In 2025, revenues fell by a striking 5.5 percent, putting quite a constraint on spending by all government entities. That figure probably overstates the extent of China’s revenue problem because Beijing bolstered revenues with one-time transfers in 2024, which were not present in 2025. But even with this consideration, little suggests that matters are improving. The new five-year plan projects only 4 percent revenue growth for 2026.

Even as revenue growth slowed, local governments continued spending apace, as Beijing built up its military, tried to mitigate the effects of the property crisis, made efforts to stimulate consumer spending, and launched an extensive program to bolster the economy’s productive capabilities in, among other things, advanced technologies, space exploration, artificial intelligence, electric vehicles, and biomedical advances. Budget deficits have accordingly exploded, rising from 2 percent to 3 percent of China’s gross domestic product in the 2010s to almost 6 percent in 2023, almost 7 percent in 2024, more than 5 percent in 2025, and almost 6 percent projected for 2026.

Given the revenue shortfall of recent years and the consequent deficit pressure, it is understandable that Beijing has shown reluctance to implement the level of fiscal stimulus the economy clearly needed. What should also be clear is that this same revenue shortfall will also block current efforts to provide China’s economy the fiscal stimulus it needs.

If it were simply a shortage of funds, Beijing could probably justify huge deficits as a way to jump-start growth and ensure a greater flow of revenues in the future. But the tax system also faces structural problems that complicate such a supply-side-like calculus. To make such an approach feasible, Beijing would in fact have to restructure the country’s entire tax code.

Presently, China’s tax code is diametrically opposed to what Beijing needs to do with the economy. Taxing in China certainly discourages consumer spending. Unlike the United States and many other developed economies, government revenues in China depend little on income taxes. Indeed, a mere 14 percent of revenues come from individual and corporate taxes combined. In contrast, some 40 percent of all central and local government revenues in China come from taxes on consumption, both steep value-added taxes and a special consumption tax.

To boost consumer spending, as the economy needs and Beijing has acknowledged, the whole tax code would need to be adjusted. Even China’s authoritarian regime would have a hard time doing that, not least because it would involve raising income taxes to replace the revenues lost to downward adjustments in consumption taxes. Nor is it likely that China will see much of a rise in gains from property sales—which the budget calls “other taxes” and which still account for 15 percent of the entire revenue take.

Aside from the economy’s immediate needs, China’s tax code looks strange indeed for a country governed by a communist ideology and an almost sentimental focus on the working “masses.” Whereas income taxes can be made highly progressive, as they are in the United States, and so take the lion’s share of government revenues from high-income people, consumption taxes relieve the wealthy, who tend to spend only a portion of their income, and burden working men and women, who frequently need to consume everything they make.

However, from another perspective, China’s tax structure is perhaps not so strange. The authoritarian regime, whatever it says, fundamentally wants to hold back consumer demands so that more of the country’s resources are at the regime’s disposal. Clearly, the revenue shortfall shows that this is not working, but that does not mean that Beijing aimed for this result when it structured the tax code in the first place. This last explanation argues that Beijing is unlikely to restructure its code and will therefore continue to struggle with revenue problems.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.