Zhu Qing, a chief professor at the Institute of Fiscal and Public Policy at Renmin University of China, explains that the full-caliber fiscal budget consists of four main components, known as the "four accounts." These are the general public budget, the government-managed fund budget, the state-owned capital management budget, and the social insurance fund budget. The Ministry of Finance recently held a press conference to detail fiscal revenue and expenditure for the first half of 2026. During this period, national general public budget revenue grew by 4.7% year-on-year, while national general public budget expenditure increased by only 1.5%. To understand why expenditure growth lagged behind revenue growth, a deeper analysis of the nation's fiscal fundamentals is necessary.
First, it is important to note that financing sources for fiscal expenditure are not limited to general public budget revenue. General public budget revenue, which includes tax and non-tax income, is the primary funding source, currently accounting for about three-quarters of fiscal expenditure. However, there are two other financing channels. One is the transfer of funds and the use of carryover balances from previous years, which currently makes up about 5% of fiscal expenditure. The main sources of these transferred funds are the government-managed fund budget and state-owned capital management budget revenues. The other is debt revenue, used to cover the gap between fiscal expenditure (including funds allocated to the budget stabilization fund) and the combined total of general budget revenue, transferred funds, and carryover balances—essentially, the fiscal deficit. Debt revenue currently accounts for about 20% of fiscal expenditure. Therefore, it is entirely possible for expenditure growth to be lower than revenue growth, but this does not mean the scale of expenditure is smaller than that of revenue. In fact, in the first half of 2026, although expenditure growth was 3.2 percentage points slower than revenue growth, the total expenditure exceeded total revenue by over 2 trillion yuan.
Second, local government fiscal expenditure accounts for a large share (about 85%) of national fiscal expenditure. This means that a slowdown in local expenditure growth will directly affect the national growth rate. In the first half of 2026, central government fiscal expenditure grew by 6.5%, while local government fiscal expenditure grew by only 0.6%. Using a weighted average based on the central-to-local expenditure ratio of 15:85, the national average growth rate for fiscal expenditure is calculated at 1.5%. Clearly, the overall expenditure growth in the first half of 2026 was significantly impacted by the slower growth of local fiscal expenditure. The subdued growth in local expenditure reflects two key characteristics of the local fiscal financing structure. First, aside from general budget revenue, transferred funds, carryover balances, and debt revenue, local governments also rely heavily on central government transfer payments. Second, local fiscal expenditure has a high dependency on financing from transferred funds and the use of carryover balances.
The largest source of local fiscal expenditure is general public budget revenue. In the first half of 2026, local general public budget revenue grew by 2.7%. While this is below the national average of 4.7%, it is higher than the 0.9% growth recorded in the same period of 2024 and the 1.6% growth in the same period of 2025. This improvement is primarily due to the rapid growth of tax revenue within the general budget. According to Ministry of Finance statistics, national tax revenue grew by 5.3% in the first half of 2026, which is not only higher than the 4.7% growth in general budget revenue but also far exceeds the growth rates for the same periods in 2024 and 2025. Due to the acceleration in tax revenue, local general public budget revenue provided 56.3% of funding for local fiscal expenditure in the first half of 2026, a figure higher than the average of about 49% in recent years. The second largest funding source for local fiscal expenditure is central government transfer payments, accounting for roughly 41% of local expenditure. In the first half of 2026, 9.4 trillion yuan of these transfers were allocated, an increase of 110 billion yuan compared to the same period last year. While the local fiscal deficit was set at 800 billion yuan for both this year and last year, there has been a significant decline in funds transferred into local general budgets, which has negatively impacted local expenditure growth. The funds transferred into local general budgets primarily come from land concession fees within the government-managed fund budget. In the first half of 2026, the decline in land concession fee revenue was a steep 31.5%, far exceeding the 18.3% drop in the same period of 2024 and the 6.5% drop in the same period of 2025. This has left many regions with few funds available to transfer into their general budgets.
From a counter-cyclical adjustment perspective, the current economic environment calls for a more proactive fiscal policy. This should be reflected not only in an increased deficit-to-GDP ratio but, more importantly, in the scale and growth rate of fiscal expenditure. If the deficit ratio rises but expenditure growth remains sluggish, the policy cannot achieve its desired "more forceful" effect. Therefore, it is recommended that, given the current low market interest rates, the central government appropriately increase the issuance of government bonds. This would allow for an increase in transfer payments to local governments, ensuring the necessary scale of fiscal expenditure to better implement a more proactive fiscal policy.
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