According to analysis, the proportion of fiscal expenditure allocated to the four key livelihood areas of education, healthcare, social security, and housing support in this year's budget is the highest in recent years, indicating a future direction for optimizing the structure of fiscal spending.
During the annual National People's Congress sessions, the Ministry of Finance, on behalf of the State Council, submitted a report on the execution of the central and local budgets for 2025 and the draft budgets for 2026 for review. A thorough reading of this report reveals three prominent features.
Fiscal expenditure is increasingly tilted towards livelihood areas. This year's government work report emphasized a fiscal policy that "focuses more on supporting consumption stimulation, investing in people, and ensuring public welfare." In line with this directive, fiscal spending allocated to the four major livelihood sectors—education, healthcare, social security, and housing—exceeds 12.4 trillion yuan. Calculations show this represents a growth rate of approximately 5%, which outpaces the overall expenditure growth of 4.4% and also exceeds the average annual growth rate for these four areas since 2020. These four categories now account for over 41% of total budgeted expenditure, the highest proportion in years. This adjustment in spending structure signals a future direction for optimizing fiscal expenditure and is a necessary measure to advance the significant strategic task of achieving common prosperity for all people during the 15th Five-Year Plan period.
The scale of new overall debt is moderate. The deficit-to-GDP ratio for the general public budget remains around 4%, with a deficit amount of 5.89 trillion yuan, an increase of 230 billion yuan from the previous year. The scales for ultra-long-term special government bonds and local government special bonds remain at last year's levels of 1.3 trillion yuan and 4.4 trillion yuan, respectively. Factoring in special bonds issued to support capital replenishment for large state-owned commercial banks, the total scale of new government debt for the year reaches 11.89 trillion yuan, an increase of 30 billion yuan from the previous year. While this sets a new historical high, the growth is relatively moderate. Adhering to the directive from the Fourth Plenary Session of the 20th Central Committee to "enhance fiscal sustainability" necessitates controlling the scale of government debt. Theoretically, a primary constraint on increasing government debt is interest payments, as these costs must be included in the annual fiscal budget. Excessively large interest payments can crowd out other fiscal expenditures, impacting the government's ability to perform its various functions. In 2025, interest payments in China's general public budget accounted for only 4.7% of total expenditure, significantly lower than Japan's 9% and the U.S. federal budget's 15%. However, the growth rate of fiscal interest payments in China has been rapid in recent years. For instance, based on public data from the Ministry of Finance, the growth rate for interest payments in the 2025 national general public budget was 4.8%, far exceeding the 1% growth in total budgeted expenditure. From 2020 to 2025, the average annual growth rate for these interest payments was 6.6%, compared to average annual growth rates of 3.2% for total budget expenditure and 3.4% for budget revenue over the same period. Interest payments for local government special bonds have grown even faster, with an average annual growth rate exceeding 22% from 2020 to 2024. Given this situation, there is a need to moderately control the scale of new debt in the coming period to preserve room for more proactive fiscal policies, thereby enhancing fiscal sustainability.
The increase in the fiscal deficit is reflected at the central government level, with the scale of the local government deficit remaining unchanged. The 230-billion-yuan increase in the general public budget deficit is entirely accounted for on the central government's ledger, to be covered by additional government bond issuance. The local government deficit remains unchanged from the previous year at 800 billion yuan. As local governments are responsible for approximately 85% of national expenditure, they face the greatest fiscal pressure. The decision not to increase the local government deficit this year is primarily due to the excessively large scale of local deficits in previous years (for example, reaching 930 billion yuan in 2019 and 980 billion yuan in 2020), which led to a rapid increase in local debt and interest payment costs. From 2020 to 2024, the average annual growth rate of interest payments in local general public budgets was 5.5%, compared to an average annual growth of 3.7% in total expenditure, meaning interest payment growth outpaced total expenditure growth by 1.8 percentage points. By increasing the central government deficit, covered by bond issuance, the associated interest costs will be borne by the central government, helping to alleviate the burden on local finances. Furthermore, almost the entire 230-billion-yuan increase in the central government deficit is allocated to increasing transfer payments to local governments. According to the current budget arrangement, central government transfer payments to local governments will increase by 222.5 billion yuan, a growth rate of 2.2%, exceeding last year's actual growth rate of 1.6% for such transfers. This will play a positive role in easing local fiscal difficulties.
Comments