Although the nation's fiscal income may slow its pace in the second half of 2008, economists believe a tax cut policy is still needed to sustain economic growth, reported the China Securities Journal on Tuesday.

Fiscal slowdown reasonable

According to the Ministry of Finance, China’s fiscal revenue reached 607.4 billion yuan ($88.73 billion) in July, up 16.5 percent year-on-year. However, the growth rate is 14.2 percentage points lower than in June.

In particular, the corporate income tax and stamp tax imposed on securities trading decreased 4.2 percent and 71.8 percent year-on-year respectively. Moreover, many economic indicators directly related to tax income grew slowly or even decreased. The indicators include industrial added value, corporate revenue, commercial housing sales, and auto sales.

However, according to Ping An Securities, the monthly decrease in tax income is not too worrying. The broker noted in a recent report that China's total tax income fluctuated from month to month. Meanwhile, there is a lag time between corporate revenue increase and tax income that is reflected later in the accounts balance.

According to Yang Zhiyong, a researcher with the Institute of Finance and Trade Economics at Chinese Academy of Social Sciences, the fast growth of first-half tax revenue mainly resulted from strong corporate earnings last year. Therefore, the 13.8-percent tax growth in July is not too low. Yang expects the whole-year tax income to grow more than 20 percent despite a slowdown in the second half.

Policy loosening encouraged

Although the tax revenue has begun to shift down, experts suggest the financial authority adopt a relatively loose fiscal policy in the second half of the year to maintain the development trend of the economy.

"According to previous experience, when an economy faces stagflation risks, a combination of a tightening monetary policy and loose fiscal policy is a good solution," says Li Huiyong, a macro-economy analyst from Shenyin-Wanguo Securities.

A tightening monetary policy is effective in reining in prices, while a loose fiscal policy can propel economic development, Li added.

Given the high growth of tax income in the first half and last year’s surplus, the government is capable of expanding fiscal expenditure and reducing taxes, according to Yang. In addition, once the economy is boosted by fiscal policies, it will contribute more taxes in the future, he said.

Yang also suggested the government provide more subsidies and favorable policies for small- and medium-sized enterprises to help them out of temporary difficulties.

A report by Hongyuan Securities added that China should gear up its tax-and-fee reforms including scrapping the road maintenance fee and imposing fuel oil tax as well as resource taxes. The move would not only encourage economic development, but also lead to stable tax revenue under an improved tax incentive mechanism, it said.

(Chinadaily.com.cn September 3, 2008)