'Dual circulation' correct way forward

China's new economic development strategy requires the government to improve fiscal policy, promote tax reform, make government spending more efficient and prevent financial risks, according to a senior finance expert.

Over the next five years, China will restructure and improve the tax system to embrace a digitized economy and reform the budget-making procedure to effectively allocate public resources. These measures target fostering the country's new economic development model, or "dual circulation", said Liu Shangxi, head of the Chinese Academy of Fiscal Sciences at the Ministry of Finance.

The new development paradigm, with domestic circulation as the mainstay and domestic and international circulations reinforcing each other, was first proposed by top-level policymakers in May.

Shifting toward the dual circulation pattern will require deep reform of the whole economic and social system instead of just changing industrial policies. "It seems like a long-running process, and the initiative will also guide the country's fiscal reforms during the next five years," Liu said.

The reforms should focus on rebalancing urban-rural development, supporting small, medium and self-owned businesses, and most importantly, creating jobs. "If we can effectively deal with the challenges and prevent potential risks among uncertainties, we will find new opportunities to spur economic growth," Liu added.

Under the impact of the COVID-19 pandemic and the intermittent lockdowns, travel and logistics have been heavily disrupted, which affected the "internal circulation" in the domestic market. The government has adopted sizable policy measures to stabilize the economy, and fiscal policy has played a significant role.

Smaller businesses have benefited from cuts in value-added and corporate income taxes during the resumption of production, said Liu, who added that further tax reforms should focus on improving the income tax system.

The government issued a package of fiscal stimulus measures this year, mainly through expanding the fiscal deficit and increasing the issuance of government bonds, to sustain economic recovery and offset risks. Policymakers said fiscal policy should be "more proactive".

Next year, the government may still face relatively tight fiscal conditions, Liu said. Hit by the unprecedented public health crisis, government fiscal revenue dropped sharply in the first half, which extended the financing gap.

Selecting investment projects with higher public value based on a scientific evaluation system could be key to improving the efficiency of public finance, he added.

Experts from the World Bank previously said public financial management is "at a crossroad" amid the COVID-19 pandemic, specifically when it comes to seeking a balance between fiscal discipline, control, speed and flexibility.

But the three fundamental objectives of public financial management remain valid - to maintain a sustainable financial position, to allocate resources to ministries and programs effectively and to deliver public services with good value for money - which requires a variety of tools to achieve these goals, World Bank experts said.