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Q1: Where is the funding for this round of tax reduction and reduction? Will government revenue reduction be accompanied by a sharp drop in government spending?

A: We expect that the “funding gap” caused by this round of tax reduction and fee reduction may be mainly filled by the stock fiscal reserves, including the transfer of fiscal reserves in the form of state-owned assets (to enrich social security). We believe that the expansion effect of large-scale tax reduction and reduction on total demand this year may not be eroded by the reduction of government spending.

In the report released last year, we discussed in detail the serious challenges faced by the central and local comprehensive fiscal revenue this year. However, due to the improvement in the marginal stream of government cash and the “revitalization” of fiscal reserve funds, this year's tax cuts and reductions are expected to constitute a “net expansion” of fiscal and boosting aggregate demand.

First, we expect the government to revitalize more than 1.5 trillion fiscal reserves in 2019. The growth rate of the budgetary expenditure announced by the National People's Congress this year has remained at a high level. Similar to last year's situation, this year the government may allocate a larger amount of fiscal reserves to cover the gap. It is estimated that last year's fiscal year may have used about 1.4 trillion of reserve funds, thus achieving a 4.2% deficit rate in the general public budget (significantly higher than the 2.6% budget deficit rate). At present, we expect the government to use more than 1.5 trillion yuan of fiscal reserve funds in 2019.

Second, the cash flow pressure of local governments has also eased this year compared to last year. Since the beginning of this year, the growth of insurance has increased. The local government's cash flow situation has two important changes compared with the second half of last year: 1) the nominal growth rate has begun to bottom out, and the marginal improvement of the land market has been improved. Under the multiple effects, the overall pressure on fiscal revenue is 2) The strict supervision of local government financing is more “pragmatic” in implementation, which also relieves the local government’s cash flow pressure to a certain extent: since last year, it has been represented by the No. 43 document and new regulations. Under the superposition of various “tightening” regulatory policies, local government revenue, financing and cash flow have been significantly tightened. Last year, the reduction of non-standard financing balance by 2.9 trillion was confirmed; this year, the pace of clean-up for local government financing has become more "pragmatic", and the non-standard balance has not dropped.

Q2: So far, how is the implementation of this round of tax reduction and reduction?

A: Judging from the actual implementation results, the past few rounds of tax reductions and reductions are slightly “poor”. From the experience of tax reductions and fee reductions in the past rounds, the impact of the downward adjustment of the statutory tax rate has been strengthened by the actual collection and “erosion”, and the actual effect of “burden reduction” is not obvious. The ratio of fiscal revenue to nominal GDP is still Upward trend. It is for this reason that everyone does not place too high expectations on the actual implementation of the current "2 trillion" tax reduction and fee reduction.


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