China’s budget deficit hits record $1.1 trillion on Covid zero slump

China’s widening budget deficit has reached record levels so far this year, showing how damaging the now-abandoned COVID-Zero policy and ongoing housing slump are to the economy and government finances.

The fiscal deficit widened from January to November at 7.75 trillion yuan ($1.1 trillion), according to Bloomberg calculations based on Finance Ministry data. This was more than double the same period last year and larger than in 2020, when the economy was battered by the initial Covid outbreak and growth was the slowest in decades.

The worsening deficit underscores just how bad the economy was in late November, shortly before the government in Beijing effectively ended its tough policy of trying to contain Covid infections.

The lockdown, testing and quarantining rules that were key to the Covid Zero policy put pressure on consumer and business spending, pushing the economy closer to contraction in the second quarter. Retail sales have already declined in October and November due to a surge in infections this quarter.

Maintaining the Covid policy was also becoming increasingly costly. Local governments faced huge costs for testing and quarantining residents, while income from land sales and taxes dwindled amid a slump in the housing market.

With the Covid infection now spread across the country, local governments are unlikely to see an immediate recovery in tax revenues and finances. Health care spending is likely to rise as more people get sick, even if spending on testing and quarantining falls. There is also little immediate prospect of a recovery in the property market, with land sale revenue likely to remain low.

Consumers are avoiding crowded places in some cities, and labor shortages and factory disruptions are expected to increase in the coming months as infections spread. Car sales, a rare bright spot for consumption this year, declined for the first time in six months in November, while the decline in home purchases deepened, although local authorities further eased restrictions on purchases.

Expenses increased, income decreased

In the first 11 months of this year, the total income from the general public and government fund budget was 18.6 trillion yuan. That was down 3% from a year earlier, a deceleration from a 4.5% decline in the first 10 months. According to the Ministry of Finance, it would have increased by 6.1% if it were not for the tax exemption that the government had given at the beginning of the year.

Governments across the country earned 715 billion yuan in November by selling land, compared with 552 billion yuan earned in the previous month but down about 13% from a year earlier. Land sale revenue has declined by double digits almost every month this year.

Revenue from deed tax decreased by 23.8% in the first 11 months of the year from the same period in 2021.

Total government spending in the first 11 months was 22.7 trillion yuan, up 6.2% from a year earlier and compared with an increase of 6.4% in the January-October period. Expenditure under the government funds budget grew 5.5%, down from a 9.8% increase in the first 10 months.

The total fiscal spending this year is expected to total 26.3 trillion yuan, Finance Minister Liu Kun wrote in an article published by the official publication Study Times on Monday. This is compared to an expenditure of 24.6 trillion yuan in 2021.

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