REPORT ON THE EXECUTION OF THE CENTRAL AND LOCAL BUDGETS FOR 2017 AND ON THE DRAFT CENTRAL

AND LOCAL BUDGETS FOR 2018

First Session ef the 13th National People's Congress

ef the People's Republic ef China

March 5, 2018

Ministry of Finance

The official Chinese version of this report will be released by Xinhua News Agency.

Esteemed Deputies,

The Ministry of Finance has been entrusted by the State Council to submit this report on the execution of the central and local budgets for 2017 and on the draft central and local budgets for 2018 to the present First Session of the 13th National People's Congress (NPC) for your deliberation and for comments from members of the National Committee of the Chinese People's Political Consultative Conference (CPPCC).

I. Execution of the 2017 Central and Local Budgets

In 2017, under the strong leadership of the Central Committee of the Communist Party of China (CPC) with Comrade Xi Jinping at its core, all localities and departments firmly established an awareness of the need to maintain political integrity, think of. ilie big picture, follow the leadership core, and keep in aligrunent. With Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era as our guide, we put into practice the guiding principles from the 19th National Party Congress, continued commitment to pursuing progress while ensuring stability, to China's new development philosophy, and to raising the quality and performance of development.

Focusing on advancing supply-side structural reform, we acted strictly in accordance with the budgets approved by the Fifth Session of the 12th NPC, conscientiously acted on the views given on the budgets by the NPC Financial and Economic Affairs Commission, and took coordinated steps in moving forward with work to keep growth stable, promote reform, make structural adjustments, improve living standards, and guard against risk. As a result, the trend for stable, positive economic performance has consistently developed; reform and opening up has been comprehensively deepened; the economic structure has been further improved; the quality and performance of development have clearly risen; risk management has made steady headway; market confidence has grown noticeably stronger, and social stability has been ensured. Execution of both central and local budgets was satisfactory.

1. General public budgetary revenue and expenditures in 2017

1) China's general public budgets

Revenue in China's general public budgets reached 17.256657 trillion yuan, representing 102.3 percent of the budgeted figure and an increase of 7.4 percent over 2016. Adding in 1.013885 trillion yuan of utilized carryover funds, surplus funds and funds from other sources (including the Central Budget Stabilization Fund and local budget stabilization funds, the budgets of central and local

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government-managed funds, the budgets of central and local government state capital operations and local governments' utilized carryover and surplus funds), revenue totaled 18.270542 trillion yuan.

Expenditures in China's general public budgets reached 20.333003 trillion yuan, representing 104.3 percent of the budgeted figure and an increase of 7.7 percent. Including 317.539 billion yuan used to replenish the Central Budget Stabilization Fund, expenditures totaled 20.650542 trillion yuan. Expenditures therefore exceeded revenue, leaving a deficit of 2.38 trillion yuan, which is consistent with the figure projected.

In 2017, revenue in China's general public budgets reversed the trend, which began in 2012, for slackening growth. Some revenue items exceeded the projections by a relatively large amount, with domestic VAT exceeding projections by 267.756 billion yuan, corporate income tax revenue by 187.561 billion yuan, and revenue from VAT, excise taxes, and customs duties on imports by 308.625 billion yuan. This was mainly due to the continued advance of supply-side structural reform enhancing the quality and performance of economic growth and bringing a corresponding growth in tax sources; the rise in the producer price index exceeding projections, directly stimulating a rapid increase in related tax revenues as calculated according to current prices; and the recovery of domestic demand including demand for foreign products leading to growth in both quantity and prices of imported commodities, bringing relatively large growth in import tax revenue.

2) Central general public budget

Revenue in the central government's general public budget reached 8.111903 trillion yuan, representing 103.2 percent of the budgeted figure and an increase of 7.1 percent over 2016. Adding in 135 billion yuan contributed by the Central Budget Stabilization Fund and 28.335 billion yuan from the budgets of central government-managed funds and central government state capital operations, revenue totaled 8.275238 trillion yuan.

Expenditures in the central government's general public budget totaled 9.507699 trillion yuan (including central government expenditures and tax rebates and transfer payments from central to local governments), representing 99.3 percent of the budgeted figure and an increase of 5.4 percent. Adding in 317.539 billion yuan contributed to the Central Budget Stabilization Fund, expenditures totaled 9.825238 trillion yuan. Total expenditures exceeded revenue, leaving a deficit of 1.55 trillion yuan, which is consistent with the figure projected.

Main revenue items were as follows. Domestic VAT revenue was 2.816597 trillion yuan, 104.9 percent of the budgeted figure. Domestic excise tax revenue was 1.022509 trillion yuan, 99.6 percent of the budgeted figure. Revenue from VAT

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and excise tax on imports totaled 1.596856 trillion yuan, 120.8 percent of the budgeted figure. Revenue from customs duties came to 299.769 billion yuan, 112.7 percent of the budgeted figure. Corporate income tax revenue was 2.042262 trillion yuan, 104.4 percent of the budgeted figure. Individual income tax revenue was 718.071 billion yuan, 111.2 percent of the budgeted figure. VAT and excise tax rebates on exports totaled 1.387037 trillion yuan, 106.7 percent of the budgeted figure, and non-tax revenue totaled 542.443 billion yuan, 66.2 percent of the budgeted figure.

Central government expenditures were 2.985889 trillion yuan, representing 100.9 percent of the budgeted figure and an increase of 7.5 percent. Main expenditure items were as follows. General public service expenditures reached 127.146 billion yuan, 100.9 percent of the budgeted figure. Spending on foreign affairs totaled 51.967 billion yuan, 95.2 percent of the budgeted figure. National defense spending was 1.022635 trillion yuan, 100 percent of the budgeted figure. Public security expenses totaled 184.894 billion yuan, 100.6 percent of the budgeted figure. Spending on education came to 154.839 billion yuan, 101.9 percent of the budgeted figure. Spending on science and technology came to 282.696 billion yuan, 99.5 percent of the budgeted figure. Spending on stockpiling grain, edible oils, and other materials was 159.748 billion yuan, 108.2 percent of the budgeted figure. Interest payments on debt were 377.943 billion yuan, 100.8 percent of the budgeted figure.

Central government tax rebates and transfer payments to local governments came to 6.52181 trillion yuan, representing 99.3 percent of the budgeted figure and an increase of 4.5 percent. This included 816.359 billion yuan in tax rebates, 89.3 percent of the projected figure, which was mainly due to arrangements made for tax rebate policies based on the reality on the ground after trials were rolled out across every sector to replace business tax with VAT; 3.51679 trillion yuan in general transfer payments, or 100.4 percent of the budgeted figure; and 2.188661 trillion yuan in special transfer payments, or 101.9 percent of the budgeted figure. The proportion of general transfer payments to total transfer payments rose to 61.6 percent. This included a 19.7 percent increase in general transfer payments for old revolutionary base areas, areas with large ethnic minority populations, border areas, and poor areas, and a 9.5 percent rise in awards and subsidies for the mechanism to ensure county-level governments' basic funding.

In 2017, the extra 250.738 billion yuan of revenue in the central government's general public budget and the 66.801 billion yuan of unspent budgeted expenditure were transferred in full to the Central Budget Stabilization Fund.

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Central government reserve funds budgeted for 2017 were 50 billion yuan. Of this, actual spending was 6.07 billion yuan, which was used to make breakthroughs in areas like research on the causes of and addressing air pollution, and the 43.93 billion yuan surplus (already included in the aforementioned 66.801 billion yuan of unspent budgeted expenditure) was transferred in full to the Central Budget Stabilization Fund. At the end of 2017, the Central Budget Stabilization Fund had a balance of 466.605 billion yuan.

3) Local general public budgets

Revenue in local general public budgets reached 15.666564 trillion yuan. This figure includes 9.144754 trillion yuan in local government revenue, an increase of 7.7 percent over 2016, and 6.52181 trillion yuan in tax rebates and transfer payments from central to local governments. Adding in utilized carryover and surplus funds as well as funds from local budget stabilization funds, local government-managed fund budgets, and local state capital operations budgets, totaling 850.55 billion yuan, total revenue was 16.517114 trillion yuan. Expenditures in local general public budgets totaled 17.347114 trillion yuan, representing an increase of 7.7 percent. Total expenditures exceeded total revenue, leaving a local government deficit of 830 billion yuan, which is consistent with the figure projected.

2. Budgetary revenue and expenditures for government-managed funds in 2017

Revenue into China's government-managed funds reached 6.146249 trillion yuan, up 34.8 percent. Adding in 29.85 billion yuan carried over from 2016 and 800 billion yuan raised through local government issuance of special purpose bonds, total revenue was 6.976099 trillion yuan. Expenditures through government­managed funds totaled 6.070022 trillion yuan, an increase of 32.7 percent.

Revenue into central government-managed funds reached 382.477 billion yuan, representing 103.2 percent of the budgeted figure and an increase of 6.4 percent. Adding in 29.85 billion yuan carried forward from 2016, revenue totaled 412.327 billion yuan. Expenditures through central government-managed funds totaled 366.919 billion yuan, representing 91.6 percent of the budgeted figure and a 9.2 percent increase. Broken down this includes 268.36 billion yuan of central government spending and 98.559 billion yuan of transfer payments to local governments. Revenue into central government-managed funds exceeded expenditures by 45.408 billion yuan. Of this figure, 38.559 billion yuan was carried forward to 2018; and 6.849 billion yuan, made up of any portion of carryover funds of individual government-managed funds exceeding 30 percent of that fund's revenue in 2017 was, in accordance with regulations, contributed to the Central Budget Stabilization Fund.

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Revenue into local government-managed funds reached 5.763772 trillion yuan, an increase of 37.3 percent, of which revenue from the sale of.state-owned land-use rights accounted for 5.205901 trillion yuan, up 40.7 percent. Adding in 98.559 billion yuan in transfer payments from central government-managed funds and 800 billion yuan raised through local government issuance of special purpose bonds, revenue totaled 6.662331 trillion yuan. Expenditures through local government-managed funds totaled 5.801662 trillion yuan, up 34.2 percent; of this 5.177963 trillion yuan was spending funded by revenue from the sale of state­owned land-use rights, an increase of 37.1 percent.

3. Budgetan; revenue and expenditures for state capital operations in 2017

Budgetary revenue from state capital operations is, mostly, collected as a certain proportion of the net profits of state-owned enterprises (SOEs) in the previous year, and expenditures are planned according to the principle of keeping expenditure and revenue balanced.

In 2017,. budgetary revenue from China's state capital operations totaled 257.869 billion yuan, a decrease of 1.2 percent, and budgetary expenditures through state capital operations totaled 201.093 billion yuan, a drop of 6.7 percent.

Budgetary revenue from central state capital operations was 124.427 billion yuan, representing 96.5 percent of the budgeted figure and a drop of 13 percent. This drop came primarily from lower-than-expected enterprise profits in the petroleum and electricity industries. Adding in 12.803 billion yuan carried forward from 2016, revenue totaled 137.23 billion yuan. Budgetary expenditures through central state capital operations reached 100.171 billion yuan, representing 86.3 percent of the budgeted figure and a drop of 30.9 percent. This drop was mainly due to a reduction in the scale of budgetary revenue from state capital operations, accompanied by an increase in the proportion of funds allocated from the central state capital operations budget to the general public budget, and a corresponding reduction in expenditure. These expenditures included 76.634 billion yuan of central government spending and 23.537 billion yuan in transfer payments to local governments. 25.7 billion yuan was transferred into the general public budget. 11.359 billion yuan of budgetary revenue from these operations was carried over to 2018.

Budgetary revenue from local state capital operations reached 133.442 billion yuan, up 13.2 percent. Adding in 23.537 billion yuan in transfer payments to local governments through the central state capital operations budget, revenue totaled 156.979 billion yuan. Budgetary spending through local state capital operations amounted to 124.459 billion yuan, up 2.1 percent. 31.061 billion yuan was transferred into the general public budget.

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4. Budgetary revenue and expenditures for social security funds in 2017

Revenue into China's social security funds reached 5.538016 trillion yuan, representing 106.9 percent of the budgeted figure and an increase of 10.5 percent. This included 3.956361 trillion yuan in insurance premiums and 1.226449 trillion yuan in government subsidies. Expenditures through these funds totaled 4.895167 trillion yuan, representing 101 percent of the budgeted figure and an increase of 12.3 percent. The social security fund surplus for 2017 was 642.849 billion yuan, which was rolled over, making the year-end balance 7.203747 trillion yuan. At present, overall there is a significant surplus in China's social security funds, but, with the impact of factors like population aging, in some provinces the dependency ratio for enterprise employee basic old-age pension funds remains low and it is difficult to keep social security funds balanced.

At year end 2017, outstanding central government debt was 13.477016 trillion yuan, well within the 14.140835 trillion yuan budgeted limit approved by the NPC. Total outstanding local government debt was 16.470659 trillion yuan, which included 10.332235 trillion yuan of outstanding local government general debt and 6.138424 trillion yuan of outstanding local government special debt, and was within the 18.81743 trillion yuan budgeted limit approved by the NPC.

For a more detailed account. of budget execution related to the above items, please refer to the Report on the Execution of the 2017 Budgets of the People's Republic of China and Its 2018 Draft Budgets in Chinese.

5. Implementation of main fiscal and tax policies and other major fiscal work in 2017

In 2017, departments of finance conscientiously acted on the requirements in the budget resolution adopted at the Fifth Session of the 12th NPC, fully implemented the Budget Law, effectively enforced proactive fiscal policy, consistently deepened fiscal and tax system reform, boosted funding for key areas, supported supply-side structural reform, and thereby promoted sustained, healthy economic and social development.

• Focusing on tax and fee cuts

We carefully monitored trials to replace business tax with VAT, put into practice and repeatedly refined related policies, and simplified the structure of VAT rates. We raised the annual taxable corporate income threshold from 300,000 to 500,000 yuan for small businesses with low profits that enjoy halved corporate income tax. For small and medium-sized high-tech enterprises, the proportion of R&D expenses covered by the additional tax reduction policy was raised from 50 to 75 percent. We launched trial tax policies related to venture capital investment and angel investment. We extended nationwide the policy to pilot making personal income tax deductions for commercial health insurance expenses. Some tax credit

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policies that crune to term at the end of 2016 were continued in 2017. The implementation of these measures cut tax by a further 380 billion plus yuan.

We abolished, suspended, or exempted 43 central government administrative charges such as the service fee for house sales, and lowered seven such charges; canceled, suspended, or reduced payment to five government-managed funds like the urban public facility surcharge, and reduced two such payment; and abolished the industry and enterprise structural adjustment fund. Including locally initiated overhauls of government charges and fees, we have cut fees by more than 190 billion yuan over the year. In addition, relevant departments introduced measures to overhaul and standardize business and service fees and charges, boost broadband speeds and lower rates for internet services, lower the energy consumption costs of enterprises, and help lower the cost and improve the efficiency of logistics. Over the year, across society burdens were ·lightened by more than 440 billion yuan.

We took further steps to regulate the levying of charges on enterprises, created and launched a comprehensive national listing system for government-managed funds, administrative charges, and business and services fees set by the government, disallowing the collection of charges for anything not on the list, and also established a system for accepting and handling reports and complaints of illegitimate charging.

• Working solidly on supply-side structural reform; carrying out five priority tasks-cutting overcapacity, reducing excess inventory, deleveraging, lowering costs, and strengthening areas of weakness

We granted 22.2 billion yuan in subsidies and awards, supporting the iron, steel, and coal industries in surpassing their 2017 targets for addressing overcapacity and in assisting affected workers. We shut down, and stopped or suspended the construction of over 65 million kilowatts of coal-fired power capacity. We appropriated 56.67 billion yuan to address the issue of central government "zombie enterprises," and resolve the longstanding problems of SOEs like their obligation to provide water, electricity, heating, gas, and property management services for the homes of their employees. We improved the way people affected by rebuilding initiatives are resettled, · and in areas with large commodity housing stock actively promoted the issuance of monetary housing compensation rather than housing. We improved and implemented policies on enterprise mergers and restructuring and the swapping and cancellation of debt, and saw that debt-to-equity swaps consistent with market principles and the rule of law were pursued in an orderly manner. We further improved the structure of central government infrastructure investment, concentrating use on investment for major water conservancy projects, a new round of power-grid upgrading projects in rural areas, and such. We promoted the use, in compliance with standards, of

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public-private partnership (PPP) models and witnessed a steady rise in the involvement of private enterprises.

We made progress in agricultural supply-side structural reform. We began building 41 national modem agriculture industrial parks. We put into practice reforms to the agricultural subsidy system, gearing it toward green development and ecological progress. We subsidized and brought to completion the shifting from grain to feed crops on 866,666.7 hectares of farmland, and trials in applying systems of crop rotation and fallow land across 800,000 hectares of cultivated land; supported and brought to completion the restoration and improvement of 161,333.3 hectares of heavy metal contaminated cropland; and guided the adjustment of crop production structures to promote the protection of farmland soil fertility. We improved the price-setting mechanism and purchase and storage systems for grain and other important agricultural products, and reduced policy­supported stockpiles of grain, cotton, and edible oils by 85.01 million tons.

The establishment of the State Agricultural Credit Guaranty Alliance Company and 33 provincial-level credit guaranty companies for agriculture was completed, and guaranty services were in total provided to more than 49,000 agricultural projects, amounting to 44.25 billion yuan, alleviating the problem of agribusinesses finding it difficult, costly, and time-consuming to obtain financing. In 200 major grain-producing counties of 13 major grain-producing provinces, we introduced agricultural catastrophe insurance for farmers engaging in moderately scaled farming operations, seeing the level of protection raised by approximately 90 percent. Land improvement was continued, comprehensive agricultural development efforts added 1.67 million hectares of high-standard cropland, over 1.44 million more hectares of cropland were covered by efficient water-saving irrigation, and work on post-disaster weak links in water conservancy and major water conservancy infrastructure made steady progress. We supported the launching of pilot and demonstration programs to develop farm-and-field communities in 18 provinces.

• Fostering strong new drivers for economic growth

We provided greater funding for science and technology activities for the public interest, fully implemented measures to reform the management of central government-funded science and technology initiatives and the funding for research projects, and used market-based approaches to promote the transfer and commercialization of advances in science and technology. We stepped up implementation of the Made in China 2025 strategy, and supported the development of smart manufacturing, of robust foundations for industry development, and of green manufacturing. We implemented and improved policy on compensating insurance for major newly-developed technological equipment,

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and added new materials to the list of products receiving subsidies for insuring initial applications. We enabled the state investment fund for integrated circuits and other funds to play a guiding role, to promote faster development in key areas of manufacturing. We implemented the adjusted government subsidies policy and over the year promoted the use of approximately 800,000 more new-energy vehicles. We supported 30 cities in becoming part of the initiative to create demonstration cities as small and micro business startup and innovation hubs, and quickened the operations of the National SME Development Fund, encouraging strong growth in society-wide business startups and innovation.

• Providing strong support for poverty alleviation

Central government allocated 86.1 billion yuan to subsidize local poverty reduction, an increase of 30.3 percent over 2016; and in fields like agriculture, education, healthcare, and transportation, the strength of investments for poor areas were stepped up. In 832 counties, including priority counties in the national initiative to reduce poverty through local development and counties in contiguous poor areas, we fully rolled out trials to integrate different rural development funds. By the end 2017, we had integrated 328.6 billion yuan of government funds for rural development. Central government allocated funds to subsidize interest on loans used to relocate people from inhospitable areas, supporting local governments in fulfilling the task of helping 3.4 million people registered as living under the poverty line to relocate from inhospitable areas. We gave strong backing to poverty reduction efforts that help people achieve returns on asset investments to bring an increase in their income. The battle against poverty continued with good momentum, and over the year 12.89 million people in rural areas were lifted out of poverty.

• Protecting and improving living standards; promoting reform and development in education

We unified policies under the "dual exemption plus subsidies" scheme for rural and urban students in compulsory education. This benefited around 143 million students in compulsory education around the country through exemption from payment for tuition and miscellaneous fees and textbooks. A total of 13.77 million boarders from financially disadvantaged families received living allowances. We also made it possible for 14 million children living with migrant worker parents in cities to have their fiscal outlays for education transferred along with them. We acted on the requirements of the reform to streamline administration, delegate powers, and improve regulation and services in relation to higher education. We refined and strengthened management over the use of funds in universities and colleges, and gave institutions of higher learning more powers of decision making. Government grants for PhD students were raised by 3,000yuan.

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We deepened medical and healthcare system reform. We rolled out comprehensive public hospital reform nationwide; and abolished the policy, in force for over 60 years, of adding markups to pharmaceuticals. We piloted the integration of maternity insurance and basic medical insurance for urban workers. Annual government subsidies for basic medical insurance for rural and non­working urban residents were raised from 420 to 450 yuan per person. Per capita government spending on basic public health services was raised from 45 to 50 yuan per year. We sorted and integrated public health service projects and reformed the way funds are allocated. We proceeded with the comprehensive reform of healthcare services at the community level.

We offered support for work concerning employment and social security. We improved the system of policies on employment and entrepreneurship, expanded the coverage of subsidies for job seekers and entrepreneurs, and encouraged local governments to offer a one-off business startup grant to eligible university graduates and those having difficulty finding jobs.

We unveiled plans to transfer a portion of state capital into social security funds. Basic pension benefits for the retirees of enterprises, Party and government offices, and public institutions were raised by approximately 5.5 percent. We integrated financial resources to set up the subsidy fund to aid people in financial difficulty. We saw to it that the subsidy fund was used across localities to guarantee expenditure for providing subsistence allowance beneficiaries and people in extreme poverty with assistance and basic necessities, for providing temporary assistance, for offering assistance to homeless people and beggars, and for ensuring the basic living conditions of orphans, benefiting a total of 77.97 million people in financial difficulty nationwide. Subsidies and living allowances for entitled groups were raised, benefiting 8.6 million people around the country. We improved policy on subsidizing disaster relief, and substantially increased four central government subsidies including the subsidy for disaster response and aid.

We strengthened government support for basic housing. We funded efforts to begin renovation on 6.09 million housing units in rundown areas and promoted the development of supporting infrastructure for public rental housing. Central government funds for subsidizing the rebuilding of dilapidated rural housing were used primarily for four key groups including people eligible for subsistence allowances, individuals living in extreme poverty on basic assistance in rural areas, the families of people with disabilities affected by poverty, and households registered as living under the poverty line. The subsidy per household was lifted significantly, from 7,500 yuan in 2016 (8,500 yuan in poor areas) to approximately 14,000 yuan in 2017. Fiscal support enabled 1.906 million households to have their housing rebuilt.

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We promoted the development of culture and sports. We sped up work on building a modern system of public cultural services. We made 49,863 public cultural facilities free to the public, made 1,257 sports facilities available free of charge or inexpensively for members of the public, and saw continued improvement in urban and rural public cultural and sports facilities.

• Ensuring funding for ecological conservation

The key task of addressing air pollution in and around the Beijing-Tianjin­Hebei region, in the Yangtze River Delta and in the Pearl River Delta was acted on. We launched centrally backed trials to promote clean energy sources for winter heating across northern China. We supported local governments in implementing the action plans for addressing water and soil pollution. We increased transfer payments to key ecosystem service zones, and the number of county-level administrative areas nationwide receiving relevant subsidies reached 819. We . intensified support for ecological conservation in the Qilian Mountains area, and pushed to find satisfactory solutions to longstanding problems. We carried out the second set of pilot projects under the initiative to protect and restore mountain, water, forest, farmland, lake, and grassland ecosystems. We moved forward with the protection and restoration of wetlands; ensured funding for subsidies and rewards for the new round of initiatives to turn marginal farmland into forests or grassland, and that to conserve grassland ecosystems; implemented policies to protect all natural forests, and supported a total ban on commercial logging in natural forests.

We funded the development of a circular economy and clean production, and initiated trials to recycle resources from animal manures and other waste. We further strengthened efforts to pilot a cap-and-trade system for emissions. We improved the mechanism for intra-river basin compensation for ecological conservation. We supported pilot initiatives for developing the national park system.

• Deepening reform of the fiscal and tax systems; improving budgetary management

We reviewed and standardized key budgetary expenditures directly linked to increases in government revenue and expenditures or to GDP, improving the mechanism by which key expenditures are guaranteed. We improved the structure of transfer payments, reducing the number of items funded by special transfer payments by 18, cutting the total to 76. For the first time, central government budgets, central department budgets, and transfer payments from central to local governments were made available online at http://www.gov.cn/ and http://www.mof.gov.cn/index.htm, and the number of central departments that released their departmental budgets rose to 105.

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We improved the government budgeting system. The proportion of funds from the central state capital operations budget allocated to the general public budget was raised to 22 percent. Three govenunent-managed funds including fees for the compensated use of additional land designated for construction projects were transferred to general public budgets. Rules, for example on fees for discharging major pollutants, related to basing expenditures on revenue and limiting designated funds to use for fixed purposes, were rescinded.

We strengthened performance-based budgetary management. Management using performance targets was applied to all Grade I and Grade II central department project expenditures and to all central-to-local special transfer payments. Performance targets were reviewed and approved along with budgets. Oversight over the execution of performance targets and performance self­evaluations were carried out across the board, and third-party organizations were invited to undertake key performance evaluations. The results of a portion of self­evaluations and key performance evaluations were reported to the NPC and released to the public.

We improved the principles on and system for government accounting, and piloted the preparation of government financial statements.

We pushed for progress in tax reforms and tax legislation. To improve the VAT system, we cut the number of VAT brackets from four to three-17 percent, 11 percent, and 6 percent brackets, abolished the 13 percent rate; and reduced the rate for agricultural products, for example, from 13 to 11 percent. Water resource tax pilot reforms were expanded to cover 10 provinces. We unveiled the general plan for building an individual income and property database.

We assisted efforts to speed up tax legislation, and saw the successful introduction of the Tobacco Leaf Tax Law, the Tonnage Tax Law, and the Regulations on the Implementation of the Environmental Protection Tax Law; the revision and release of provisional regulations on VAT; and extensive legislative work underway on the Tax Law on Farmland Used for Nonagricultural Purposes, the Vehicle Purchase Tax Law, the Resource Tax Law, the Customs Duties Law, and other tax laws.

We improved the fiscal system. We worked sector by sector in moving forward with reforms to divide fiscal powers and expenditure responsibilities between central and local governments. We released reform plans for foreign affairs, and drafted the reform plans for education, and the medical and healthcare sector. We conducted research toward the general reform plan for further improving revenue sharing between central and local governments. We drafted the reform plan for improving local tax systems.

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• Strengthening the management of local government debt

In accordance with the law we standardized local government financing through bond issuance, and strengthened the use of ceilings to regulate local government debt. Over the year, new local government bonds issued totaled 1.59 trillion yuan and were therefore kept below the ceiling of 1.63 trillion yuan for new local government bonds issued in 2017 that was approved by the NPC. We focused on developing local government special purpose bonds that can strike a balance between revenue and expenditures, and began issuing special purpose bonds to support land reserves and government toll roads.

We issued documents on further standardizing local government issuing of bonds, on putting a stop to illegal and unauthorized financing in the name of government procurement of services, and so on. We established a positive list and a negative list, and prohibited various kinds of financing in violation of laws and regulations, and in disguised form, putting in place oversight and regulatory policies covering all of the current main forms of illegal and regulation-breaking financing used by local governments. We organized investigations into illegal financing guaranty by some city and county governments and financial institutions and, according to law and regulations, strictly held those responsible to account through dismissal, demotion, fines, and other means. The handling of these cases was given public exposure, playing a cautionary and educational role. At the same time, we continued to carry out local government debt risk assessments and give early warnings, and urged and guided local governments to effectively guard against debt risks.

• Tightening oversight over public finances

We organized and executed oversight over and inspections on the public release of local budgets and final accounts, management of the use of poverty alleviation funds, central departments' compliance with financial and economic discipline, and special funds for rewards and subsidies for industry and enterprise structural adjustments. We found over 49 billion yuan of public funds to have been· used in breach of regulations, held those responsible strictly to account, and gave impetus to the improvement of regulations and standardization of management, promoting the enforcement of important fiscal policies and institutions.

Fiscal and budgetary work in 2017 has been an important part of the practical moves toward fiscal reform and development of the past five years. These five years have seen a continuous increase in national fiscal strength, consistent new improvements in the precision and effectiveness of fiscal policy, and continuous new breakthroughs in developing the system and capacity for modern fiscal governance. In the great course of the cause of the Party and country, as historic

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achievements have been made and historic change has occurred, fiscal work has played a positive role.

First, we continued to implement proactive fiscal polictJ, helping to keep the economy performing within an appropriate range.

Expenditures in China's general public budgets were increased from 12.6 trillion yuan in 2012 to 20.3 trillion yuan in 2017, and the deficit-to-GDP ratio was kept below 3 percent. We extended trials replacing business tax with VAT to all industries, applying VAT to all goods and services, and bidding farewell to the business tax that had been levied for 66 years. The reform saw tax burdens cut by over 2 trillion yuan. We abolished, exempted, suspended, or reduced payment related to 1,368 government-managed funds and administrative charges, with related cuts amounting to 384.5 billion yuan. We actively adjusted the fiscal spending structure and put idle budgetary funds to use, ensuring that funds were available for spending on people's wellbeing and key projects.

Second, we continued to advance supply-side structural reform, pursuing a new dynamic balance between supply and demand.

We made solid progress in the five priority tasks of cutting overcapacity, reducing excess inventory, deleveraging, lowering costs, and strengthening areas of weakness. We introduced and implemented a raft of fiscal and tax policies favorable to the healthy development of the real economy, and promoted economic structural improvements and the faster growth of new drivers. With a view to improving the quality of agricultural supply, we further improved fiscal policies supporting agriculture, supported the establishment of the industrial, production, and operational systems for modern agriculture, and promoted a shift in agricultural and rural development toward green ecological sustainability and greater attention to meeting the demand for quality. We deepened implementation of the innovation-driven development strategy, consistently increased investments in science and technology, optimized the structure of investments, improved the means of support, and saw the role of innovation in powering development grow stronger and stronger.

Third, we continued to deepen the reform of fiscal and tax systems, achieving important progress in building a modern fiscal system.

We introduced and implemented a series of major reform measures related to making budgets publicly available, practicing medium-term fiscal planning and management, improving the transfer payment system, strengthening performance­based budget management, and so on, and saw the framework for the modem budgetary management system basically established. We improved the excise tax system, adjusting the scope of taxation, optimizing the structure of rates, and· improving the way tax is levied on the different points in the chain. We continued the reform to apply ad valorem rates to all resource taxes. We worked faster to

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advance the reform to divide up fiscal powers and expenditure responsibilities. We determined the appropriate ratio for sharing VAT revenue between central and local governments following the blanket replacement of business tax with VAT, and achieved general stability in the fiscal strength of the central and local governments.

Fourth, we continued to ensure and improve living standards, helping the people to feel more satisfied.

More was done to see targeted poverty reduction and elimination measures put into action, and central government subsidies earmarked for local poverty reduction grew at an average annual rate of 22.7 percent. We worked to unify urban and rural funding mechanisms for compulsory education with a focus on rural areas, and improved the system of policies for providing financial aid to students from poor families. We improved policies and measures on employment and business startups and achieved a stable landscape in employment both £or priority groups and overall. The basic medical insurance system achieved complete coverage, the serious disease insurance system was put in place, and the medical insurance schemes for rural and non-working urban residents were integrated. We built up the set of social assistance systems with subsistence allowances, assistance to people living in extreme poverty, and emergency aid as its main pillars. We consistently increased basic old-age pension benefits, urban and rural subsistence allowances, and benefits for entitled groups. Construction began on 34 million units of government-subsidized housing in urban areas around the country, and rebuilding was completed on 17 million dilapidated rural houses.

Fifth, we continued to promote legal compliance in the management of public finances, improving the quality of fiscal management.

The revised Budget Law was promulgated and put into effect, and we introduced regulations on the implementation of the Environmental Protection Tax Law, the Asset Valuation Law, and the Government Procurement Law, and so on, making continual progress in building up our body of fiscal and tax legislation. We rolled out across the board the oversight model of random inspection and public releasel and upped the intensity of fiscal oversight and inspections.

We established standard mechanisms for local governments' financing through bond issuance, strengthened the management of local government debt, and gave initial shape to the institutional framework for oversight and management of local government debt and the system for risk prevention and control.

We made further progress in establishing the modern treasury management system, achieved important outcomes in the reform to make government bonds market-based and in building the yield curves of government bonds, and made

1 The model comprises inspections of randomly selected entities by randomly selected inspectors and the public release of inspection results.

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continuous improvements to the operational mechanisms for government procurement.

We continued to build and improve the internal controls of the Ministry of Finance and the entire fiscal institution, and constantly strengthened risk management and checks and balances in relation to core fiscal services and the execution of fiscal power. We helped to promote integrated online oversight of budgets. The central budgetary internet oversight system was established and put into operation, and provincial-level financial departments were all connected online to provincial-level people's congresses, thus proactively subjecting themselves to people's congress oversight.

The achievements made in the reform and development of the public finances over the past five years are the result of the firm leadership of the Party Central Committee with Comrade Xi Jinping at its core; of the sound guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era; of the oversight of the NPC and the CPPCC National Committee together with their deputies and members; and of the concerted efforts of all regions, all departments, and the people of all our nation's ethnic groups.

At the same time, we are soberly aware that we still have the following difficulties and challenges to face in budget operations and public finance work.

• The difficulty in maintaining a balanced budget is notable; and some county and township governments have difficulty in their financial operations, and face great pressure in ensuring salaries, basic financial operations, and the basic wellbeing of the people.

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The structure of spending needs to be further improved; the stubborn pattern of constantly rising spending on some items has not been fundamentally changed; and fragmentary spending needs to be quickly addressed.

The need to strengthen performance-based fiscal management is urgent; some local governments, departments, and budget institutions attend to allocation but not to management, money is spent without asking to what effect; and the problem of funds sitting idle and being wasted is serious.

There .are still many tough problems to tackle in fiscal and tax reform; some reforms need to be further accelerated; and hard work is needed to see reform measures implemented to the intended effect.

Some places continue to violate laws and regulations or ·use disguised forms in financing, and there are hidden risks that cannot be ignored.

We take these problems very seriously and will adopt strong measures to see them resolved.

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II. Draft Central and Local Budgets for 2018

The year 2018 is the first year for implementing the guiding principles from the 19th National Party Congress; it is the 40th anniversary of reform and opening up; and it is a pivotal year as we continue to work toward a decisive victory in building a moderately prosperous society in all respects and to implement the 13th Five-Year Plan. This makes the compilation of this year's budgets and public finance work all the more important. We need to adapt to the new era, focus on new goals, and act on new arrangements; give better play to the role of public finance as a foundation and pillar of the country's governance; and help the Chinese economy to keep making new progress in achieving high quality development.

1. Analysis on the prospects for fiscal revenue and expenditures in 2018

• On fiscal revenue

In 2018, the comprehensive implementation of the guiding principles from the 19th National Party Congress will be a powerful driving force for deepening reform and promoting development, and there are many favorable conditions for China's sustained, healthy economic growth. At the same time, destabilizing factors and uncertainties in the international environment and economic development are mounting, and there will be some pressure and challenges when it comes to increasing government revenue. In particular, there might be a weakening of price-related increases in revenue, and the combination of new and old measures to cut taxes and fees will lead to a significant drop in revenue.

• On fiscal spending

At each level there will be a relatively large number of expenditure items that must be guaranteed as well as a significant amount of new spending to be added. Priority must be given to spending related to the critical battles to forestall and defuse major risks, carry out targeted poverty alleviation, and prevent and control pollution. Special focus must be given to efforts to deepen supply-side structural reform, speed up China's establishment as a country of innovators, put the rural revitalization strategy into effect, strengthen the modernization of national defense and the military, and advance major country diplomacy with Chinese characteristics. More investments are needed to address the many weaknesses in areas related to ensuring people's wellbeing like employment, education, healthcare, housing, and elderly care.

The general assessment is that in 2018 revenue will continue to maintain positive momentum while expenditure grows quickly, and the budget will continue to be tightly balanced. All levels of government must continue to tighten their belts; exercise economy and frugality, work hard, and carefully calculate and

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budget all spending; and ensure all public funds are spent to sustain China's development and improve people's lives.

2. The thinking and principles guiding the preparation of the 2018 budgets and public finance work

The thinking guiding the preparation of this year's budgets and public finance work is that we need to:

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Follow the firm leadership of the Party Central Committee with Comrade Xi Jinping at its core

Follow the guidance of Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Theory of Three Represents, the Scientific Outlook on Development, and Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era

Comprehensively and fully apply the guiding principles from the 19th National Party Congress, and the second and third plenary sessions of the 19th Party Central Committee

Implement the Party's basic theory, line, and policy

Uphold and strengthen overall Party leadership

Uphold the general principle of pursuing progress while ensuring stability

Continue commitment to the new development philosophy

Act in response to the evolution of the principal contradiction in Chinese society

Aim for high quality development

Ensure coordinated implementation of the five-sphere integrated plan1 and the four-pronged comprehensive strategy2

Regard supply-side structural reform as the main task in hand

Continue to pursue proactive fiscal policy, and strengthen fiscal sustainability

Continue implementing tax and fee cuts to further lighten the burden on businesses

• Adjust and upgrade the structure of spending; ensure support for key areas and projects; strictly control general expenditures; increase efficiency in the use of government funds; focus on making solid progress in the critical battles to forestall and defuse major risks, carry out targeted

1 The five-sphere integrated plan is to promote coordinated economic, political, cultural, social, and ecoioyical advancement.

The four-pronged comprehensive strategy is to make comprehensive moves to finish building a moderately prosperous society in all respects, deepen reform, advance law-based governance, and strengthen Party self-governance.

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poverty alleviation, and prevent and control pollution; and give impetus to correcting imbalances and inadequacies in our development

• Strictly implement the Budget Law; tighten our belts; improve the budgetary management system; and exercise performance-based management across the board

• Take incremental steps to establish a fiscal relationship between central and local governments built on clearly defined powers and responsibilities, appropriate financial resource allocation, and greater regional balance; move faster to promote the equalization of access to basic public services; and promote sustained, healthy economic and social development

To put this thinking into action, we need to start out by considering the basic fact that China's economy is transitioning to a stage of high quality development, and focus on seeing that the following key principles are acted on:

First, continuing to cut taxes and fees.

We will make the real economy the focus of work on economic development, unveil new tax and fee cuts in due course as we improve the tax system, and slash costs in the real economy.

Second, adjusting and upgrading the structure of spending.

We will make government spending more publicly oriented and universally beneficial, rigorously control general expenditures, and guarantee support for sectors and major projects like supply-side structural reform, poverty alleviation, ecological and environmental protection, education, and national defense.

Third,. deepening the reform of fiscal and tax systems.

With the aim of speeding up the establishment of a modern public finance system, we will move forward with reforming the division of fiscal powers and spending responsibilities between central and local governments, make the budgets more binding and transparent, improve the tax system, and allocate fiscal resources more efficiently.

Fourth, promoting coordinated regional development.

We will provide firm support for the implementation of the coordinated regional development strategy; see that transfer payments play a facilitative role in coordinating regional development; work faster to reduce the disparities between different regions in basic public service provision; and strengthen the capacity. of governments in regions facing financial difficulties and of county and township governments to pay salaries, carry out normal operations, and safeguard the basic wellbeing of local populations.

Fifth, implementing performance-based management across the board.

Budgetary allocations will be combined with performance-based management.

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We will see that our limited public funds go to where they will be used to the best effect, use a performance-oriented approach in strictly managing expenditures, and further improve the efficiency of the use of funds.

Sixth, strengthening fiscal sustainability.

Arrangements for revenue and expenditure budgets will be reasonable and deficit-to-GDP ratio will be appropriately lowered to expand the space for future macro-regulatory policies. We are resolved to put a stop to illegal and regulation­breaking borrowing by local governments. To ensure people's wellbeing we are committed to doing our utmost while working within our means.

3. Fiscal policy for 2018

In 2018, the proactive nature of fiscal policy will remain unchanged, and we will increase efficiency with a focus on key tasks. With the aim of cutting the number of tax brackets from three to two, adjustments will be made to the level of VAT rates, with the focus on lowering rates for manufacturing, transportation, and some other industries. Tax services will be improved. We.will implement personal income tax reform. We will apply a unified annual sales revenue threshold for defining small-scale VAT payers. We will further expand the coverage of the preferential policy of halved corporate income tax for small- and micro-businesses. We will include more regions in tax-related pilot programs for business startup investment and angel investment. A one-off tax deduction will be offered for new R&D instrument or equipment purchases of less than 5 million yuan in the year of purchase. We will implement a tax credit policy on foreign-sourced corporate income. We will expand the scope of the preferential policy on land use tax to include more logistics companies. We will continue to implement some of the preferential tax policies that expired at the end of 2017.

The implementation of the above measures will bring tax cuts of over 800 billion yuan over the year. Together with the overhaul of government-managed funds and different types of fees and charges, including administrative charges, the tax burden will be reduced by over 1 trillion yuan. At the same time, we will execute coordinated management of revenue, deficits, special debt, and funds from budget stabilization funds; expand spending as appropriate; and provide the necessary financial support for securing a decisive victory in building a moderately prosperous society in all respects, building a modernized economy, and better ensuring and improving people's wellbeing.

The main revenue and expenditure policies for 2018 are:

1) Providing support for the three critical battles

• Winning the critical battle to forestall and defuse major risks

Our approach will be to tackle symptoms and root causes, combine channeling with blocking, and pursue incremental progress, to proactively prevent and defuse

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the risks posed by local government debt. We will increase the scale of local government special purpose bonds as is appropriate, giving priority to supporting ongoing local projects to see them make steady progress. In 2018 we plan for local governments to issue special purpose bonds totaling 1.35 trillion yuan, an increase of 550 billion yuan over last year. We will resolutely contain the rise in hidden debts, and take active and prudent measures to address existing hidden debts. We will maintain that whoever borrows is responsible for that debt, strictly enforce the system of local governments being responsible for local debt regulatory duties, and see that debtors and creditors will, according to law, share risk in a reasonable way.

• Winning the critical battle against poverty through targeted alleviation

On the basis of the current poverty line and in accordance with the basic policy of targeted poverty reduction and alleviation, funds will be raised through multiple channels; targeted alleviation measures will be tailored to help specific groups of people living in poverty; and further action will be taken toward concentrated efforts in areas affected by extreme poverty. Central government will allocate 106.095 billion yuan to subsidize local poverty reduction, an increase of 20 billion yuan, or 23.2 percent over last year, and the additional funds will be used mainly in areas affected by extreme poverty, including the three districts (Tibet, the four prefectures in southern Xinjiang-Hotan, Aksu, Kashi, and Kirgiz Autonomous Prefecture of Kizilsu, and the Tibetan ethnic areas in Sichuan, Yunnan, Gansu, and Qinghai provinces) and the three prefectures (Liangshan in Sichuan, Nujiang in Yunnan, and Linxia in Gansu). A stronger weighting of financial backing will be given to areas affected by extreme poverty using channels like transfer payments for education and key ecosystem service zones and central investments in infrastructure. In strict compliance with stipulated scope and use, we will speed up the substantive consolidation of rural development funds in poor counties, exercise performance-based management over poverty relief funds across the board, and establish and improve regular oversight mechanisms, seeing that poverty relief funds are well managed and used to the intended effect.

• Winning the critical battle to prevent and control pollution

Our focus will be on solving salient environmental problems, and we will promote an overall improvement in ecosystems and the environment. In its biggest investment in years, central government will allocate 40.5 billion yuan for the prevention and control of air, water, and soil pollution, an increase of 6.465 billion yuan, or 19 percent, over last year. To make our skies blue again, we will give priority support to addressing air pollution in areas like the Beijing-Tianjin-Hebei region, continue pilot programs to promote clean winter heating and comprehensive use of straw in the northern region, and promote the development of clean energy. With the aim of achieving faster progress in addressing water

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pollution, we will put in place incentives for restoring ecosystems along the Yangtze Economic Belt; support sewage treatment plants in the central and western regions to improve their performance and efficiency; and take more action in the Blue Bay environmental improvement initiative. To strengthen soil pollution control and soil restoration, we will support trial zones for the comprehensive prevention and curtailment of soil pollution in undertaking demonstration programs, and move forward with efforts to restore and improve cultivated land contaminated by heavy metals.

Comprehensive action will be taken to improve·rural environments, more will be done to construct and ensure the maintenance of sewage and waste treatment facilities, and strong steps will be taken to promote the recycling of livestock and poultry waste. The area covered by work to comprehensively address groundwater over-abstraction in north China will be expanded. We will develop a nature reserve system composed mainly of national parks. A new round of subsidy and reward policies for grassland ecological conservation will be launched; the system for the protection of natural forests will be improved; and more cultivated land will be turned into forests or grassland. We will back the launch of a large­scale afforestation campaign, and strengthen the protection and. restoration of wetlands. We will research the development of diversified, market-based compensation mechanisms for ecological conservation efforts, and actively support the reform of the.environmental regulation system.

2) Deepening supply-side structural reform

• Supporting improvement and upgrading in the manufacturing industry

We will use a combination of methods, including special funding and government investment funds, to support projects in fields key to the Made in China 2025 strategy, and promote further integration between industries and the Internet. We will continue to promote the growth of the integrated circuits industry and the new materials industry. We will lower VAT rates in manufacturing and some other industries, and give better play to the role of import tax policies for major technologies and equipment.

• Strengthening and expanding new growth drivers

We will implement the Internet Plus services upgrade initiative, support the transformation and upgrading of traditional service industry and the accelerated growth of modern service industry, and cultivate new growth areas: We will continue the preferential vehicle purchase tax policy for new-energy vehicles, and improve policies on related subsidies, to promote good quality, strong growth in the new-energy vehicle industry. We will lighten the tax burdens of basic telecommunications enterprises, and give impetus to the development of new growth drivers.

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• Continuing to push ahead with five priority tasks-cutting overcapacity, reducing excess inventory, deleveraging, lowering costs, and strengthening areas of weakness

We will make good use of central gqvernment special funds for rewards and subsidies to reduce overcapacity in the steel and coal industries, and support efforts to cut excess capacity in the coal-fired power industry. We will step up efforts to restructure the debts of "zombie enterprises," and quicken the pace of debt-to-equity swaps carried out in a way consistent with market principles and the rule of law. We will continue to address the longstanding issues of SOEs and to support the central government's efforts to address its "zombie enterprises" and improve enterprises in particular difficulty. While cutting taxes and fees, we will also improve the mechanisms for the dynamic management of administrative charges and government-managed funds and for reporting and handling unauthorized charges, and prevent against the reappearance of administrative charges already dealt with. We will let investment play a key role in improving the composition of supply, regulate and promote the use of PPP, strengthen the management of capital, improve the support policy system, and make concrete efforts to improve the quality of public service supply.

3) Implementing the innovation-driven development strategy

• Enhancing capability for scientific and technological innovation

We will give strong support to science and technology activities for the public interest, and increase funding for basic research. We will quicken the implementation of major science and technology projects and the main programs of the Sci-Tech Innovation 2030 initiative. We will support the building of national laboratories and world-class research institutions. We will further implement policies on reforming the way funding for scientific research projects is managed and improve the management of central government-funded science and technology programs. We will work faster to put into practice target- and results­based performance appraisals of government spending on science and technology. We will continue efforts to establish a technological innovation system, with enterprises as the main players, that is guided by the market, and that integrates the efforts of enterprises, universities, and research institutes; and we will support eligible enterprises to take up more national science and technology projects. We will give full play to the role of incentive mechanisms, and speed up the application of scientific and technological advances to boost productivity.

• Promoting entrepreneurship, innovation, and the growth of small and micro businesses

To upgrade the initiative to promote mass entrepreneurship and innovation, we will intensify efforts to create demonstration cities that act as business startup

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and innovation hubs for small and micro businesses, and reward regions that achieve clear results in expanding the scale of financing guaranty and reducing guaranty costs for small and micro businesses. We will set up a national financing guaranty fund, improve policies on special funding for the development of inclusive finance, and create a better financing environment for small and micro businesses and for agriculture, rural areas, and farmers.

4) Supporting the rural revitalization strategy

• Improving policies for supporting and protecting agriculture

We will practice management based on major projects plus listed tasks, and explore establishing a long-term mechanism for coordinating and integrating rural development funds. We will improve the agricultural subsidy system, and increase the awards for major grain-producing counties. We will improve the agricultural credit guaranty system and the mechanism for sharing agricultural risk, and begin piloting full-cost insurance for the three main grain crops-rice, wheat, and corn.

• Furthering supply-side structural reform in agriculture

We will deepen the reform of grain pricing mechanisms, reform the system for purchasing and stockpiling rice and wheat, and improve the mechanism combining market-based purchase and government subsidies for com and soybeans. We will continue reducing stockpiles of corn and work hard to cut excess stockpiles of rice. We will expand the scale of crop-rotation and fallow-land trials, and strengthen the quality grain initiative. We will establish a compensation system for fishing bans in key waters of the Yangtze River basin.

• Speeding up efforts to develop modern agriculture

We will take strong steps to develop high-standard cropland, develop efficient water-saving irrigation, and strengthen weak links in post-disaster water conservancy. We will support innovations in agricultural science and technology, and promote the breeding of superior varieties of major crops and R&D of key farming machinery. We will support the development of appropriately scaled-up operations in various forms, build up the system of commercial services for agricultural production, and encourage small rural households to become involved in modern agriculture. We will support the growth of leading local industries with unique features and strengths, run demonstration projects for development and innovation throughout the agricultural industry chain, and promoted the. integrated development of the primary, secondary, and tertiary industries in rural areas. We will move forward with the reform and development of state farms on reclaimed land.

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• Deepening comprehensive rural reform

We will put into effect a mechanism to ensure adequate funding for village­level organizations, and support the development of rural collective economic entities. We will work toward bringing the beautiful countryside initiative to the next level, give better play to the role of the awards and subsidies mechanism and platform for public works decided on through villager deliberation, and undertake trials of comprehensive rural reform. We will also establish sound mechanisms for guaranteeing government funding for the implementation of the rural revitalization strategy. We will increase investments in education, culture, infrastructure, and environmental protection in rural areas, and improve the systems and mechanisms for integrated urban and rural development.

5) Promoting coordinated regional development

• Making access to basic public services more equitable

We will markedly increase central government general transfer payments to local governments, focusing on increasing payments for equalizing access to basic public services, payments for old revolutionary base areas, areas with large ethnic minority populations, border areas, and poor areas, and subsidies to support policies for meeting people's basic needs. We will step up special transfer payments for key fields to increase support for less developed regions and regions in financial difficulty. We will press provincial governments to allocate more funds and grant more spending power to lower levels of government, and strengthen the capacity of governments below the provincial level to ensure provision of basic public services.

• Supporting faster implementation of the Three Initiatives

All relevant plans and requirements will be implemented, and support will be strengthened for the Belt and Road Initiative, the coordinated development of the Beijing-Tianjin-Hebei region, and the development of the Yangtze Economic Belt. We will support the development of the Xiongan New Area in accordance with forward-looking plans and high standards. We will encourage the central, western, northeastern, and eastern regions to achieve better development by drawing on their own strengths.

6) Increasing protection for and improving living standards

• Supporting the development of fair, quality education

We will ensure that the urban and rural funding mechanisms for compulsory education are unified, focusing on funding compulsory education in rural areas, and improve basic conditions in badly built and poorly operated schools providing compulsory education in poor areas. We will implement the third phase of the action plan on preschool education, the plan for universalizing senior secondary

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education, and the quality improvement plan for modern vocational education. We will support accelerated development of world-class universities and disciplines, strengthen the workforce of teachers, and further improve the system of financial assistance and subsidies for students. We will support and regulate non­governmental investment in education.

• Strengthening employment and social security

We will implement a proactive employment policy, continue to fund employment subsidies, and encourage employment and entrepreneurship. Effective from January 1, 2018, we increased basic old-age pension benefits for enterprise retirees, retirees of Party and government offices and public institutions, and rural and non-working urban residents. We will implement the overall plan for old-age pension reform, put in place a central regulation system for basic old­age pension funds for enterprise employees, and divert a portion of state capital into social security funds. We will take further steps in reforming the pension system for Party and government offices and public institutions. In selected regions we will pilot the use of commercialpension schemes that allow deferred payment of individual income tax. We will take prudent steps in reforming the salary income distribution system. We will moderately and proportionately increase subsistence allowances for urban and rural residents, adjust subsidies for entitled groups as needed, and strengthen the cushion for people living in extreme poverty, people with disabilities, and other groups.

• Making progress in building a Healthy China

We will consolidate progress already made in stopping markups on pharmaceuticals to make up for low-priced medical services, and improve the medical and healthcare service systems. We will move forward with merging the basic medical insurance systems for rural and non-working urban residents across the country, increase the government subsidy for basic medical insurance for rural and non-working urban residents by 40 yuan (20 yuan of which will be allocated to the serious disease insurance scheme), bringing it up to 490 yuan per capita per annum, and increase the ratio of personal contributions accordingly. We will increase the annual per capita government subsidy for basic public health services by a further 5 yuan, to bring it to 55 yuan per person per year. We will urge public hospitals to strengthen budgetary management.

• Improving the mechanism for providing adequate housing

We will support and speed up the development of a housing system with multiple types of supply and multiple channels for housing support, which encourages both renting and purchasing. We will continue developing government-subsidized housing, support efforts to start renovation on another 5.8 million housing units in rundown areas in 2018, and step up support for the

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construction of public rental housing and supporting infrastructure. We will continue support for local renovation of dilapidated housing, prioritizing people eligible for subsistence allowances, individuals living in extreme poverty on basic assistance in rural areas, the families of people with disabilities affected by poverty, and households registered as living under the poverty line. We will weight resource allocation to areas affected by extreme poverty.

• Promoting cultural prosperity

We will improve the public cultural service system, and deepen efforts in the initiative to see culture benefit the people. We will ensure that China's cultural relics are given effective protection and used to greater benefit, and that our intangible cultural heritage is protected and carried on. We will encourage deeper integration between traditional and new media, support the development of socialist art and literature, and promote the development of the cultural sector.

• Supporting the Peaceful China initiative

We will deepen comprehensive judicial and supporting reforms, improve the crime prevention and control system, and effectively maintain public security.

We will support the drive to modernize national defense and the armed forces, and provide firm support for building a strong military. Support will be continued for reform in national defense and the armed forces. We will actively support adjustments and reform in the armed police force. Reform in investment in defense-related science and technology industries will be deepened. We will fully implement the military-civilian integration strategy, research and improve supporting policies, and put funding in place.

The central government will earmark 537.6 billion yuan for investment in infrastructure, an increase of 30 billion yuan over last year, with stronger support for agriculture, rural areas, and farmers, innovation-driven growth, environmental protection, living standards, capability building for ensuring security, and other key areas. We will improve the composition of existing funds, reduce expenditure on small and miscellaneous projects, and ensure more effective use of funds.

4. Revenue and expenditures in the general public budgets for 2018

1) Central general public budget

Revenue in the central general public budget is expected to be 8.5357 trillion yuan, an increase of 5.2 percent over the actual figure for 2017 (as detailed below). Adding in 213 billion yuan from the Central Budget Stabilization Fund and 32.3 billion yuan from the budgets of central government-managed funds and central government state capital operations, revenue for 2018 will total 8.781 trillion yuan. Expenditures in the central general public budget are projected to reach 10.331 trillion yuan, an increase of 8.5 percent. Total expenditures are projected to exceed total revenue, leaving a deficit of 1.55 trillion yuan, which is the same as 2017. The

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Central Budget Stabilization Fund is projected to carry a balance of 253.605 billion yuan. The ceiling for the outstanding balance of central government bonds is 15.690835 trillion yuan.

Expenditures in the central general public budget are divided into central government expenditures, tax rebates and transfer payments to local governments, and payments to central government reserve funds.

(1) Central government expenditures will total 3.2466 trillion yuan, up 8.1 percent. This is broken down as follows: general public service spending totals 145.388 billion yuan, up 11.6 percent. This is mainly to strengthen the ability of departments under direct central government management to perform their duties by appropriately raising the level of public funding. Spending on foreign affairs totals 60.07 billion yuan, up 15.6 percent. National defense spending is 1.106951 trillion yuan, up 8.1 percent. Public security expenses total 199.11 billion yuan, up 5.5 percent. Spending on education totals· 171.122 billion yuan, up 6.5 percent. Spending on science and technology is 311.484 billion yuan, up 10.1 percent. Spending on stockpiling grain, edible oils, and other materials totals 137.15 billion yuan, a reduction of 14.1 percent, which is mainly due to the strengthening of efforts to reduce excess policy-supported stockpiles of grain, cotton, and edible oils and a corresponding reduction in spending on subsidizing interest payments on loans for stockpiling grain, cotton, and edible oils. Interest payments on debt total 428.652 billion yuan, up 13.4 percent. The central department budgets for 2018 are formulated based on current set-up of institutions and their functions, and during the course of implementation adjustments will be made based on the scale of draft budgets in this report in light of institutional reforms.

(2) 6.2207 trillion yuan will be transferred to local governments, up 9 percent, the biggest increase since 2013.

General transfer payments to local governments will total 3.89945 trillion yuan, up 10.9 percent. Of this amount, transfer payments for equalizing access to basic public services total 2.443857 trillion yuan, up 9.1 percent (this includes 246.279 billion yuan in awards and subsidies for the mechanism to ensure county-level governments' basic funding, up 10 percent); transfer payments to old revolutionary base areas, areas with large ethnic minority populations, border areas, and poor areas total 213.333 billion yuan, up 15.8 percent; transfer payments for basic pension schemes are 669.656 billion yuan, up 14.3 percent; and transfer payments for rural and non-working urban resident medical insurance total 280.791 billion yuan, up 11.8 percent.

Special transfer payments to local governments will total 2.32125 trillion yuan, up 6.1 percent. This consists of 18.73 billion yuan in special transfers for the modem vocational education quality improvement plan, up 5.6 percent; 36.732 billion yuan for supporting the reform and development of local institutions of

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higher learning, up 7.8 percent; 46.878 billion yuan in employment subsidy funds, up 6.8 percent; 48.219 billion yuan for subsidizing the cost of settling decommissioned military personnel, up 21.2 percent; 139.634 billion yuan for the subsidy fund to aid people in financial difficulty, up 5.3 percent; 44.362 billion yuan in subsidies for entitled groups, up 9.7 percent; 62.926 billion yuan in subsidy funds for public health services, up 7.2 percent; 22.113 billion yuan in subsidies for medical assistance, an increase of 56.7 percent, which is mainly to support areas affected by extreme poverty in increasing medical assistance for poor populations; 24.36 billion yuan in subsidies for agricultural resource and ecological conservation, up 7.6 percent; and 143.3 billion yuan in special transfers for central government­subsidized urban housing projects, up 7.1 percent.

(3) Tax rebates to local governments total 813.7 billion yuan.

(4) Central government reserve funds total 50 billion yuan, which is consistent with the budgeted figure for 2017. In implementation, reserve funds will be counted as central government expenditures or transfer payments to local governments as the situation requires.

2) Local general public budgets

Revenue in local general public budgets is projected to be 9.782 trillion yuan, up 7 percent. Adding in 7.0344 trillion yuan in tax rebates and transfer payments from the central government and 40 billion yuan transferred from other local sources, revenue is expected to total 16.8564 trillion yuan. Expenditures in local general public budgets are projected to be 17.6864 trillion yuan, an increase of 7.3 percent after deducting utilized carryover and surplus funds from last year and funds transferred from other sources. This leaves a local deficit of 830 billion yuan, the same as 2017, which will be made up through local government issuance of general bonds. The ceiling for the outstanding balance of local government general bonds is 12.378922 trillion yuan.

3) All China's general public budgets

Revenue in the general public budgets of both the central and local governments is projected to total 18.3177 trillion yuan, up 6.1 percent. Adding in 285.3 billion yuan transferred from other sources, revenue is expected to total 18.603 trillion yuan. Expenditure in all China's general public budgets is 20.983 trillion yuan, an increase of 7.6 percent after deducting local governments' utilized carryover and surplus funds from last year and funds transferred from other sources. This leaves a deficit of 2.38 trillion yuan, the same as 2017. Deficit-to-GDP ratio is projected to, along with GDP growth, appropriately reduce to 2.6 percent, a drop of 0.4 percentage points over the budgeted figure in 2017. This is commensurate with China's steady economic growth and sound fiscal operations, and will expand the space for long-term development and macro regulation.

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5. Revenue and expenditures in government-managed fund budgets for 2018

Revenue into central government-managed funds is projected to be 386.304 billion yuan, up 0.2 percent. Adding in 38.559 billion yuan carried forward from last year, revenue will total 424.863 billion yuan. Expenditures through central government-managed funds are expected to be 424.717 billion yuan, up 15 percent. This figure consists of 326.271 billion yuan in central government expenditures, an increase of 20.5 percent, which is mainly due to a relatively significant increase in expenditures through the railroad construction fund, the civil aviation development fund, and public welfare funds financed by lottery proceeds; and 98.446 billion yuan in transfer payments to local governments, down 0.1 percent. A projected 146 million yuan will be transferred into the general public budget.

Revenue into local government-managed funds is projected to be 6.030181 trillion yuan, up 4.6 percent, of which proceeds from selling state-owned land-use rights account for 5.46617 trillion yuan, up 5 percent. Adding in 98:446 billion yuan in transfer payments from central government-managed funds and 1.35 trillion yuan of revenue generated from special local government debt, revenue into local government-managed funds is projected to total 7.478627 trillion yuan. Expenditures through local government-managed funds are expected to total 7.478627 trillion yuan, up 28.9 percent, which includes 6.693208 trillion yuan in expenditures funded by the proceeds from selling state-owned land-use rights, an increase of 29.3 percent, which is mainly due to the substantial rise in the corresponding revenue from issuing special purpose bonds and a commensurate increase in expenditures. The ceiling for the outstanding balance of local government special debt is 8.618508 trillion yuan.

Revenue into the government-managed funds in both central and local government budgets is projected to be 6.416485 trillion yuan, an increase of 4.3 percent. Adding in 38.559 billion yuan carried forward from last year and 1.35 trillion yuan of revenue generated from special local government debt, revenue is projected to be 7.805044 trillion yuan. Expenditures through China's government­managed funds are projected to be 7.804898 trillion yuan, up 28.5 percent.

6. Revenue and expenditures in state capital operations budgets for 2018

Budgetary revenue from central government state capital operations is projected to be 137.682 billion yuan, up 5.9 percent. Adding in 11.359 billion yuan carried forward from last year, budgetary revenue from central government state capital operations is projected to total 149.041 billion yuan. Budgetary expenditures through central government state capital operations are expected to be 116.887 billion yuan, up 16.4 percent. This figure consists of 106.887 billion yuan in central government expenditures, an . increase of 39 percent, which is mainly for supporting state sector restructuring and forward-looking ar).d strategic industry

30

development, with an appropriate increase of spending on capital injections into central government enterprises; and 10 billion yuan in transfer payments to local governments, a reduction of 57.5 percent, which is mainly due to the cut in subsidies for relieving SOEs that were previously under the central government but are now under local governments, of their obligation to provide employees' homes with water, electricity, heating, gas, and property management services. A projected 32.154 billion yuan will be allocated to the central general public budget, an increase of 3.6 percent, raising the proportion of funds in the central government's state capital operations budget allocated to its general public budget from 22 percent in 2017 to 25 percent this year.

Budgetary revenue from local government state capital operations is projected to be 146.084 billion yuan, up 9.5 percent. Adding in 10 billion yuan in transfer payments from the central government state capital operations budget, total revenue is 156.084 billion yuan, down 0.6 percent. Budgetary expenditures through local government state capital operations are estimated to be 120.471 billion yuan, down 3.2 percent. A projected 35.613 billion yuan will be transferred into local general public budgets.

Revenue in the state capital operations budgets of both the central and local governments is projected to be 283.766 billion yuan, up 7.7 percent. Adding in 11.359 billion yuan carried over from last year, total budgetary revenue from China's state capital operations will be 295.125 billion yuan. Budgetary expenditures through China's state capital operations are expected to be 227.358 billion yuan, up 12.9 percent. A projected 67.767 billion yuan will be transferred into general public budgets.

7. Revenue and expenditures in social security fund budgets for 2018

Based on the progress in the reform of the pension system for employees of Party and government offices and public institutions, it has been decided that beginning in 2018 budgets will be formulated for the basic old-age pension funds for employees of the central and local Party and government offices and public institutions, and for the first time social security fund budgets will be divided into central and local budgets.

Revenue into central government social security funds is projected to be 67.634 billion yuan, up 97.4 percent, which includes 31.861 billion yuan in insurance premiums and 35.29 billion yuan in government subsidies. Expenditures through central government social security funds are expected to total 65.483 billion yuan, up 103.9 percent. With this year's projected surplus of 2.151 billion yuan, the year­end balance will be 27.043 billion yuan after the balance from 2017 has been rolled over.

31

Revenue into local government social security funds is projected to be 6.741665 trillion yuan, up 22.5 percent, which includes 4.818887 trillion yuan in insurance premiums and 1.663118 trillion yuan in government subsidies. Expenditures through local government social security funds are expected to total 6.388749 trillion yuan, up 31.4 percent. With this year's projected surplus of 352.916 billion yuan, the year-end balance will be 7.671985 trillion yuan after the balance from 2017 has been rolled over.

The relatively large increase in revenue and expenditures in central and local government social security fund budgets for 2018 is mainly due to the inclusion of the basic old-age pension funds for employees of Party and government offices and public institutions into the budgets.

Revenue in both central and local government social security fund budgets is projected to be 6.809299 trillion yuan, up 23 percent. This includes 4.850748 trillion yuan in insurance premiums and 1.698408 trillion yuan in government subsidies. Expenditures through China's social security funds are expected to total 6.454232 trillion yuan, up 31.8 percent. With this year's projected surplus of 355.067 billion yuan, the year-end balance will be 7.699028 trillion yuan after the balance from 2017 has been rolled over.

It should be noted that as local budgets are formulated by local people's governments and submitted for approval to the people's congresses at their respective levels, the relevant data is still being compiled. All projected figures for local revenue and expenditures in this report have been compiled in lieu of the final projections by the central finance authorities.

For a detailed account of the above budget arrangements, please refer to the Report on the Execution of the 2017 Budgets of the People's Republic of China and Its 2018 Draft Budgets in Chinese.

In accordance with the Budget Law, after the beginning of a new budget year and prior to the approval of the Draft Budgets by the NPC, arrangements may be made for the following expenditures:

• carryover expenditures from the previous financial year

• government department basic expenditures and program expenditures, and transfer payments to lower-level governments, that must be made in the current year after referring to the amount of budgetary expenditures for the corresponding period over the previous year

• expenditures mandated by law

• expenditures for dealing with natural disasters and other emergencies

32

Based on the above stipulations, in January 2018, expenditures in the central general public budget totaled 1.1291 trillion yuan, which includes 163.1 billion yuan spent at the central level and 966 billion yuan in tax rebates and transfer payments made to local governments.

III. Fiscal Reform and Development in 2018

1. Taking further steps to ensure compliance with the Budget Law

We will improve rule of law awareness in the execution of the budgets, ensure stricter enforcement of the Budget Law, and make budgets more binding. We will introduce the revised Implementation Regulations of the Budget Law, and step up efforts to improve the complementary institutions for the Budget Law.

We will make the formulation of the budgets more scientific and standardized. We will do more to ensure all projects in department databases are covered by government budgets, improve standards for budgetary expenditure quotas, make full use of the role of budget reviews, and enrich and improve the content included when preparing the budgets. We will strengthen the annual budgets' links to medium-term fiscal planning and improve their fit with the responsibilities and work arrangements of different departments, and thus making the budgets better­designed and more reasonable.

We will introduce greater standardization in the coordination between budgets, and in compliance with regulations, transfer items not included in the government­managed fund list into general public budgets. We will continue to raise the proportion of funds allocated from state capital operations budgets into general public budgets, and avoid overlap in fund allocation.

We will take further steps to make budgets accessible to the public, expand the scope covered by the requirement that key spending item budgets are to be reported to the NPC and released to the public; intensify oversight and inspections, and guide and urge local governments to see that budgets are made available to the public. We will continue to assist efforts toward integrated online budget oversight. We will report to the NPC Standing Committee on the allocation and utilization of government funds for medical and healthcare and accept their special inquiries.

2. Speeding up fiscal and tax system reform

We will unveil reform plans on the division of fiscal powers and spending responsibilities between central and local governments in relation to basic public services, and research and develop plans for reforms in this regard in other fields

33

including transportation, science and technology, and environmental protection. We will move faster in formulating the plan for reforming central and local government revenue sharing. We will deepen reform of the transfer payment system, and improve the system of fiscal policies for supporting the process as people with rural household registration are granted urban residency.

We will continue to improve the VAT system, and drive forward legislative work on VAT in light of reform progress. We will assist with legislative work on real estate tax. We will move forward with personal income tax reform to develop a system of combined taxation based on both adjusted gross income and specific income types, reasonably raise the salary threshold for personal income tax, and increase additional deductions for specific types of expenses like children's education and medical expenses for serious diseases. We will promote the development of local· tax systems. We will enforce the principle of law-based taxation, and speed up efforts to promote legislative work on specific tax laws. We will extend the trial preparation of government financial statements. We will develop a sound reporting system for state-owned asset management, and move forward with implementing special reporting and comprehensive reporting on the state-owned assets of financial enterprises. We will strengthen supervision and inspections over reform, and ensure reform measures are fully implemented and produce solid results.

3. Implementing performance-based management across the board We will formulate a guiding document on implementing performance-based

management across the board. We will gradually expand performance-based management to cover all government funds, and thoroughly incorporate it into the whole process of budget formulation, execution, and oversight. We will strengthen cost-benefit analysis on major policies and projects, and improve fiscal resource allocation and department spending structures.

We will strengthen budget performance target management, optimize performance target setting, and improve the mechanisms for setting performance targets at the same time as granting budgeted funds. We will expand the scope of performance evaluation; establish a system for linking budget arrangements and policy adjustments to performance evaluation results; make accountability for performance more binding; and reduce ineffectual and inefficient funding. We will up the intensity of performance information disclosure, and move forward with seeing that performance targets and performance evaluation results are reported to the NPC and released to the public. We will explore establishing a comprehensive performance evaluation system for local government funds, and promote an overall improvement in the level of performance-based management of local government funds.

34

4. Improving management of budget implementation

We will see that budgets reviewed and approved by people's congresses are strictly implemented; without going through the legally prescribed procedures no adjustment shall be made. Where there is an actual need, and a budgetary adjustment is required, it must be submitted to the standing committee of the people's congress at the same level for examination and approval. We will collect tax strictly in accordance with the law, and resolutely prohibit illegal taxation including the collection of any tax not prescribed by law. We will standardize and strengthen management of non-tax revenue, and step up efforts to increase the level of rule of law in non-tax revenue management. We will strengthen the management of budget approval and implementation, and speed up the process of making transfer payments available to local governments, helping to see that government funds are appropriated, put into use, and begin performing promptly. We will act faster to put idle funds and funds difficult to spend in the current budget year to work, coordinating adjustments to put them to use in other fields where funding support is urgently needed, and reduce the amount of carryover and surplus funds.

We will strictly implement the systems for centralized treasury collection and payment, government procurement, and government credit cards; regulate the management of special fiscal accounts; and strictly prohibit the transfer of government funds from the treasury to special fiscal accounts in violation of regulations. We will improve the yield curves of government bonds, and step up the development of government bond markets. We will tighten the management of the balance in the treasury, and research establishing a treasury general account management system based on balance targets. We will strictly control the establishment of new government investment funds, and conduct an overhaul and integration of existing government investment funds by type, to prevent an excess or glut of such funds.

5. Strengthening management of local government debt

The laws of economics must be followed, and the debt financing of local governments must be matched with their ability to pay debts. We will make sure that the "front door" is open for legal and regulation-compliant borrowing. We will establish reasonable local government debt ceilings for different regions. We will steadily move forward with the reform of special purpose bonds management, develop more types of special purpose bonds, and research and roll out performance evaluation for local government debt management. We will take strict steps to block up the "back door" of illegal and rule-flouting borrowing, strictly prohibiting illegal, regulation-breaking, or disguised forms of borrowing beyond statutory debt ceilings. We will formulate targeted contingency plans, and work

35

actively and with prudence to defuse local government debt risks. We will urge financial institutions to grant credit prudently in line with regulations, and to assess the risks of financing based on enterprise projects and not on local government credit.

We will further improve the management system for market-based issuance of local government bonds. We will coordinate the use of the interbank bond market and stock exchanges, promote the over-the-counter sale of local-government bonds in commercial banks, and enhance the liquidity of local-government bonds. We will intensify accountability inspections; improve the performance evaluation system for officials; resolutely investigate and punish all forms of illegal and rule­flouting financing guaranty by local governments; strictly rectify irregularities in financing;-and enforce lifelong accountability and the retroactive investigation of liability.

· 6. Tightening up financial discipline

We are committed to strict austerity, will practice economy in all activities, and will strictly prohibit wasteful and excessive spending. We will step up the level of oversight and checks over the public finances, and push for major fiscal and tax reforms and fiscal and tax policies to be acted on. We will watch particularly closely the management and utilization of funds in areas such as poverty alleviation and elderly care and of enterprise subsidies, resolutely punish all violations of financial discipline such as fraudulent claiming, retention, and diversion of such funds, and strengthen work on bringing violators to account. We will take further steps in deepening work on internal control in departments of finance, strengthen the enforcement of internal controls, and focus on developing an internal control system for all stages of fund allocation, management, and utilization. We will step up work to rectify problems discovered during auditing, and establish a strong permanent rectification mechanism.

Actively accept the law-based oversight of people's congresses and the democratic oversight of CPPCC committees is, for departments of finance, a statutory duty and a major political task. In the past year, the Ministry of Finance strengthened clarification and explanation services concerning public finance for the annual sessions of the NPC and the CPPCC National Committee, and improved routine communication and links with the deputies and members. A total of 2,780 suggestions made by deputies to the NPC and 1,363 proposals by members of the CPPCC National Committee have been handled and feedback has been given to deputies and members.

This year, the Ministry of Finance will provide more detailed and standardized services for deputies and members; report promptly on progress in fiscal and tax reforms and major public finance work; focus on raising the quality of our

36

handling of suggestions and proposals; continue tirelessly to transform our approach to work; keep improving the quality of budgetary management and our capacity for financial governance; and better serve deputies and members as they perform their duties in compliance with the law.

Esteemed Deputies,

The new era requires a new look and new action. We will unite more closely around the CPC Central Committee with Comrade Xi Jinping at its core, hold high the great banner of socialism with Chinese characteristics, use Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era as our guide, consciously accept the oversight of the NPC, solicit the comments and suggestions of the CPPCC National Committee, have the drive to progress, get our heads down and work hard, and make a good solid job of all fiscal and budgetary work, promoting sustained and healthy economic and social development, and working with tireless dedication to realize the great goals set at the 19th National Party Congress.

37

Revenue and Expenditures in 2017

Figure 1: Revenue in China's 2017 General Public Budgets

--··---~ Domestic VAT Domestic excise t.ax VAT and excise tax on imports VAT and excise tax rebates on exports Corporate income tax Individual income tax Resource tax Urban construction and maintenance tax Property tax Stamp lax

Urban land use tax VAT on land Vehicle and vessel tax Tonnage tax Vehicle purchase tax Customs duties Tax on farmland used for nonaglicultural purposes Deed transfer lax

Tobacco leaf tax Other tax revenues

5,637.8 1,022.5 1,596.9 -1,387

3,211.1 1,196.6

135.3 436.2 260.4 220.6

236 491.1

77.4 5

328.1 299.8

165.2

491 11.6 0.4

Billions of yuan

Figure 2: Expenditures in China's 2017 General Public Budgets

General public services 8.3 %

Public security 6.1 %

Education 14.9%

Science and technology 3.6%

Social security and employment 12.2%

Medical and health care and family planning 7.2%

~------ Energy conservation 2.8%

,------- Urban and rural communities 10.5%

Agricultrue, forestry, and water conservancy 9.1 %

;=:=::;:::;JE:=:====---------- Transport5.1 % c_ _____________________ Housingsupport3.1%

~--------------------- Culture, sports, and media,

Note: Numbers in these figures have been rounded off.

38

stockpiling of grain, edible oils, and other materials, etc. 17.1 %

Non-tax revenue 6.7%

Figure 3: Revenue in the 2017 Central General Public Budget

-r.x.~e ( .93$%

. /

[

J ;

I

Domestic VAT

Domestic excise tax

VAT and excise tax on imports VAT and excise tax rebates on exports Corporate income tax Individual income tax Resource tax

Urban construction and maintenance tax

Stamp tax

Tonnage tax

Vehicle purchase tax

Customs duties Other tax revenues

2,816.6

1,022.5

1,596.9 -1,387

2,042.3

718.1

4.3 15.8

106.9

5 328.1

299.8

0.4 Billions of yuan

Figure 4: Expenditures in the 2017 Central General Public Budget

General public services

Foreign affairs

National defense Public security Education

Science and technology Culture, sports, and media

Social security and employment Medical and health care and family

lanni.11 Energy conservation and environmental protection Urban and rural communities Agriculture, forestry, and water conservancy Transport

Natural resource exploration, information technology, etc. Commercial services, etc. Finance Land resources, oceanic affairs, meteorology, etc. Housing support Stockpiling of grain, edible oils, and otl1er materials Other expenditures Interest payments on debt Fees for bonds issuance

39

127.1

52

1,022.6

184.9

154.8 282.7

27.1 100.1

10.8

35.1

2.3

70.9

115.6

37.4

5

85.3

29.8

42.1

159.7

59 377.9

3.5 Billions of yuan

Trillions of yuan

12

10

8

6

4 8.2752

2

Figure 5: Revenue and Expenditures in the 2017 Central General Public Budget

, . . . • Central government : : : : deficit (1.55)

Total revenue

~ Contribution from the Central Budget Stabilization Fund (0.135) and from the budgets of central 9.8252 government-managed funds and central state capital operations (0.0283)

Revenue in the central general public budget (8.1119)

40

r!;)J,.;)j.-[i;'.>•[i; .. §l.~.,§l.:,;)j.,;'.;)j,•.;)J·.··~···8:.•··!:li❖§i.•ij: • Contribution to the Central Budget Stabilization Fund (0.3175)

Total expenditures

Tax rebates and transfer payments from central to local governments (6.5218)

Central government expenditures (2.9859)

Projected Revenue and Expenditures for 2018

Figure 1: Projected Revenue in China's 2018 General Public Budgets

/,,,,,.,----

/. /

I

I

Domestic VAT

Domestic excise tax

VAT and excise tax on imports

VAT and excise tax rebates on exports

Corporate income tax

5,919

1,057

1,706

-1,477

3,443 Individual income tax 1,291.5 Resource tax

Urban construction and maintenance tax

Property tax

Stamp tax

Urban land use tax

VAT on land

Vehicle and vessel tax

Tonnage tax

Vehicle purchase tax

Customs duties

Tax on farmland used for nonagricultural purposes Deed transfer tax

Tobacco leaf tax

Environmental protection tax

148.6

458.1

284

235.5

258.5

537

84.5

5.3

358

314

177

525

11.5

30 Billions of yuan

Figure 2: Expenditures in China's 2018 General Public Budgets

General public services 8.1 %

Public securily 6%

Education 15%

Science and technology 3.6%

Social securily and employment 12.4 %

Medical and health care and family planning 7.3%

------- Energy conservation and environmental protection 2.8%

r------- Urban and rural communities 10.1 %

Agricultrue, forestry, and water conservancy 9.2%

;=::::;;;;::~!::'====--------- Transport 5.1 % L_ _____________________ Housingsupport3.1%

L-----------------------Culture, sports, and media,

41 Stockpiling of grain, edible oils, and other materials, etc. 17.3%

Figuxe 3: Projected Revenue in the 2018 Central General Public Budget

\

\ i

Tax,J;!!Venue:,: 9(%

Non-tax revenue ·-,,__ 6%

Domestic VAT Domestic excise tax VAT and excise tax on imports VAT and excise tax rebates on exports Corporate income tax Individual income tax Resource tax Urban construction and maintenance tax

Stamp tax Tonnage lax Vehicle purchase tax Customs duties

Figure 4: Expenditures in the 2018 Central General Public Budget

Central government

reserve funds 0.5%

General public services Foreign affairs National defense

Public security Education Science and technology Culture, sports, and media Social security and employment Medical and health care and family

lannin Energy conservation and environmental protection Urban and rural communities Agriculture, forestry, and water conservancy Transport Natural resource exploration, information technology, etc. Commercial services, etc. Finance Land resources, oceanic affairs, meteorology, etc.

Housing support Stockpiling of grain, edible oils, and other materials Other expenditures Interest payments on debt Fees for bonds issuance

42

2,957 1,057 1,706

-1,477

2,190 775 4.6

16.6 114 5.3 358 314

Billions of yuan

145.4 60.1

1,107

199.1 171.1 311.5

28.1

118

20.9

37.6

7.9

58.7

124

29.2

9.5 83.2

32.4

44.4

137.2

88.2 428.7

4.7 Billions of yuan

Figure 5: Projected Revenue and Expenditures in the 2018 Central General Public Budget

Trillions of yuan

12

10

8

6

8.781 4

2

0

; : : : : : : Central government : : : : : : : • deficit (1.55)

Total revenue

Contribution from the Central Budget Stabilization Fund (0.213) and from the budgets of central 10.331 government-managed funds and central state capital operations (0.0323)

Revenue in the central general public budget (8.5357)

43

..-,--------,..::• central government reserve funds

Total expenditures

(0.05)

Tax rebates and transfer payments from central to local governments (7.0344)

Central government expenditures (3.2466)

Revenue and Expenditures (2013-2017)

Figure 1: Revenue in China's General Public Budgets (2013-2017)

Trillions of yuan

25

20

15

10

5

0

2013 2014 2015 2016 2017

• Revenue ;,; Expenditures

Figure 2: Government Deficits and Deficit-to-GDP Ratios (2013-2017)

Trillions of yuan

25

2

1.5

1

0.5

0

2013

238

2014 2015 2016 2017

:c:a,::<c, Deficit ...,_Deficit-to-GDP Ratio

44

5

4.5

4

3.5

3

25

2

1.5

1

0.5

0

Figure 3: Revenue in Central and Local General Public Budgets (2013-2017)

Trillions of yuan

10

9

8

7

6

5

4

3

2

1

0

2013 2014 2015 2016 2017

• Central ,;i Local

Figure 4: Expenditures in Central and Local General Public Budgets (2013-2017)

Trillions of yuan

20

18

16

14

12

10

8

6

4

2

0

11.974

2013

129216

i':

2014

17.3471

16.0351 15.0336

I 29859Df

2015 2016 2017

II Central .-, Local

45

Figure 5: Central Government Transfer Payments to Local Governments (2013-2017)

Trillions of yuan

6

5 4.6509 4.2973

4 ~

3

2

1

0

2013 2014

5.0079

:--..-...:

2015

5.2574

I

2016

57055

I

2017

Figure 6: Central Government Subsidy Funds for Local Poverty Reduction (2013-2017)

Billions of yuan

100

90 86.1

80

70 66.1

60

50

40 37.9

30

I 20

10

425 46.1

I 0

2013 2014 2015 2016 2017

The central government subsidy funds for local poverty reduction were mainly used to help poor rural areas accelerate their economic and social development, improve the basic working and living conditions of people targeted by poverty reduction, strengthen the ability for self-development, raise incomes~ etc.

46

Figure 7: Expenditures on Education from China's General Public Budgets (2013-2017)

Trillions of yuan

3.5

3

25

2

1.5

1

0.5

0

22002

~

2013

; • : . .

23042

7.

•

. 2014

3.0259

2.6272 28073

I m~ I I I . 2015 2016 2017

Expenditures on education from the general public budgets were mainly used to move forward the process of integrating urban and rural compulsory education, increase the provision of public-interest preschool education, make senior secondary education universally available, accelerate the development of modern vocational education, promote the reform and development of institutions of higher learning, implement the financial aid policy for students from financially disadvantaged families, combat poverty through developing education, etc.

Figure 8: Expenditures on Science and Technology from China's General Public Budgets (2013-2017)

Billions of yuan

800

700

600

500

400

300

200

100

0

508.4

2013

531.4

I 2014

728.6 656.4

586.3

2015 2016 2017

Expenditures on science and technology from the general public budgets were mainly used to support public science and technology activities, promote the reform and development of research institutes at the central level, guide enterprises in technological innovation and the application of scientific and technological advances, bring in and cultivate scientists and engineers, etc.

47

Figure 9: Expenditures on Culture, Sports, and Media from China's General Public Budgets (2013-2017)

Billions of yuan

400

350

300

250

200

150

100

50

0

254.4

2013

269.1

2014

3W.7 316.3 336.7

I 2015 2016 2017

Expenditures on culture, sports, and media from the· general public budgets were mainly used to improve the public cultural service system, implement the initiative to see culture benefit the people, help socialist culture and arts flourish and develop, strengthen the protection and proper use of cultural relics and the protection and passing on of cultural heritage, carry out public fitness activities, advance the development of the culture sector, etc.

Figure 10: Expenditures on Agriculture, Forestry, and Water Conservancy from China's General Public Budgets (2013-2017)

Trillions of yuan

2

1.8 1.738

1.8587 1.8494

1.6

1.4 1.335

1.2

1.4174

:$: 1

0.8

0.6

0.4

0.2 0 .

2013 2014 2015 2016 2017

Expenditures on agriculture, forestry, and water conservancy from the general public budgets were mainly used for the development of agricultural production, water conservancy, the comprehensive development of agriculture, agricultural resource and ecological conservation, special fiscal support for poverty alleviation, agricultural production disaster relief and major flood and drought prevention and control efforts, comprehensive reform in rural areas, animal disease control and prevention, etc.

48

Figure 11: Expenditures on Medical and Health Care and Family Planning from China's General Public Budgets (2013-2017)

Trillions of yuan

1.6

1.4

1.2

1 0.9187

0.8 I 0.6

0.4

02

0

2013

1.1953

1.0177

I I 2014 2015

1.3159

I I 2016

1.46

2017

Expenditures on medical and health care and family planning from the general public budgets were mainly used to subsidize the funds for basic medical insurance for rural and non-working urban residents, support the comprehensive reform of public hospitals and community-level medical and health care institutions, implement the essential medicines system, provide certain basic public health services and major public health services for urban and rural residents, medical assistance, family planning services, etc.

Figure 12: Expenditures on Social Security and Employment from China's

General Public Budgets (2013-2017)

Trillions of yuan

3

25 21591

24812

2 1.9019

I 1.4491 1.5969

I 1.5 ;,,;

I 1

0.5

0

2013 2014 2015 2016 2017

Expenditures on social security and employment from the general public budgets were mainly used on subsidies for basic pension funds, administrative department and public institution retirement benefits, subsistence allowances, benefits for entitled groups, employment subsidies, natural disaster survivor assistance, etc.

49

Figure 13: Expenditures on Energy Conservation and Environmental

Protection from China's General Public Budgets (2013-2017)

Billions of yuan

600 567.2

500 480.3 473.5 I 381.6 ~

I 400 343.5

I 300

I rm 200 I I fl 100 fl -,

0 ' ' ' 2013 2014 2015 2016 2017

Expenditures on energy conservation and environmental protection from the general public budgets were mainly used for the control and prevention of water, air, soil and other forms of pollution, energy conservation and emissions reduction, natural forest protection, initiatives to turn marginal farmland into forests or grassland, the development of renewable energy, rural environment improvement initiatives, etc.

Figure 14: Expenditures on Government-Subsidized Housing Projects from China's General Public Budgets (2013-2017)

Billions of yuan

500 450

400

350 301.3 300

I 250 ·

200 ·

150 •

100 -

50 -

0

2013

3429

I m 2014

439.1

390.7

I 355.6

I I I I 2015 2016 2017

Expenditures on government-subsidized housing projects from the general public budgets were mainly used to renovate housing in all rundown areas, provide rent subsidies to urban families qualifying for housing support, develop public rental housing, rebuild dilapidated rural housing, etc.

50