China's fiscal deficit surges as Xi Jinping's zero-COVID takes its toll

China's budget deficit reached a record high in the first 11 months of the year due to a combination of factors, including President Xi Jinping's zero-COVID policy and a real estate slump, as per a report from Financial Times. According to the Ministry of Finance, total fiscal spending by all levels of government exceeded revenue by approximately $1.1tn from January through November, more than double the deficit reported during the same period in the previous year. The decline in land sales, a major source of government income, was one of the main contributors to the higher deficit.

Additionally, tax cuts and reduced revenue from taxes on car purchases have impacted fiscal income. The government has also increased spending on healthcare and social welfare in response to the pandemic. As the deficit continues to deepen, authorities are under pressure to cut back on expenditure, and it is expected that China's fiscal outlay will decrease by 12% in December.

Should Beijing be concerned about budget deficit? 

CCP and Xi Jinping have now pivoted away from the zero-COVID policy, after witnessing the widespread social unrest the policy was causing in China and the damage it was doing to China's economy. Yet, a surging budget deficit can be detrimental for China's economy, especially at a time when China is already struggling to speed up its economic growth. A budget deficit represents an excess of government spending over revenue.

This means that the government is borrowing money to finance its operations, which can lead to an increase in government debt. As the government's debt level increases, it may become more difficult for it to borrow money in the future, as investors may be hesitant to lend to a government that is perceived as being financially unstable. This can make it harder for the government to fund important projects and initiatives, which can lead to a slowdown in economic growth.

Moreover, a budget deficit can lead to an increase in interest rates. When the government borrows money, it must pay interest on its debt. If the government's borrowing needs are high, it may be forced to pay higher interest rates to attract investors. This can lead to an increase in the overall cost of borrowing for both the government and private sector, which can reduce investment and economic activity.