CIA 3

Macroeconomics
(BBA233)
Fiscal Policy and its Impact on the Economy,
Employment & Inflation of China

Submitted by: 2120212 Meghansh Agarwal

2120219 Vinayak Sharma
2120251 Bhargav Naidu
2120258 Shivam Shah
2120265 Ebbony

Submitted to: Prof. Manoj Morais

BACHELOR OF BUSINESS ADMINISTRATION

DEPARTMENT OF MANAGEMENT STUDIES

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 TABLE OF CONTENT

Sr. No Particulars Page No.

1. Fiscal Policy 3-7

2. China’s Fiscal Policy 8-12

3. Impact of Fiscal Policy on Economy 13-17

4. Impact of Fiscal Policy on Inflation 18-19

5. Impact of Fiscal Policy on Employment 20-23

6. Impact of Fiscal Policy on Poverty 24-27

7. Should Monetary and Fiscal Policymakers try to Stabilise the 28-29

Economy?

8. Conclusion 30

9. References 31-32

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 FISCAL POLICY

What is Fiscal Policy?

Fiscal policy influences the economy by using government spending and taxes. When the

government decides what goods and services to buy, what transfer payments to distribute, or

what taxes to collect, it is engaged in fiscal policy. Specific groups feel the direct economic

impact of any change in government budgets – such as a tax cut for families with children that

would increase their disposable income. However, fiscal policy discussions often focus on the

impact of government budgetary changes on the economy. Although “revenue-neutral”

changes in taxes or spending can be interpreted as fiscal policy - and can affect the overall level

of output by changing the incentives that firms or individuals face - the term “revenue neutral”

policy budgeting is generally used to describe the impact on the aggregate economy of levels

of aggregate spending and taxes, and more specifically, the gap between them.

The fiscal policy restricts or restricts when revenues exceed expenditures (i.e. the government

budget is in surplus) and flexible or expands when expenditures exceed revenues (i.e. the

budget is in deficit). Often, the focus is not on the extent of the deficit but the course of the

deficit. Thus, reducing the deficit from $200 billion to $100 billion is considered restrictive

fiscal policy, even if the budget is still in deficit.

The ability of Fiscal Policy

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Fiscal policy is an essential tool for managing the economy because it can affect total

production, i.e. gross domestic product. The first effect of fiscal expansion is to increase

demand for goods and services. This increased demand leads to an increase in both output and

price. The degree to which an increase in demand increases output and prices depends on the

state of the business cycle. If the economy is in recession, with production capacity unused and

workers unemployed, an increase in demand will mainly lead to an increase in output without

changing the price level. If the economy is at full employment, then the fiscal expansion will

have more impact on prices and less impact on aggregate output.

Fiscal policy’s ability to affect production by affecting aggregate demand makes it a potential

tool for economic stabilisation. During a recession, the government may pursue expansionary

fiscal policy, bringing output back to average and putting the unemployed back to work. During

boom times, when inflation is seen as a bigger problem than unemployment, the government

can run a budget surplus, which helps slow down the economy. Such an opposite policy would

result in an average balanced budget.

Objectives of Fiscal Policy

• Full Employment: One of the government’s main goals is to keep and put people to

work. Governments benefit from higher taxes and lower spending on social security.

An expansionary policy might seek to invest in infrastructure that directly creates jobs.

Alternatively, it could cut taxes to indirectly boost jobs from their purchases to give

consumers more money.

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• Economic Growth: As a financial system grows, its citizens, on the whole, turn out to

be greater prosperous. So that is an essential objective. At the equal time, governments

need to be careful. A competitive expansionary economic coverage ought to show

unfavourable withinside the lengthy-term. We handiest want to study Greece as an

example. Whilst financial boom is a comprehensible aim, it needs to be taken into

consideration along with stability. For instance, heavy authority spending can make

contributions to inflation. To a significant deal, spending can create excessive tiers of

debt and an inflation price that destroys the nation`s wealth.

• Control Debt: Budget deficits are not necessarily bad. However, over time, this created

more and more debt. If economic growth and tax revenues do not increase, a country

will face unsustainable debt levels. A sound fiscal policy would aim to control this

before drastic measures.

• Control Inflation: When an economy thrives, it can suffer from high inflation (this can

also depend on monetary policy). Since 2% is often the target, any of the above is cause

for concern: especially if it is consistently above. Although inflation is a monetary

phenomenon, governments still take measures to prevent it. Fiscal policy cannot do

much if the money supply is already loosened. However, governments try to raise taxes

to reduce disposable income and consumption.

• Re-Distribution: Another government aims to transfer wealth from the rich to the poor.

Higher taxes on the wealthy can sometimes translate into high tax revenue, but this is

not always the case. Hiding and hiding may occur, or they may leave the country.

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 However, small incremental increases may not have such a significant impact in the

short term.

• Political: Fiscal policy has inevitably become a political tool that many incumbent

governments use a bit to get re-elected. Loosening fiscal policy and more lavish

spending can often win some ‘floating voters’ over.

Limitations of Fiscal Policy

• Size of Fiscal Measures: A budget is not a simple report of government revenues and

receipts. It explains and shapes the economic structure of a country. When budgets

account for only a small part of national income in developing economies, fiscal policy

cannot have the desired effect on economic development. Direct taxation sometimes

becomes an instrument of limited application because most of the population is not

covered. Furthermore, tax measures will not boost a faltering economy that requires

massive support when total tax revenue is a smaller fraction of national income.

• Fiscal Policy as Ineffective anti-cyclical measure: Loose fiscal measures and tighter

fiscal policy will not promote rapid economic growth when different sectors of the

economy are not closely integrated. Government measures may not always have the

same effect on all sectors. So we can have, for example, a recession in some sectors

followed by a price increase in others. Increasing purchasing power through deficit

financing, a policy adopted by J.M. Keynes advocated in the 1930s, may not have

revived depressed economies but simply arrows of price.

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 • Administrative Delay: Fiscal measures may introduce delay, uncertainties and

arbitrariness arising from administrative bottlenecks. As a result, the fiscal policy fails

to be an assertive and, therefore, a helpful stabilisation policy.

Impact of Fiscal Policy on Macro Economy

Fiscal policy affects aggregate demand, the distribution of wealth, and the economy’s capacity

to produce goods and services. In the short run, changes in spending or taxing can alter both

the magnitude and the pattern of demand for goods and services. With time, this aggregate

demand affects the allocation of resources and the productive capacity of an economy through

its influence on the returns to factors of production, the development of human capital, the

allocation of capital spending, and investment in technological innovations. Through their

effects on the net returns to labour, saving, and investment, tax rates also influence the

magnitude and the allocation of productive capacity.

Macroeconomics has long featured two general views of the economy and the ability of fiscal

policy to stabilise or even affect economic activity. The equilibrium view sees the economy

quickly returning to total capacity whenever disturbances displace it from full employment.

Accordingly, changes in fiscal policy, or even in monetary policy, have little potential for

stabilising the economy. Instead, inevitable delays in recognising economic disturbances,

enacting a fiscal response, and the economy reacting to the change in policy can aggravate,

rather than diminish, business-cycle fluctuations. An alternative view sees critical market

failures causing the economy to adjust with more difficulty to these disturbances. If, for

example, consumers were to reduce their current spending in order to consume more in the

future, producers, who would not know the consumers’ plans for want of the appropriate

futures markets for goods and services, would see only an indefinite drop in demand, and this

might encourage them, in turn, to reduce their hiring and capital spending. In this world, fiscal

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and monetary policy changes have more significant potential for stabilising aggregate demand

and economic activity. How the economy reacts to fiscal policy depends on whether it is at full

employment or operating below its total capacity.

CHINA’S FISCAL POLICY

The Chinese government has pursued an aggressive fiscal policy to finance key construction

projects by issuing public debt in recent years. Meanwhile, a sound monetary policy has been

implemented in coordination with fiscal policy. Thanks to the combination of the two policies,

the deflationary trend has been contained, economic restructuring has been accelerated, and

economic growth has been promoted. China’s GDP exceeded $12 trillion in 2002, a historic

breakthrough. In recent years, the reform of the tax collection system has helped the

government revenue to grow steadily. Significant progress has also been made in the reform of

public expenditure management.

China’s GDP exceeded $12 trillion in 2002, a historic breakthrough. In recent years, the reform

of the tax collection system has helped the government revenue to grow steadily. Significant

progress has also been made in the reform of public expenditure management.

Despite the above achievements, there stay demanding situations dealing with China’s

monetary development, specially meditated withinside the slowdown of presidency sales due

to the fact the start of 2002, the pretty excessive percentage of non-acting loans withinside the

monetary sector, weaker call for in rural regions and continual employment pressure. In

addition, uncertainties over the worldwide monetary outlook have impacted China’s exports

and monetary growth. To remedy those problems, the Chinese authorities will retain to enhance

home call through proactive monetary coverage and sound economic coverage and similarly

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accelerate monetary restructuring and enhance the exceptional performance of monetary

growth. Significant trends in the latest monetary and economic guidelines are as follows.

Whatever form it takes, fiscal policy must have a goal, operate through budget revenues and

expenditures, and perform its role within the framework of a specific mechanism. Before China

started to reform and open up, there was fiscal policy, but in a different form from the market

economy. When China was a planned economy, its tax revenues and expenditures were tightly

planned, which made Chinese fiscal policy difficult. This fiscal policy lacks independence and

is not linked to state planning. In other words, tax revenue and expenditure must comply with

the requirements of the state plan. Within the framework of the state planning system, this

fiscal policy serves the purpose of macroeconomic regulation and control. There has long been

a different kind of fiscal policy that corresponds to principles and direction, consistency and

stability, as is often claimed. It is more of a system than a policy, or even a fiscal policy in the

broad sense, which includes one that serves microeconomic goals. However, according to this

standard, almost all budgeting systems and activities are tied to fiscal policy, which will

become practically synonymous with public finance and lose its existential meaning.

Importantly, fiscal policy has been slow to become a specific and unavoidable subject in public

finance research.

Different Stages of Fiscal Policy in Modern Chinese History

1. Fiscal Policy Mainly Aimed to Restore the National Economy (1949-1952):

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This was the first time China adopted the market-oriented fiscal policy, right after founding the

People’s Republic of China and before establishing the planned economic system. Before

China put the socialist market financial system in place, it would take some time and resume

the market-oriented fiscal policy. Though China stressed the role of the market at both times,

it recognised different ways, extents, objectives, and environmental conditions for the market

to play its part.

After its founding, the People’s Republic of China faced a pretty severe inflation problem.

However, it was hardly possible to either raise revenue or reduce expenditure.

On the one hand, military expenditures, general administrative expenses, and taking over the

military and educational personnel of the old regime led to enormous fiscal pressure. On the

other hand, raising adequate fiscal revenue required a unified fiscal and economic system, but

most importantly, a unified fiscal system. Therefore, the gap between fiscal revenue and fiscal

expenditure remained.

The market-oriented fiscal policy adopted at this stage was implemented in a highly fragmented

market economy. The fiscal balance continued through 1951 and 1952, which registered a

fiscal revenue of RMB 17.394 billion and a fiscal expenditure of RMB 17.207 billion but found

it challenging to fulfil employment goals and other policy objectives.

2. Planned Fiscal Policy (1953-1978):

In addition to tax policy, China managed to amass fiscal resources through price policy,

depreciation policy, and low-wage policy. Macro fiscal policy was integrated with micro fiscal

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policy and state finance with state-owned enterprise finance. Direct regulation of fiscal policy

in the planned economic system built upon the premise that enterprises (mainly public-owned

enterprises) could not finance and manage their business independently. The total balance of

the national economy required not only an overall balance but also balance in four specific

areas, namely fiscal balance, credit balance, material balance, and foreign exchange balance

(added later). For example, the “2-3-4” rule required that of the total national income, 20%

should go to accumulation, 30% to fiscal revenue, and the proportion of capital expenditure to

fiscal expenditure should be 40%.1 Quite aware of the law governing the proportional and

coordinated development of the national economy, China still allowed construction to overtake

the accumulation of fiscal resources in some cases. However, as the “Cultural Revolution”

broke out, plans became the basis, public finance the guarantee, and as a result, the national

economy was severely damaged (Xu, 1980).1 The ultimate goal of fiscal policy in a planned

economic system was to maintain fiscal balance. In the final analysis, such a policy was only

a kind of classical fiscal concept dominated by simple fiscal revenue and expenditure concepts

and viewed fiscal deficit avoidance and the regular operation of public finance as an immediate

objective.

3. Fiscal Policy Accommodating the Needs of Economic Transformation (1978-

2012):

We mean the transformation from the planned economy to the market economy by economic

transformation. Gradually, central planning could no longer play a fundamental role, and

government macro-control measures had to change from direct intervention to indirect

regulation.

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To transit from the planned economy to the market economy, the government needs to make

adjustments in three aspects in terms of how to manage the economy, namely, replacing

microeconomic management with macroeconomic management, replacing direct management

with indirect management, and replacing an annual directive plan with instructional medium-

and long-term plans (Xiang et al., 1993). In other words, a market-oriented fiscal policy was

emerging with evident characteristics.

Meanwhile, China was shifting from a sellers’ economy to a buyers’ economy, which provided

a material basis for implementing expansionary fiscal policy. Although its terminology might

have some Chinese characteristics, the type of fiscal policy was described according to

expansionary (proactive) policy, neutral (prudent) policy and tight policy.

4. Fiscal Policy Accommodating the Needs of the New Era (2012-Present):

The further reform of the fiscal and taxation system should aim to develop the current fiscal

policy, which helps realise macroeconomic stability goals and plays an essential role in the

modernisation of the state governance system and the enhancement of state governance

capacity. Fiscal policy faces significant operational pressure, and fiscal risks continue to

increase. In the socialist market economy, the market plays an increasingly decisive role in

resource allocation, and fiscal policy primarily functions within the law of the market. For

fiscal policy in the new era, the supply-side structural reform is a new condition and offers new

options. With the advent of an era of economic globalisation and against the background of

building a community with a shared future for humanity, a country can no longer choose its

fiscal policy solely based on domestic considerations. Choosing the right fiscal policy

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compatible with the open economic system has become a new topic for all countries and

regions.

IMPACT OF FISCAL POLICY ON ECONOMY

Fiscal policy is making a substantial contribution to China’s economic growth. China’s forceful

fiscal response was made possible because China had ample fiscal space when the GFC hit.

Kong and Feng (2019) find that China’s fiscal policy is generally countercyclical and achieves

its desired economic effects. For instance, Lam and Wingender (2015) find that improving the

progressivity of personal income taxes, introducing property taxes, and setting up a

comprehensive value-added tax can promote China’s growth, boost fiscal revenues, and reduce

the fiscal deficit.

Some studies have estimated China’s fiscal multipliers. (2010) found that fiscal multipliers for

China are broadly in line with the United States. (2017) estimated that China’s fiscal multiplier

increased from 0.75 in 2001–2008 to 1.4 in 2010–2015, with the most significant impact on

the manufacturing sector. (2016) obtained local government fiscal multipliers of approximately

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0.6, much lower than most previous studies’ estimates. They found that public expenditures,

managed by the local authority and financed by raising taxes on local households and issuing

local government debt, can have New Keynesian effects on output growth.

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Statistics show the effects of the fiscal stimulus package under the fixed exchange rate regime.

In 2009 the increase in Chinese GDP would be equal to 2.6 per cent, and in 2010, to 0.6 per

cent. The increase is driven by private consumption (+3.2 and +1.3 per cent in 2009 and 2010,

respectively), which benefits from higher transfers to households and low real interest rates.

Compared to the baseline scenario, higher Chinese aggregate demand implies higher inflation

and the Chinese real exchange rate appreciation over the two years). We assess the role of the

exchange rate regime on the effects of the fiscal package. We also report results in the case of

Chinese monetary policy following a standard Taylor rule. When the fiscal package is activated

and inflation and GOP increase in China, the monetary authority raises the nominal interest

rate. The GDP increased by 1.8 per cent in 2009 and by 0.7 per cent in 2010. Compared to the

fixed exchange rate regime, the lower expansionary effects on aggregate demand imply a lower

increase in imports in 2009 and 2010, even though the Chinese real exchange rate appreciation

makes imports cheaper than domestic goods through the standard substitution effect.

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Finally, we further evaluate the contribution of expansionary policy by assuming that, given

the fiscal stimulus, the US and China’s annualised policy rates are held constant at the 0.25 per

cent level for eight periods until the end of 2010 instead of six. In this scenario, the increase in

Chinese GDP would be equal to 33 per cent in 2009 and 0.9 per cent in 2010. As current and

expected real interest rates are lower, private investment positively reacts to the stimulus in

2009 (while the retrenchment in 2010 is weaker than when policy rates were held constant for

six instead of eight periods.

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 IMPACT OF FISCAL POLICY ON INFLATION

Inflation remains one of the most important macroeconomic factors for any country. For any

country, it is essential to control its inflation because the rate of inflation in the economy affects

the prices of goods in the economy and will affect the population in a significant way.

Inflation also decides the cost of production of goods in the country, which makes maintaining

inflation very crucial for China. China is mainly an industrial nation and exports goods to the

world. And most of the goods are either finished or parts, and if the rate of those goods goes

upwards, the economy of the whole world gets affected. It also leads to a fall in China’s exports.

A few decades ago, the inflation rate in China was a roller coaster as the economy of the country

was not stable yet. In 1989 the inflation rate was ~28%, and in 1999 it was ~(-2.2)%.

In the last decade, though, the inflation rate has been stable, not going above 3%. This inflation

range may seem to be good since it is less, and less inflation is good, but it is not always the

case. Rapid growing economies show a high inflation rate, and this low inflation rate in the

recent decade in China might show slow economic growth.

But the inflation in China was intentionally kept low by the government to facilitate the

country’s exports and imports.

Various fiscal policies by the government were introduced to do so. The government has

knowingly decreased its transfer payments and government expenditure to reduce the fiscal

deficit, which in turn avoids inflation.

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The government has also levied high taxes on its citizens and disincentivised holding of money

by incentivising savings, which leads to less holding of money in peoples’ hands, leading to

low demands of goods and services, decreasing the money supply in the economy.

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 IMPACT OF FISCAL POLICY ON EMPLOYMENT

The key factors impacting employment in China can be characterised by the following: (i)

developmental stage upgrading from low- to middle- and high-income stages, similar to other

developing countries; (ii) a demographic transition from high to low fertility experienced by

many emerging economies; and (iii) an institutional transition from a planned to a market

economy shared with other former planned economies. During these transition periods, the role

of China’s macroeconomic policies in promoting employment also altered over time. We

generalise some facts regarding labour market developments by narrating the employment

expansion in China’s transitional period.

From 1980 to 2013, the annual growth rate of GDP was 9.7 per cent, while total employment

grew by 1.8 per cent annually, urban employment by 4.0 per cent, and rural employment by

0.6 per cent. More specifically, rural employment has declined since 1997: the share of

agricultural labour in the total employment declined from 68.7 per cent in 1980 to 33.6 per cent

or 22.7 per cent in 2012, depending on the measurement methodology used.

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When population growth at first slowed – particularly as the growth of the working-age

population aged between 15 and 59 – and then after 2010 grew negatively, employment

pressure eased, and the employment rate has grown at a relatively slower rate in recent years.

Thirdly, a higher labour force participation rate and fuller employment were realised primarily

by increasing the labour share of the non-agricultural sectors. China experienced massive

labour migration from the agricultural to the industrial and services sectors, from rural to urban

areas, and from the poorer central and western regions to the wealthier coastal ones, a

phenomenon recognised by scholars as to the largest peacetime migration ever in human

history.

First, the targeted economic growth rate is incorporated in the budgeting and allocation

approval process. As a routine, the annual budget determines the appropriate level of budget

deficit given the policy response to the economic cycle, ensures funds are allocated to support

national employment policies, sets up target growth rates for pre-employment public

investments, and allocates expenditure to social protection programmes.

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For example, in different years, the official macroeconomic policy stance has been “fiscal

policies aiming to promote the adjustment of the national economy” (1979), “tight fiscal

policies” (1988), “moderately tight fiscal policies” (1993), “active fiscal policies” (1998),

“prudent fiscal policies” (2004), and “active fiscal policies” (since 2008) respectively. As for

active fiscal policies, stimulus measures include: issuing national or local bonds on behalf of

local government, supporting public investment in infrastructure construction and other

projects, relieving or exempting taxes on small, medium, and micro enterprises and start-ups,

and implementing financial discount policies for micro finance and social security funds.

Third, reforms of the taxation system aim to foster and develop targeted sectors and industries

to expand employment. One such reform is the value-added tax reform through a pilot

programme, which will replace the business tax with a value-added tax (or VAT/BT reform)

on transportation and other selected modern services sector. This has created the necessary

policy environment for services sector development, particularly for the current services sector,

and therefore provided new growth possibilities for employment.

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For this reason, the Central Government has gradually extended the VAT/BT reform to a

broader range of sectors and regions. Such progress with tax reform has accelerated the faster

growth of output value and employment generation in the services sector, increasing the share

of the services sector in the total economy significantly.

From 2000 to 2010, the share of the services sector in terms of value-added increased from

39.8 to 44.2 per cent, an average annual increase of 0.44 percentage points. The modern

services sector can roughly be categorised as the following: water management and

conservation, environment, and public facilities, information transmission, computer services

and software, financial intermediation, real estate, leasing and business services, scientific

research, technical service and geological prospecting, education, health, social security and

social welfare, culture, sports and entertainment, and public management and social

organisation.

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 IMPACT OF FISCAL POLICY ON POVERTY

Large-scale poverty reduction in China has been achieved through rapid economic growth.

Official statistics show that real GDP grew at an average of 9.4% per year from 1979 to 2003,

exceeding 10% in the first half of the 1980s and 1990s. Despite the urban disparity, rural and

regional areas have increased significantly. However, overall economic growth has benefited

the majority of the population, including the poor, and has been a significant driver of poverty

reduction for two decades.

China’s poverty alleviation policies have focused on creating opportunities by creating wealth

for the poor and transferring wealth to the poor, mostly avoiding “handover” altogether. These

include rural reform 1978-1985, national target poverty reduction programs 1986-1993, plan

87 for 1994-2000 and the New Century Rural Poverty Reduction Plan for 2001-2010.

• Rural Reform (1978-1985):

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In the early years of the doi moi period after 1978, the most pressing issue was stimulating

rural economic growth through rural reform. To stimulate the rural economy, the Chinese

government began institutional reforms in rural production, distribution systems, and

procurement prices.

• The National Targeted Poverty Reduction Programs (1986-1993):

Rural poverty reduction programs launched in the mid-1980s include a variety of actors,

initiatives, and funding channels. The leading group of the State Council on Poverty Alleviation

(LGPR) was established in 1986 to bring unity to many poverty reduction initiatives and

especially to promote economic development in the developing regions. Specific tax incentives

have been applied to poor areas (Office of the Leading Group on Poverty Reduction and

Development, 1989). However, China’s overall progress in poverty reduction has been slower

and even reversed for some years, concurrently with the stagnation of the rural economy.

• The 8-7 Poverty Reduction Program in China:

It aimed at 1) assisting poor households with land improvement, increased cash crop, tree crop

and livestock production, and improved access to off-farm employment opportunities, 2)

providing most townships with road access and electricity, and improving access to drinking

water for most poor villages, 3) accomplishing universal primary education and basic

preventive and curative health care, 4) graduating better off counties in the coastal provinces

from the newly established list of nationally designated developing countries, 5) managing well

available funding, with attention to the appraisal and financial viability of poverty reduction

investment activities, recovery of loan funds and leakage of poverty reduction funding to

alternative activities, and 6) enlisting involvement and support from all government ministries

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and agencies, the coastal provinces and major municipalities, and other domestic and

international organisations.

• Poverty Reduction Strategy in the New Century (2001-2010):

Drawing critical lessons from “Plan 8-7”, the Chinese Government launched the New Century

Rural Poverty Reduction Plan from 2001-to 2010. The new plan targets poor villages instead

of poor districts, emphasises human and social development capital in poor localities and

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promotes participatory approaches to poverty alleviation. The new plan emphasises the

development of science and technology, education, culture and health, acknowledging that

disease is already the main driver pushing rural households into poverty.

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 SHOULD MONETARY AND FISCAL POLICYMAKERS TRY TO

STABILISE THE ECONOMY?

When left on its own, the economy tends to be volatile. When households and businesses

become pessimistic, they reduce spending, which reduces the overall demand for goods and

services. The decline in aggregate demand, in turn, reduces the production of goods and

services. Companies are laying off workers, and unemployment is rising. Real GDP and other

income measures fell. Rising unemployment and falling incomes are helping to confirm the

initial pessimism that caused the recession.

Such degradation does not benefit society - it represents a pure waste of resources. Workers

who have lost their jobs due to reduced aggregate demand will work instead. Instead, business

owners whose factories are idle during a recession produce valuable goods and services and

sell them at a profit.

There is no reason for society to suffer the ups and downs of the business cycle. The

development of macroeconomic theory has shown policymakers to minimise the severity of

economic fluctuations. By “going with the wind” of economic changes, fiscal and monetary

policy can stabilise aggregate demand, output, and employment. When aggregate demand is

not enough to supply full employment, policymakers must increase government spending, cut

taxes, and increase the money supply. When aggregate demand is excessive, which risks

increasing inflation, policymakers must cut government spending, raise taxes, and reduce the

money supply. Such policy actions make the most of macroeconomic theory by leading to a

more stable economy that benefits everyone.

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The stance of the Communist Party of China or the government of China has always been pr

measures. They have always gone with adopting measures to stabilise the economy. For the

last 70 years, the government has been relying on correcting the force of external problems on

the economy through government interference.

In this report, we have gone into great detail to explore the fiscal policies adopted by the

government of China in the modern era to fight these problems. It ranges from increasing taxes

to directly getting involved in controlling inflation and people’s spending.

The Chinese government is infamous for intentionally regulating the price of its currency in

comparison with the US Dollar. The Chinese economy is entirely dependent on exports, and

for this, they have to keep the costs of their goods cheaper than their competition. To do that,

the government does not let the price of RMB go up.

This shows that the Chinese policymakers are pro-measures and do not hesitate to put ut fiscal

and monetary policies whenever needed.

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 CONCLUSION

A review of the fiscal policy adopted by the People’s Republic of China in the past 70 years

reveals that fiscal policy should be understood as a macroeconomic stabiliser and part of the

public policy that helps modernise China’s system and capacity for governance. Fiscal policy

must be supported by sufficient financial resources and requires the regular and sustainable

operation of public finance. Changes in the objectives, tools, operational conditions and effects

of fiscal policy should be followed closely. China should look at national and global conditions

when deciding its future fiscal policy. The choice of China’s future fiscal policy must be based

on China’s national conditions, have an international version, and be combined with fiscal and

taxation reform to meet the needs of new economic development in the new era.

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of-Fiscal-

policy_1611/#:~:text=Large%20scale%20underemployment%2C%20lack%20of,othe

r%20limitations%20of%20fiscal%20policy

• https://www.econlib.org/library/Enc/FiscalPolicy.html

• https://www.weforum.org/agenda/2020/06/china-stimulus-covid19-economic-

recovery/

• https://www.oecd.org/coronavirus/policy-responses/tax-and-fiscal-policy-in-response-

to-the-coronavirus-crisis-strengthening-confidence-and-resilience-60f640a8/

• https://link.springer.com/article/10.1007/s10290-021-00414-5

• https://www.macrotrends.net/countries/CHN/china/unemployment-rate

• https://www.macrotrends.net/countries/CHN/china/youth-unemployment-rate

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