China Will Fall Short of Ambitious Tax Cut Target, S&P Says

(Bloomberg) -- China will fall well short of its target of cutting taxes and fees by a record 2 trillion yuan ($298 billion) this year, according to S&P Global Ratings.

The government will likely only be able to cut taxes by 1.5 trillion yuan, about 25 percent short of its goal, S&P credit analysts led by Yutong Zou wrote in a note on Monday. That’s because while they government has cut companies’ contributions to the social security fund, authorities will be stepping up enforcement, they wrote.

"We expect that China’s tax cuts in 2019 will not be as deep as headline figures suggest," the analysts wrote in a release accompanying the report. "Nevertheless, they will be deep enough to put some pressure on official budget spending to make up for lost revenue."

The government has vowed to reduce spending, issue more local government bonds and require more profit transfers from state-owned banks and enterprises. State-owned companies may contribute about 100 billion yuan more, assuming a 5 percent increase in their dividend payment, and the special bond issuance will largely be directed to investment projects instead of budgetary funding, the economists wrote.

To meet the goals, they estimate the government needs to reduce its expenditure by 680 billion yuan, squeezing its capabilities to build more infrastructure.

The budget deficit is only projected to increase by 380 billion yuan, and officials will be reluctant to use too much of the reserve funds because that pile is shrinking, the S&P analysts wrote. Growth in revenue from land sales will decelerate due to a cooling of the property market, bringing in only about 200 billion yuan more, they said.

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