China factory assembly line
China has raised deficit-GDP ratio to 3% from 2.3%. Reuters

Falling fiscal revenues and downside pressures on gross domestic production has forced the world's second largest economy to raise its deficit-to-GDP ratio to a level coincides the warning line noted by the Maastricht Treaty in 1991.

China will increase the deficit-to-GDP ratio to 3% from 2.3% last year, and cut taxes across the board, Premier Li Keqiang said on Saturday at the annual parliamentary session, according to a Xinhua report.

The 0.7 percentage point rise the ratio is estimated to provide the government about 470 billion yuan more to spend.

China's GDP growth rate has fallen to a 25-year low last year and fiscal revenue growth to its lowest since 1988.

The government deficit for 2016 is projected to be 2.18 trillion yuan ($335bn), up 560 billion yuan over last year.

Of the deficit, 1.4 trillion yuan will be carried by the central government, and the remaining 780 billion yuan will be carried by local governments, Li told almost 3,000 lawmakers at the Great Hall of the People in central Beijing.

"The moderate increase in government deficit is projected primarily to cover tax and fee reductions for enterprises, a step that will further reduce their burdens," Li said.

Li's government work report included measures that would alleviate the financial burden on enterprises and individuals by over 500 billion yuan.

One of the measures is the replacement of the business tax with the value-added tax in all sectors, ensuring "the tax burdens on all industries are reduced."

The business community has long been demanding lowering taxes arguing other countries are offering competitive rates.

Cao Dewang, the head of, Fuyao Glass, a leading international manufacturer of automotive and industrial glass, said he has increased its investment in the United States to $750mn last year, after a comparison of the tax rates and other costs between the United States and China.

Cao is also a member of the Chinese People's Political Consultative Conference (CPPCC).


Several experts, however, believe that the world's second largest economy can afford this margin of a rise in the deficit-GDP ratio given the size of the economy and relatively lower debt.

They say this will facilitate structural reform in China.

Xinhua quoted Stephen Roger, senior fellow of Yale University's Jackson Institute for Global Affairs, as saying China has ample fiscal space to increase its budget deficit in order to provide support to economic growth.

"It is both wise and prudent to minimize risks by taking out insurance in the form of proactive fiscal policy," Roger said.

And the Maastricht Treaty's 3% warning line is not always fitting, said Jia Kang, a Chinese economist and member of the CPPCC National Committee.