China's deficit-to-GDP ratio is set at around 4 percent this year, and the government deficit is set at 5.89 trillion yuan ($853 billion), 230 billion yuan ($33 billion) more than last year, according to the government work report delivered to the National People's Congress, the top legislature, on March 5.

Increasing deficit is a concrete measure the Chinese Government takes to pursue a more proactive fiscal policy in 2026. This year, revenue in the national general public budget will total 24.12 trillion yuan ($3.5 trillion), and expenditure is expected to increase to 30.01 trillion yuan ($4.35 trillion), resulting in a budgetary deficit of 5.89 trillion yuan, according to the Ministry of Finance (MOF). The deficit will be financed by treasury bonds.

Is a deficit of 5.89 trillion yuan too large? Will a more proactive fiscal policy lead to an increase in liquidity and potentially bring about excessive inflation and other risks to the economy? The answer is no, based on the execution of fiscal budgets for 2025. Last year, China's deficit-to-GDP ratio reached 4 percent for the first time, hitting a record high. The country registered a deficit of 5.66 trillion yuan ($820 billion), which was consistent with the figure projected.

In 2025, China's GDP grew 5 percent year on year and the consumer price index growth remained the same as in 2024. This means that despite record-high deficit ratio and deficit size, the Chinese economy maintained a stable performance. This year, the deficit-to-GDP ratio will be the same as in 2025 but the deficit size will be a little bit higher. According to the MOF, national fiscal expenditure will mainly focus on the following areas:

First, supporting the development of a robust domestic market, such as implementing interest subsidy policies for loans to micro, small and medium-sized enterprises, providing enterprises with easier access to cheaper financing, stimulating private investment, and making greater efforts to boost consumption.

Second, supporting faster development of new drivers of growth, such as facilitating industrial transformation and upgrading, allocating ultra-long special treasury bonds to support large-scale equipment upgrades and supporting the equipment upgrading needs of small and medium-sized enterprises (SMEs). China will continue with government reward and subsidy policies for SMEs that use specialized and sophisticated technologies to produce unique and novel products to encourage greater investment in research and development. The country will also advance city-based pilot programs for the digital transformation of SMEs to drive forward full integration between the real and digital economies. More funds will be used to achieve greater self-reliance and strength in science and technology. Science and technology will remain a fiscal spending priority, with expenditures in the central budget rising by 10 percent to 426.4 billion yuan ($61.8 billion). China will support forward-looking planning for major science and technology projects and accelerate major national science and technology programs.

Third, ensuring and improving public wellbeing, including expanding employment and raising its quality, improving the fairness and quality of education, enhancing the medical and healthcare service capacity and medical security, refining the social security system, and supporting cultural and sports programs.

Fourth, balancing regional development, including promoting all-round rural revitalization and advancing new urbanization.

Fifth, accelerating the green transition across all sectors, including stepping up efforts to improve the environment and working toward peaking carbon emissions and achieving carbon neutrality.

Sixth, ensuring necessary funding support for national defense, diplomacy, and judicial and law enforcement work.

As a large country with a population of over 1.4 billion, China needs the support and guarantee of the national budget for economic and social development, improvement of people's wellbeing and national security. A moderate government deficit based on sound and rational budget formulation is feasible and necessary.

Copyedited by G.P. Wilson 

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