Macroregulation through public finance operations played an increasingly bigger role. We made a timely adjustment in the fiscal policy in light of the objective requirements for economic development, successfully shifting a proactive policy to a prudent one, thus promoting continued steady and rapid economic development. On the basis of a careful review of the implementation of the fiscal policy, we put in place a sound financial macroregulatory system that is basically equipped to handle all situations in economic operations including inflation, deflation, and maintenance of a basic balance between supply and demand in spite of structural imbalances by setting appropriate targets, integrating policies, choosing opportunities carefully and carefully organizing implementation.

The way government funds were spent was improved by putting people first. We adjusted the pattern of expenditures by continuously reducing government investment in regular competitive and profit-making industries with the aim of gradually phasing out such investment in line with the requirements of a scientific outlook on development and the growth of the socialist market economy. We supported the reform and development of social programs such as those to develop compulsory education, employment services, social security and public health. We directed more funds toward financially strapped areas, industries and groups of people, making it the starting point and ultimate goal of government spending to realize, safeguard and develop the fundamental interests of the overwhelming majority of the people.

Reform of the system for administering public finance was constantly deepened. We promoted the reforms of the export tax rebate mechanism, the VAT, and the individual income tax and the reform for sharing income tax revenue, deepened the reform of the budgetary management system, and supported other aspects of economic restructuring. We promoted development of the legal framework for public finance work, strengthened basic accounting work, improved oversight of public finance, and further improved the administration of public finance.

Figure 3

Changes in Government Revenue During the Tenth Five-Year Plan Period

At the same time, we are keenly aware that there are still quite a few problems that need to be solved in the operation of public finance and implementation of the budget.

First, now that China has entered a new stage of economic and social development, financial support to ensure all-round, balanced and sustainable social and economic development is no longer adequate. For instance, we need to increase investment in weak links in development such as agriculture, rural areas and farmers, compulsory education, public health and environmental protection.

Second, we need to increase funding for efforts to improve our capacity for independent innovation, promote scientific and technological progress, and transform the pattern of economic growth.

Third, progress in the effort to make the level of basic public services available more uniform across the country is still too slow. Lower-level governments in some areas are still experiencing financial difficulties, and more funding is needed to safeguard government authorities at lower levels and strengthen their ability to serve the public.

Fourth, there are still quite a few other areas that are affected by heavy debt obligations both overt and covert that are affecting economic development, making it extremely difficult for us to prevent and defuse financial risks.

Fifth, reform of the budget system and the management system of public finance needs to be deepened still more to make management of public finance more standardized, scientific and transparent. The State Council is paying close attention to these issues, and has called on the Ministry of Finance and relevant departments to take effective measures to solve them. We must boost our sense of urgency and our sense of mission as we constantly work to improve services and the management of public finance by accelerating development of the public finance system, setting up a scientific policy-making mechanism, deepening reform and optimizing the pattern of expenditures.

II. The Draft Central and Local Budgets for 2006