2. A combination of fiscal and tax tools was used to promote steady and rapid development of the economy. On the basis of the prudent fiscal policy, we in 2006 revised and enhanced policy tools in response to economic developments and changes, relaxing control in some areas and tightening it in others, to make the regulatory function of public finance more effective and better focused.

First, we adjusted and improved relevant tax policies. On April 1, 2006, we began making the biggest adjustment in the items and rates of the consumption tax seen since 1994, increasing some items and rates and lowering others. We raised the salary threshold for the personal income tax and increased the deductible amount for the personal income tax for employees of domestic enterprises from 800 yuan per month to 1,600 yuan per month. We adjusted the policy on the natural resources tax. We also adjusted export rebate rates for some products, eliminating or reducing export rebates for more products whose production is high in energy consumption or is highly polluting. In addition, more commodities were added to the list of those not eligible for the processing trade. We introduced export tariffs on some products whose production is high in energy consumption or is highly polluting while lowering import tariffs on some resource products. Tax reforms such as the trial VAT reform in northeast China made steady progress. Adjusting and improving tax policies played a positive role in conserving resources, protecting the environment, guiding consumption in the right direction and indirectly improving income distribution.

Second, we made necessary adjustments in the scale of central government allocations and improved the utilization structure. Central government allocations in 2006 totaled 125.4 billion yuan (including 10 billion yuan from surplus revenue). These funds were mainly used to fund items such as the building of a new socialist countryside, social programs, environmental and ecological protection and the large-scale development of the western region and to fund an appropriate number of major new projects with overall bearing on development. Moreover, the pace of implementation of the budget was regulated to keep it in line with the overall situation in economic development, and the performance of government funds was improved by strictly managing investment and tightening oversight.

Third, we adjusted and standardized fiscal and tax policies for managing housing and real estate revenue and expenditures. The required length of ownership when resale of privately owned housing is exempt from business tax was raised to five years from the two-year requirement stipulated in 2005. We improved the system for managing public accumulation funds for housing, further clarified the source of funding for building low-rent housing in urban areas and ensured that the funding was available. We also adjusted standards for fees for using land for new construction projects, revised land-use policies and formulated policies to standardize the use of revenue derived from the transfer of state land-use rights, yielding initial results in curbing speculation in the housing market. We made further progress in implementing the strictest possible system for protecting farmland and promoted more efficient and intensive use of land.

Fourth, we worked out and implemented fiscal and tax policies to encourage energy conservation and development of new energy resources. Responding to the high oil prices, we carried out a great deal of research on how to stimulate development of oil substitutes, formulated the policy to support the development of bioenergy, and set up the basics for a system of fiscal and tax policies to promote the development of alternative energy sources. In addition, we overhauled the mechanism for setting oil prices and introduced a special surcharge on oil sales. The above measures, along with other control measures, played an important role in maintaining the direction for economic development expected under the guidance of macroeconomic regulation.