The following is the full text of the Report on the Implementation of the Central and Local Budgets for 2004 and on the Draft Central and Local Budgets for 2005, submitted to the Third Session of the Tenth National People's Congress on March 5, 2005.

REPORT ON THE IMPLEMENTATION OF THE CENTRAL AND LOCAL BUDGETS FOR 2004 AND ON THE DRAFT CENTRAL AND LOCAL BUDGETS FOR 2005

(Third Session of the Tenth National People's Congress, March 5, 2005)

Ministry of Finance of the People's Republic of China

Fellow Deputies,

The Ministry of Finance has been entrusted by the State Council to submit this report to the Third Session of the Tenth National People's Congress (NPC) on the implementation of the central and local budgets for 2004 and on the draft central and local budgets for 2005 for your examination and approval and also for comments and suggestions from the members of the National Committee of the Chinese People's Political Consultative Conference (CPPCC).

I. Implementation of the Central and Local Budgets for 2004

All local authorities and departments conscientiously implemented the principles and policies set by the central authorities and the related decisions and resolutions passed at the Second Session of the Tenth NPC in 2004. There was continued progress in economic development and in all social undertakings and people's lives improved. The central and local budgets were implemented well.

From a base of just over 2 trillion yuan for 2003, national revenue rose to 2.635588 trillion yuan (excluding revenue from generation of debt, both here and below), 464.063 billion yuan or 21.4 percent more than the previous year and representing 111.8 percent of the budgeted figure. National expenditures totaled 2.836079 trillion yuan, an increase of 371.084 billion yuan or 15.1 percent year-on-year and representing 105.9 percent of the budgeted figure. Expenditures exceeded revenue by 200.491 billion yuan.

Total revenue in the central budget amounted to 1.508154 trillion yuan, up 215.071 billion yuan (after deducting the additional 127.532 billion yuan used for export tax rebates), or 16.6 percent over the previous year and representing 109.1 percent of the budgeted figure. Total expenditures in the central budget came to 1.827439 trillion yuan (including 1.037877 trillion yuan in tax rebates and subsidies for local authorities), 214.588 billion yuan or 13.3 percent more than the previous year and representing 107.4 percent of the budgeted figure. The deficit in the central budget was 319.285 billion yuan, 545 million yuan less than the 319.83 billion yuan approved at the Second Session of the Tenth NPC. Total revenue in local budgets amounted to 2.225853 trillion yuan (including tax rebates and subsidies granted by the central government), an increase of 414.714 billion yuan or 22.9 percent year-on-year and representing 112.6 percent of the budgeted figure. Total expenditures in local budgets came to 2.10705 9 trillion yuan (including 60.542 billion yuan turned over to the central government), 322.218 billion yuan or 18.1 percent more than the previous year and representing 106.6 percent of the budgeted figure. Local revenue exceeded expenditures by 118.794 billion yuan and this surplus is to be rolled over into the budget for this year. These figures may change a little when the final accounts are prepared.

The main situation during the implementation of the central budget and financial work in 2004 is as follows.

1. Implementing the central budget in accordance with the law and properly utilizing revenue in excess of the projected figure.

Under the correct leadership of the Party Central Committee and the State Council, the people of all our ethnic groups worked hard to carry out the principles and policies set by the central authorities. As a result, major national economic indexes were noticeably better than expected. The sustained, rapid and sound development of the national economy and greatly improved performance of enterprises laid a solid foundation for the large increase in revenue. Taxpayers paid their taxes honestly and in accordance with the law, and financial, tax and customs departments tightened management. All this effectively guaranteed good revenue growth. National revenue increased by 464.063 billion yuan. If the additional 127.532 billion yuan used to clear up overdue payments on export tax rebates is included, national revenue would increase by 591.595 billion yuan, a 27.2 percent year-on-year increase. The main taxes collected in 2004 are as follows. Domestic value added tax (VAT) increased by 178.118 billion yuan over the previous year, or 100.231 billion yuan over the projected figure. Import tax collected by customs agencies was90.079 billion yuan more than last year's figure, all of which is in excess of the projected figure. Corporate income tax grew by 103.078 billion yuan, 71.03 billion yuan more than the projected figure. Personal income tax increased by 31.787 billion yuan, 11.591 billion yuan over the projected figure. Domestic consumption tax rose by 31.905 billion yuan or 25.131 billion yuan in excess of the projected figure; business tax, 73.616 billion yuan, or 35.061 billion yuan more than the projected figure. The revenue increase resulted from the collection of these six taxes totaled 508.583 billion yuan, accounting for 86 percent of the total revenue increase of 591.595 billion yuan.

At the same time, it should be noted that around 200 billion yuan of the surplus was due to special and one-time factors. First, part of the revenue increase for 2004 occurred due to overheated investment in some industries and price rises. A total of 70 to 80 billion yuan more was collected in the form of VAT than in most years due to the introduction of the "production-side VAT", which increased in line with the overheated growth of investment and added value of industry, where the new VAT is mainly collected. Second, the reform of the export tax rebate mechanism resulted in the loss of a quarter from the fiscal year of 2004 and reduction of export tax rebates by 3 percentage points on average, thereby cutting expenditures by nearly 100 billion yuan in the budget. Third, nearly 30 billion yuan in additional revenue was generated when the tax departments cleared up transitional accounts.

The revenue in the central budget was 253.771 billion yuan (including the additional amount used to pay export tax rebates) in excess of the figure projected for 2004. We acted in accordance with the directive of the Party Central Committee and the State Council to adopt a scientific outlook on development, with the Decision of the NPC Standing Committee on Strengthening Examination and Oversight of the Central Budget and with related resolutions formulated at the Second Session of the Tenth NPC. Moreover, since a large part of the surplus was due to special and one-time factors, we deemed it inappropriate to use the surplus to increase regular expenditures. The surplus was therefore mainly used to clear up payments in arrears and to increase spending to balance economic and social development. Specifically, the additional 127.532 billion yuan that was to be spent on export tax rebate payments was used to clear up overdue payments. The 3.57 billion yuan from increased collection of the vehicle purchase tax was used for special purposes as required by relevant regulations. An additional 32.103 billion yuan was spent on education and science, on tax rebates and general transfer payments for local authorities and on transfer payments for ethnic minority regions as required by relevant laws and regulations and by the regulations governing the system of public finance. Another 15.604billion yuan was used to support the reform of rural taxes and administrative charges as well as grain production. A total of 40.485 billion yuan was spent to pay overdue grain compensation for returning cultivated land to forests. A further 3.25 billion yuan was used to pay basic old-age pensions for workers retiring from state-owned enterprises and fund subsistence allowances for urban residents. A total of 14.856 billion yuan was paid into the national social security fund, 3 billion yuan was used for subsidies to support the closing down or bankruptcy of enterprises, and an additional 13.371 billion yuan was spent to fight disasters and provide relief. In making these arrangements, we looked in all directions to prevent risks and adhered to a scientific outlook on development that requires putting people first and striving for well-rounded, balanced and sustainable development. We brought general expenditures under control and supported macroregulation and balanced economic and social development. The State Council has reported these arrangements and uses for the surplus in the central budget to the NPC Standing Committee. The revenue in excess of the projected figures in local budgets was used by local authorities mainly to alleviate financial difficulties in counties and townships, fund expenses for science, education, culture and health, support agriculture and clear up overdue debts.

2. Following a scientific outlook on development while taking all issues into consideration.

1) Adopting a series of policies and measures to promote increases in grain production and rural incomes. When compiling its budget for 2004, the central government gave top priority to supporting agriculture, rural areas and farmers through increased investment and preferential policies. Responding to new developments in macroeconomic operation, particularly changes in grain production, the Party Central Committee and the State Council in late March decided to intensify efforts to solve the problems facing agriculture, rural areas and farmers by adopting more effective measures. Taking into consideration the overall interests of the country, the Ministry of Finance did everything possible to secure funding for this effort in spite of all the difficulties and increased spending to support agriculture by 15.604 billion yuan. Financial authorities at all levels adopted concrete measures on their own initiative to fully implement the policy of "two reductions or exemptions, and three subsidies" [exempting all taxes on native agricultural products except for tobacco, exempting or basically exempting the agricultural tax, directly subsidizing grain producers and subsidizing the purchase of improved crop strains and large agricultural machinery and tools, tr.]. Besides repealing all taxes on native agricultural products except for tobacco, the central government exempted or basically exempted Jilin and seven other provinces from paying the agricultural tax. In addition, the tax rate was reduced by three percentage points in Henan and ten other major grain-producing provinces as well as Guangdong Province, in some cases through local initiative, and the rate was reduced by one percentage point in another 11 provinces, including Shanxi. Subsidies were given directly to grain producers in 29 provinces, autonomous regions and municipalities directly under the central government; the purchase of improved strains of rice, wheat, corn and soybeans was subsidized in Hebei and 12 other major grain-producing provinces; and the purchase of large agricultural machinery and tools was subsidized in 66 major grain-producing counties and in the land reclamation zones under the jurisdiction of the central government. A total of 31.32 billion yuan was allocated from the central budget to fund this policy. In addition, the central government also adopted the following policies and measures to support agriculture. First, funding for bond-financed agriculture projects was increased by 38 billion yuan in 2004, representing 34.5 percent of the total increase in funds for bond-financed projects. Second, to ease the impact on social security recipients of price rises for grain and other basic foodstuffs, beginning in the second half of 2004, an additional 2.25 billion yuan was spent to increase basic old-age pensions for workers retiring from state-owned enterprises and 1 billion yuan more was allotted to fund subsistence allowances for urban residents. Third, increased funding for overall agricultural development mainly went to major grain-producing areas, and the 6.316 billion yuan for improving agricultural production conditions was changed from interest-bearing loans to non-interest-bearing loans. Fourth, we conscientiously implemented the preferential policy requiring that increased spending on education, health and culture be concentrated on rural areas and on the effort to stabilize prices for the means of agricultural production. Fifth, around a dozen agriculture-related administrative and institutional charges were canceled, exempted or reduced. Sixth, we funded the training of more than 2 million rural workers in urban areas, about 80 percent of whom have found jobs. All in all, support for agriculture, rural areas and farmers from the central budget in 2004 was the largest in many years. Thanks to these sound policies, favorable weather and our hard work, grain output was good, farmers benefited, and the rising trend in prices was weakened. All this has laid a solid foundation for the central authorities to improve macroregulation by starting with support for agriculture, rural areas and farmers.

2) Effectively slowing the overheated growth of investment in some industries by adjusting the orientation and strength of government investment. Taking into consideration the necessity of maintaining the "five balances" [balancing urban and rural development, development among regions, economic and social development, development of man and nature, and domestic development and opening wider to the outside world, tr.], we took the initiative to adjust the orientation of funds for bond-financed projects, expanding investment in some sectors and reducing it in others. The focus of our efforts was to ensure adequate funding for key ongoing projects and projects in agriculture, forestry, water conservancy, science and education, culture and health, energy and road building in counties and townships. We put off other investment projects where possible, and in particular, suspended funding for projects in certain overheated industries. These changes allowed us to strengthen the management of budgets for bond-financed projects by improving the examination and approval process and allocating funds in strict accordance with construction progress. A total of 45.692 billion yuan was left over for use in bond-financed projects in 2005. In addition, we adjusted some policies related to tax reduction or exemption in the real estate industry as needed and increased support for agriculture while controlling the pace of urban expansion through measures such as adjustment of the structure of funds from land-use fees to use some of them to develop agricultural land. These measures played an active role in ensuring effective macroregulation and balancing economic and social development.

3) Energetically supporting work related to employment, reemployment and social security to promote harmonious social development.

We conscientiously carried out the fiscal and tax preferential policies formulated by the central authorities to promote employment and reemployment and continued to support implementation of the program for college student volunteers to serve in the western region. The central government increased funding for reemployment subsidies by 2.225 billion yuan, up 54.6 percent year-on-year. Local authorities also made corresponding allocations for employment subsidies, effectively contributing to employment and reemployment efforts. We continued to successfully maintain the "two guarantees" [guarantee of a basic living allowance for workers laid off from state-owned enterprises and guarantee that the pensions of retirees are paid on time and in full, tr.] and work to ensure that the urban poor receive subsistence allowances. The central government spent 14.4 billion yuan on basic living allowances for laid-off workers to ensure they were paid on time and in full and took concrete measures to incorporate the allowances into the unemployment insurance system. The central government paid 52.4 billion yuan in transfer payments for old-age insurance, guaranteeing that basic pensions for workers retiring from state-owned enterprises were paid on time and in full. In addition, allocations from the central budget were used to support pilot programs to improve urban social security systems in Jilin and Heilongjiang provinces.

The central government earmarked 296 million yuan to subsidize local governments in steadily implementing a new system for rural cooperative medical and health care services on a trial basis. In addition, 300 million yuan was taken from lottery funds for public welfare to develop the rural medical assistance system. A financial guarantee mechanism was set up with 1.5 billion yuan in special transfer payments from the central budget plus corresponding funding from local budgets to improve the living standards of economically disadvantaged demobilized servicemen working as cadres in some enterprises. The central government appropriated 1.701 billion yuan in subsidies to prevent and control major floods and droughts and respond to major flooding, plus 4 billion yuan as relief for people in areas stricken by catastrophic natural disasters. Local governments also allotted funds for these purposes. All this not only helped to promptly resolve the difficulties of disaster victims in their work and lives, but also put in place a contingency funding mechanism for responding to natural disasters to make relief supplies and equipment readily available.

4) Increasing investment in education, science, culture and health to promote the development of all social undertakings. Educational expenditures for the whole country in 2004 increased by 42.189 billion yuan, or 14.4 percent. Of this amount, expenditures for education from the central budget grew by 4.323 billion yuan, or 15 percent. Vigorous efforts were made to improve conditions for elementary education in rural areas. Continued support was given to major programs such as the project to renovate or rebuild dangerous primary and secondary school buildings across the country, the plan to make nine-year compulsory education basically universal and basically eliminate illiteracy among young and middle-aged adults in the western region, and projects to support modern distance education in rural primary and secondary schools and make adjustments in the geographic distribution of these schools. The basic shape of a state investment system for assisting poor students through public finance has been put in place. The system provides poor students in rural primary and secondary schools with free textbooks, pays for miscellaneous education-related fees, and gives poor students staying on campus a living allowance. It also grants state student loans to college students and provides a living allowance to students from destitute families. The system provided more than 24million poor students receiving compulsory education in rural areas in the central and western regions with free textbooks and was widely praised by students, their parents and the general public. We increased investment in institutions engaged in basic research, hi-tech research, research for public benefit and non-profit research and continued to support development of a national platform to supply the basic conditions for science and technology and the knowledge innovation pilot program of the Chinese Academy of Sciences. Expenditures for science and technology for the whole country in 2004 increased by 9.85 billion yuan, or 13.7 percent. Of this amount, expenditures from the central budget grew by 5.234billion yuan, or 11.9 percent. Support was continued for the national programs to share cultural information and send books to the countryside to promote cultural undertakings at lower levels. Four billion yuan was earmarked for public health to support the systems for disease prevention and control, medical treatment, monitoring enforcement of health laws and rural health services, as well as efforts to prevent, control and treat serious diseases such as AIDS, tuberculosis, snail fever and endemic diseases. Nearly 200 million yuan in subsidies was spent on trials of a system for rewarding and supporting some rural families that observe the state's family planning policy, thereby encouraging rural people to follow the policy. A total of 848 million yuan, 275 million yuan of which was from the central budget, was used asa strong guarantee to prevent and control the highly pathogenic avian flu, and a number of supporting fiscal and tax policies were adopted to effectively lessen the impact of the disease on poultry producers and related enterprises.

5) Increasing investment in administrative, procuratorial, judicial and public security organs to support the development of political power. Subsidies totaling 3.13 billion yuan were allocated from the central budget in 2004 for procuratorial, judicial and public security organs to help improve conditions for processing cases at the lower levels in poverty-stricken areas. A total of 400 million yuan was earmarked to simplify customs clearance procedures in Shenzhen, Zhuhai, Guangdong, Beijing, Tianjin and Shanghai. Another 250 million yuan was allocated to support China's first economic census. A total of 920 million yuan was earmarked for trial reforms of the prison system in 14 provinces and municipalities directly under the central government. A policy of granting allowances and other benefits to families of policemen and policewomen who die on duty was introduced to promote a spirit of justice and encourage the police to work selflessly to safeguard social stability and people's personal safety. The central government also explored ways to establish an effective incentive and restraint mechanism to support and promote the establishment and improvement of mechanisms to ensure adequate funding for procuratorial, judicial and public security organs in local budgets at all levels and increase funding for them. The central government supported and participated in the work of establishing a system for responding to emergencies that involve other countries to meet the need to protect the security of Chinese institutions and citizens abroad and fight terrorism.