Buried in China's latest government budget were some numbers that led to a surprising trend. Tax revenue is declining.
The decline means that China's central government has little money to address the country's serious economic challenges, such as housing market conflicts and nearly bankruptcy of hundreds of local governments.
Weak tax revenues also threatened further in the future, with Chinese leaders squared with President Trump and imposing a 20% tariff from China. Beijing has little reserve cash to support export industries that are driving economic growth but could be damaged by tariffs.
The decline in tax collection puts Chinese leaders in an unfamiliar position. Until the past few years, China had enjoyed robust revenues. This enjoyed infrastructure investment, rapid military accumulation and extensive industrial subsidies. Even as economic growth has slowly slowed over the past 12 years, tax revenues remained fairly stable until recently, even robbing consumer spending.
Tax revenues have fallen more than ever last year. And the only previous two declines in recent decades have been under special circumstances. In 2020, China imposed an essentially nationwide pandemic lockdown for several months, and in 2022 Shanghai endured a two-month lockdown.
There are currently several reasons for the decline in tax revenue in China. The big one is deflation, a massive drop in prices. The corporations and now the Chinese government have found that they don't have much money to pay monthly on their debts.
Since September, Chinese officials have promised several times that they actually have to do what all foreigners and Chinese economists recommend. It's about spending more money to support the troubling consumers of the country to take measures such as higher pensions, medical benefits, more unemployment insurance or restaurant vouchers. But again and again, including Sunday, they laid out an ambitious programme without offering anything beyond their extra spending.
The usual explanation of frugality comes from years of opposition from China's top leader Xi Jinping. In his 2021 speech, he warned that China should not “go too high or let Social Security go overboard.”
However, China's 2025 budget, released by the Treasury Ministry on March 5, suggests another explanation. The central government may not have the money. Despite record borrowing, it will be difficult to find the money you need to stimulate consumption.
Last year, total tax revenue fell 3.4%. That may not look like a lot. However, that is a significant difference from the economy as a whole, and according to official statistics it increased by 5% before being adjusted to deflation.
A decline in tax revenue means that China's fiscal deficit is growing. Not because of the government's additional spending to support the economy, but because there is less money coming into the till. The issue has been exacerbated over the years in local governments spreading across the central government, causing revenues to plummet from the sales of state land.
The Fitch rating calculates that overall domestic and local government revenue, including taxes and land sales, totals 29% of recent economic output in 2018. However, this year's budget represents only 21.1% of the economy in 2025.
About half of the decline comes from rapid revenues from land sales, a well-documented issue related to crashes in the housing market, while the rest is weak tax revenue, a new issue.
That would be a huge amount. If overall revenues remain in the economy over the past seven years, the Chinese government would spend another $1.5 trillion in 2025.
China announced this month that it would allow official fiscal deficit targets to rise to 4% this year after attempting to keep it close to 3% since the 2009 global financial crisis. But analysts say the true deficit is already huge.
Without borrowing, if expenditures are compared to actual income only, the Treasury budget shows a deficit equal to almost 9% of the economy. In 2018, it was only 3.2%.
“The deficit is so high and debt is rising so rapidly, so it's financially challenging,” said Jeremy Zuch, director of sovereignty ratings at Fitch.
China's biggest tax is VAT, a type of sales tax that the government collects in virtually every transaction, from rent to refrigerators. Last year, revenue from VAT was below 7.9% forecast.
The word “defl” is banned in official Chinese documents, so ministries came up with an e-musical explanation. “This decline was primarily due to the fact that producers' prices were lower than expected.”
Producer prices, which were calculated essentially as goods leave factories and farms, fell 2.3% in China last year.
Revenue from VAT began to weaken in 2018. That was when the government helped the government cut these taxes significantly for exporters and offset the impact of the tariffs that President Trump had imposed in his first term.
Since then, the cost of that tax credit has skyrocketed, with China's exports rising sharply and other economies stagnate, creating a trade surplus of nearly $1 trillion last year.
Another issue lies in the decline in pay and rising layoffs, especially late last year. Income taxes collected from individuals were 7.5% below last year's forecast, the Treasury said in its budget.
China's own sudden tariffs on imports are another major source of revenue. However, as Chinese consumers lost much of their savings in the housing market conflict, Chinese consumers have cut down on purchasing imports such as handbags and perfumes, but prices for many imports have fallen. Therefore, revenue from tariffs fell 9.2% below last year's forecast, the Treasury said.
The financial situation this year could be even worse than the budget expects. The Treasury budget repeated many of the same optimistic assumptions made last year about tax revenue and overall economic performance.
Western governments earn substantial revenues from investment profits, inherited property and taxes on real estate. However, in China, there is no tax on investment profits or inherited assets, and there is little in real estate.
The general shortage in real estate taxes lies at the root of another problem. Local governments in China are also running out of money. Until recently, they had earned up to 80% of their revenue from selling land to property developers.
However, these sales have plummeted since the housing accident began in 2021, hampering demand for new apartments and causing many developers to go bankrupt.
Local governments are responsible for most pensions, medical benefits and other social expenditures in China. The central government has been selling extra bonds to raise funds to bail out the weakest local governments. Many of them are behind in debt. The central government is calling for local governments to strengthen social spending, but new financial support is scarce due to the lack of cash itself.
And according to Jia Kang, retired research director at the Treasury and one of China's most influential voices on tax policy, the new tax will not come anytime soon. He said in an interview that public opposition to inheritance taxes is strong, but that profits from investments or taxes on real estate would damage the stock or housing market.
One factor that doesn't pose tax challenges in China is fraud or tax evasion, Jia said. The steps to check payments are incredibly detailed, he said. “It's difficult to cheat on this system.”
Siyi Zhao contributed to the research.
