Keeping the budget on track

IF A country’s fiscal deficit hit 10% of GDP five years running, you might reasonably conclude that its public finances were parlous. So it is understandable that China has bristled at suggestions that it is veering into such territory. Officially, China is a paragon of fiscal rectitude: its annual deficits have averaged just 1.8% in the past half-decade. But the IMF, Goldman Sachs and others have come up with “augmented” estimates of nearer to a tenth of GDP, more than five times the official number.

At face value, these estimates imply that China is suffering from a budget gap—not to mention a credibility gap—of Greek proportions. Are things really that bad? Almost certainly not. The augmented figures form a clearer picture of China’s fiscal health. But they also differ from conventional measures in important ways, and so are potentially misleading.

The IMF devised the alternative concept a few years ago, to track the vast amount of spending that occurs off China’s public balance-sheet. Because the central government places tight limits on...Continue reading