REPORT ON THE IMPLEMENTATION OF CENTRAL AND LOCAL BUDGETS FOR 2011 AND ON DRAFT

CENTRAL AND LOCAL BUDGETS FOR 2012

Fifth Session of the Eleventh National People s Congress March 5, 2012

Ministry of Finance

The official version of this report will be released by Xinhua News Agency.

Fellow Deputies,

The Ministry of Finance has been entrusted by the State Council to submit this report

on the implementation of central and local budgets for 2011 and on draft central and local

budgets for 2012 to the Fifth Session of the Eleventh National People's Congress (NPC)

for your deliberation and approval and for comments and suggestions from members of

the National Committee of the Chinese People's Political Consultative Conference

(CPPCC).

I. IMPLEMENTATION OF CENTRAL AND

LOCAL BUDGETS FOR 2011

In 2011, under the firm leadership of the Communist Party of China (CPC), the people

of all the country's ethnic groups worked diligently with one heart and one mind. All

localities and government departments comprehensively carried out decisions and

arrangements of the central leadership, conscientiously implemented relevant resolutions

of the Fourth Session of the Eleventh NPC, firmly grasped the theme of scientific

development and the main thread of accelerating the transformation of the pattern of

economic development, and strengthened and improved macro-control. As a result, the

economy developed in the direction anticipated through macro-control, living standards

constantly improved, reform and opening up continued to deepen, and the Twelfth

Five-Year Plan got off to a good start. On this foundation, continued progress was made in

fiscal development and reforms, and government budgets were satisfactorily implemented.

1. Implementation of Public Finance Budgets

National revenue totaled 10.374001 trillion yuan, an increase of 24.8% over 2010

(here and below). Adding the 150 billion yuan from the central budget stabilization fund,

utilized revenue totaled 10.524001 trillion yuan. National expenditure amounted to

10.892967 trillion yuan, up 21.2%. Adding the 289.2 billion yuan used to replenish the

central budget stabilization fund and the 191.834 billion yuan of local government

expenditure carried forward to 2012, national expenditure came to 11.374001 trillion yuan.

Total national expenditure therefore exceeded total national revenue by 850 billion yuan.

Breaking them down, central government revenue amounted to 5.l30615 trillion yuan,

111.9% of the budgeted figure and an increase of 20.8%. The central budget stabilization

fund contributed 150 billion yuan, bringing the total revenue used by the central

government to 5.280615 trillion yuan. Central government expenditure amounted to

5.641415 trillion yuan, 103.8% of the budgeted figure and an increase of 16.7%. This

consists of 1.651419 trillion yuan of central government spending, up 3.3%, and 3.989996

trillion yuan in tax rebates and transfer payments to local governments, an increase of

23.4%. Adding the 289.2 billion yuan used to replenish the central budget stabilization

fund, central government expenditure totaled 5.930615 trillion yuan. Total expenditure

exceeded total revenue, leaving a deficit of 650 billion yuan, 50 billion less than the

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budgeted figure. The outstanding balance on government bonds in the central budget was

7.204451 trillion yuan at the end of2011, which was under the budgeted limit of7.770835

trillion yuan for the year.

Billions of yuan

6,000

5,000

4,000

3,000

5,280.615

2,000

1,000

Figure 1

Balance of Central Government Finances in 2011

Central government deficit (650)

1~~~~~~ Contribution from the central . budget stabilization fund

Revenue

(150)

5,930.615

Central government revenue (5,130.615)

"'-:-'--':-:-7-'-"'-:-.,-,-., Payment into the central budget stabilization fund

(289.2)

Expenditure

Tax rebates and transfer payments to local governments

(3,989.996)

Central government spending (1,651.419)

Revenue collected by local governments came to 5.243386 trillion yuan. Adding the

3.989996 trillion yuan in tax rebates and transfer payments from the central government,

local government revenue totaled 9.233382 trillion yuan, an increase of 26.6%. Local

government expenditure amounted to 9.241548 trillion yuan, up 25.1%. Adding the

191.834 billion yuan carried forward to 2012, local government expenditure totaled

9.433382 trillion yuan. Total expenditure exceeded total revenue by 200 billion yuan.

Billions of yuan

10,000

9,000

8,000

7,000

6,000

5,000 9,233.382

4,000

3,000

2,000

1,000

Figure 2

Balance of Local Government Finances in 2011

Revenue

Local government deficit (200)

Centra! government tax rebates and transfer payments

(3,989.996)

9,433.382

Revenue collected by local governments

(5,243.386)

2

Expenditure

Local government spending carried forward to

2012 (191.834)

Local government spending (9,241.548)

1) Implementation of main items in the central budget

(1) Main revenue items and use 0.1 surplus revenue

On the whole, the revenue situation was good in 2011, which reflected factors

including steady and robust economic growth, good corporate performance, price

increases, improved tax collection and administration, and the placement of past

off-budget funds under budgetary management. Central government revenue exceeded the

budgeted figure by 544.6 billion yuan, mainly because revenue projections in early 2011

were based on calculations using relevant targets for economic and social development. As

it turned out, most economic indicators surpassed forecasts in the course of implementing

the budget, and consequently tax revenue exceeded the budgeted figure. Specifically,

imports greatly exceeded the figure projected at the start of the year, up 24.9%, and

revenue from import taxes surpassed the budgeted figure by 272.9 billion yuan. The value

added of large industrial enterprises increased by 13.9%; fixed asset investment, 23.6%;

retail sales of consumer goods, 17.1 %; the consumer price index, 5.4%; the output

producer price index (PPI), 6%; and the input PPI, 9.1 %. All of these increases exceeded

forecasts at the beginning of the year, and revenue from domestic value-added tax (VAT)

and excise tax surpassed the budgeted figure by 114.3 billion yuan. Profits of large

industrial enterprises nationwide rose 25.4%, higher than projected early last year, and

corporate income tax revenue exceeded the budgeted figure by 164.2 billion yuan. (Export

tax rebates surpassed the budgeted figure by 120 billion yuan, which resulted in a decrease

in revenue by the same amount.)

Main revenue items

Domestic VAT revenue was 1.827739 trillion yuan, 104% of the budgeted figure;

domestic excise tax revenue, 693.593 billion yuan, 106.7% of the budgeted figure; receipts

from VAT and excise tax on imports, 1.356026 trillion yuan, 120.9% of the budgeted

figure; revenue from customs duties, 255.91 billion yuan, 117.9% of the budgeted figure;

corporate income tax revenue, 1.002181 trillion yuan, 119.6% of the budgeted figure;

individual income tax revenue, 363.306 billion yuan, 116.4% of the budgeted figure; VAT

and excise tax rebates on exports, 920.474 billion yuan, 115% of the budgeted figure; and

non-tax receipts, 267.695 billion yuan, 128.7% of the budgeted figure.

Use of surplus revenue

In accordance with relevant laws and regulations as well as the relevant resolution of

the Fourth Session of the Eleventh NPC, of the 544.6 billion yuan in central government

surplus revenue, we disbursed 94.4 billion yuan to increase tax rebates and general

transfer payments to local governments, 30 billion yuan to increase education spending,

7.6 billion yuan to increase science and technology spending, 16 billion yuan to increase

funding for low-income housing projects, 62.1 billion yuan to increase expenditure on

road construction and fuel subsidies for certain people with financial difficulties and some

public service industries, 20.7 billion yuan to increase one-off living allowances to poor

people, 50 billion yuan to reduce the central government deficit, and 263.8 billion yuan to

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replenish the central budget stabilization fund for budgetary purposes next year. The State

Council has reported on the use of central government surplus revenue in 2011 to the

twenty-fourth meeting of the Standing Committee of the Eleventh NPC.

(2) Main expenditure items

In accordance with the decisions and arrangements of the central leadership, and

following deliberation and approval by the NPC, the central government further increased

investment in agriculture, education, medical and health care, social security, employment,

low-income housing, culture, and science and technology, thereby ensuring spending on

key items.

Education spending reached 324.86 billion yuan, 109.6% of the budgeted figure and

an increase of 27.5%. This figure consists of 99.905 billion yuan of central government

spending and 224.955 billion yuan in transfer payments to local governments. We spent

10.13 billion yuan to support the development of rural preschool education in the central

and western regions and ethnic minority areas. A total of 85.91 billion yuan was used to

improve the mechanism for guaranteeing the costs of rural compulsory education.

Benchmark public funding per student per year for rural primary and secondary schools

was increased by 100 yuan; all of the country's rural compulsory education students were

exempted fTom tuition and miscellaneous fees and supplied with free textbooks; 12.28

million students living in school dormitories from poor families received financial

assistance; and 26 million students received subsidies for nutritious meals. We used

18.681 billion yuan to implement the plan for upgrading weak rural schools providing

compulsory education. A total of 7.7 billion yuan was disbursed to exempt 29 million

urban compulsory education students from tuition and miscellaneous fees and help 11.67

million children of rural migrant workers to receive compulsory education in cities.

Altogether 13.398 billion yuan was spent to strengthen vocational education infrastructure

and exempt 3.95 million secondary vocational school students who are from poor families

or studying agriculture-related majors from tuition. We appropriated 31.119 billion yuan to

improve the policy system for providing financial aid to students from poor families,

which benefited roughly 18.67 million students. We also spent 109.054 billion yuan to

support the development of higher education.

Spending on science and technology came to 203.406 billion yuan, 104.6% of the

budgeted figure and a 17.7% increase. This figure consists of 194.214 billion yuan of

central government spending and 9.192 billion yuan in transfer payments to local

governments. We spent 43.5 billion yuan to implement major state science and technology

programs, 29.48 billion yuan to support Program 973 and other basic research, and 99.77

billion yuan to strengthen applied technology research. We started full-scale independent

research and development (R&D) on major scientific research equipment to raise the

country's level of R&D in this area. We strengthened scientific and technological

infrastructure in localities to improve their research conditions.

Expenditure on culture, sports, and media totaled 41.588 billion yuan, 111.1 % of the

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budgeted figure and an increase of 31.6%. This figure consists of 18.872 billion yuan of

central government spending and 22.716 billion yuan in transfer payments to local

governments. We supported free admission to 44,751 museums, memorial halls, and other

public cultural facilities, and continued with efforts to extend radio and television

reception and develop other key cultural programs that benefit the people. We

strengthened protection of key cultural artifacts, major cultural and historical sites, cultural

resources related to the early history of the CPC, and intangible cultural heritage, and

increased the international broadcasting capability of key media. We also deepened reform

of the cultural administration system, and stimulated development of the culture industry.

Spending on medical and health care amounted to 174.778 billion yuan, 101.2% of

the budgeted figure and an increase of 17.7%. This figure consists of 7.132 billion yuan of

central government spending and 167.646 billion yuan in transfer payments to local

governments. We allocated 76.655 billion yuan to increase government subsidies for the

new rural cooperative medical care system and basic medical insurance for non-working

urban residents from 120 yuan to 200 yuan per person per year. We spent 35.22 billion

yuan in subsidies to fully implement the national system for basic drugs; deepen the

comprehensive reform of community-based medical and health care institutions and clear

their debts; raise per capita spending on basic public health services for urban and rural

residents from 15 yuan to 25 yuan each year; and carry out major public health service

programs. We disbursed 14.999 billion yuan to reform systems and mechanisms for

managing public hospitals and help medical and health care institutions to improve their

services. We also spent 11.483 billion yuan to increase medical assistance in both urban

and rural areas.

Spending on social security and employment reached 471.577 billion yuan, 106.8% of

the budgeted figure and an increase of 23.9%. This figure consists of 50.248 billion yuan

of central government spending and 421.329 billion yuan in transfer payments to local

governments. We allocated 19.6 billion yuan in subsidies to extend the new old-age

insurance for rural and urban residents to over 60% of the country and provide pension

benefits for participants aged 60 and over. We provided living allowances totaling 31.1

billion yuan to more than 86 million people with financial difficulties, including urban and

rural recipients of subsistence allowances as well as childless and infirm rural residents

receiving guarantees of food, clothing, medical care, housing, and burial expenses. We

provided 184.69 billion yuan in subsidies to the basic retirement pension fund for

enterprise employees to support efforts to increase basic pensions of enterprise retirees,

with monthly benefits reaching over 1,500 yuan per person on average; to improve the

overall planning system for basic retirement pension funds of enterprise workers at the

provincial level; and extend coverage to uninsured retirees of collectively owned

enterprises. A total of 79.74 billion yuan in subsidies was used to put in place a

mechanism to raise social assistance and social security benefits when prices rise, to raise

average monthly subsistence allowances for urban and rural recipients from 251 and 117

5

yuan to 278 and 135 yuan respectively, to increase subsistence allowances for orphans, to

provide more subsidies to help beggars and the homeless, and to support development of a

social security system and a service system for people with disabilities. We spent 23.688

billion yuan to provide subsidies and living allowances to entitled groups and increase

subsidy and allowance standards as needed, and 8.64 billion yuan to ensure basic living

conditions of disaster victims. We supported policy-backed closures and bankruptcies of

state-owned enterprises (SOEs) and made proper arrangements for their laid-off workers.

We also disbursed 41.384 billion yuan to expand fiscal and tax policies to encourage and

support business startups, implement various policies to support employment, and increase

subsidies to help pay interest on guaranteed small loans.

Spending on guaranteeing housing was 172.063 billion yuan, 133.1 % of the budgeted

figure and an increase of 52.8%. This figure consists of 32.882 billion yuan of central

government spending and 139.181 billion yuan in transfer payments to local governments.

Spending to accelerate the construction of low-income housing projects was 143.257

billion yuan, and adding the 28 billion yuan carried over from allocations for previous

years, total spending reached 171.257 billion yuan.

Spending on agriculture, forestry, and water conservancy amounted to 478.526 billion

yuan, 104.3% of the budgeted figure and an increase of 23.3%. This figure consists of

41.657 billion yuan of central government spending and 436.869 billion yuan in transfer

payments to local governments. We spent 139.878 billion yuan to strengthen agricultural

and rural infrastructure. With this money, we built small irrigation and water conservancy

facilities in 1,250 key counties, assisted 1,100 counties in preventing and responding to

geological disasters due to mountain torrents, completed ahead of schedule all tasks of

reinforcing dilapidated key small reservoirs, and harnessed 1,239 small and medium-sized

rivers. We used 135.13 billion yuan to improve the dynamic mechanism for adjusting

general subsidies for agricultural supplies and the policy of subsidies to help pay

agricultural insurance premiums, consolidate the policy of subsidies for superior crop

varieties, and further expand the scope of subsidies for the purchase of agricultural

machinery. We allocated 16.3 billion yuan to promote wider application of agricultural

technology and stimulate development of modern agriculture and specialized farmer

cooperatives. We disbursed 23.012 billion yuan to upgrade 1.619 million hectares oflow­

and medium-yield cropland to high-yield standards, 13.6 billion yuan to establish a

subsidy and award mechanism for grassland ecological conservation in major herding

provincial-level administrative areas, and 31.41 billion yuan in subsidies to put in place a

comprehensive fiscal policy system for poverty alleviation and support poverty relief

efforts in contiguous areas with particular difficulties. We also earmarked 18.3 billion

yuan to support the building of 340,000 village-level public works projects, the launching

of which were determined by villagers themselves, and carry forward trials of paying off

public service debts of villages and townships in an orderly manner.

Spending on energy conservation and environmental protection came to 162.303

6

billion yuan, 102% of the budgeted figure and an increase of 12.5%. This figure consists

of 7.419 billion yuan of central government spending and 154.884 billion yuan in transfer

payments to local governments. A total of 94.4 billion yuan was spent to conserve energy

and reduce emissions. With these funds, we strengthened development of key energy

conservation projects capable of saving the equivalent of more than 22 million tons of

standard coal each year. We redoubled efforts to implement the project for promoting

energy-efficient products for the benefit of the people, putting into use over 5 million

kilowatts of energy-efficient electric motors, more than 16 million highly efficient and

energy-conserving air-conditioners, and 160 million energy-efficient lighting products,

and shut down backward production facilities with a total capacity of 150 million tons at

cement plants, 31.22 million tons at iron foundries, and 19.25 million tons at coke works.

We carried out major emissions reduction projects, including those to prevent and control

water pollution in the watersheds of the Huai, Hai, Liao, and Songhua rivers and Tai, Chao,

and Dianchi lakes; constructed 20,000 kilometers of sewer lines to complement urban

sewage treatment facilities; and conducted environmental improvement demonstrations in

about 10,000 contiguous villages across 17 provincial-level administrative areas. We spent

47.456 billion yuan to implement the second phase of the project for protecting virgin

forest resources and consolidate achievements already made in returning farmland to

forests and grazing land to grasslands. We spent 13.943 billion yuan to carry forward

demonstration projects on the use of new energy in buildings, use biomass energy

comprehensively, carry out demonstrations on the use of renewable energy in buildings,

and promote the development of a circular economy.

Expenditure on transportation totaled 329.859 billion yuan, 115.1% of the budgeted

figure and an increase of 26.9%. This figure consists of 33.111 billion yuan of central

government spending and 296.748 billion yuan in transfer payments to local governments.

We spent 219.921 billion yuan to strengthen public transportation infrastructure, upgrade

or expand 20,000 kilometers of national and provincial highways, improve 1,091

kilometers of inland waterways, and build or upgrade 190,000 kilometers of rural roads.

We used 64.148 billion yuan to provide fuel subsidies for urban public transportation and

other public service industries. We also provided 26 billion yuan in subsidies to support

local governments in phasing out tolls on government-financed Grade II highways.

Expenditure on resource exploration, electricity, and information came to 82.696

billion yuan, 111 % of the budgeted figure. This consists of 46.412 billion yuan of central

government spending and 36.284 billion yuan in transfer payments to local governments.

We used 42.975 billion yuan to strengthen resource exploration, electricity, and

information infrastructure. We spent 3.5 billion yuan to support technology R&D and

demonstrations for industrial application in strategic emerging industries, carry out major

industrial innovation and development projects, and subsidize R&D on high-end

equipment manufacturing. We also allocated 10.296 billion yuan to promote the

development of small and medium-sized enterprises in these areas.

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Expenditure on stockpiling grain, edible oils, and other materials totaled 89.062

billion yuan, 78.8% of the budgeted figure and a decrease of 2.4%. The difference

between the actual and budgeted amounts was mainly due to fewer actual subsidies being

granted to pay interest on stockpiling grain. This total consists of 54.008 billion yuan of

central government spending and 35.054 billion yuan in transfer payments to local

governments. We spent 32.033 billion yuan to completely eliminate local contributions to

grain risk funds in major grain-producing areas and cover the shortfalls thus incurred, and

to give direct subsidies to grain growers. We used 45.023 billion yuan to steadily raise the

minimum purchase prices of wheat and rice, implement the policy for temporarily

purchasing and stockpiling canola seeds and soybeans, and increase reserves of petroleum,

nonferrous metals, and other important commodities.

National defense spending was 583.597 billion yuan, 100% of the budgeted figure and

an increase of 12.6%. This figure consists of 582.962 billion yuan of central government

spending and 635 million yuan in transfer payments to local governments. These funds

were used to improve living conditions and benefits of officers and enlisted personnel,

strengthen informationization of the military, modernize equipment and supporting

facilities, and improve the armed forces' ability to respond to emergencies and disasters.

Spending on public security amounted to 169.547 billion yuan, 104.8% of the

budgeted figure and an increase of 14.9%. This figure consists of 103.701 billion yuan of

central government spending and 65.846 billion yuan in transfer payments to local

governments. We pressed ahead with reforming the system of ensuring funding for

primary-level procuratorial, judicial, and public security departments to enhance their

service capabilities.

It should be noted that decreases in actual expenditure on stockpiling materials such

as grain and edible oils and on other items led to a surplus of 25.4 billion yuan in central

government expenditure in 2011, which has been transferred to the central budget

stabilization fund.

(3) Central government tax rebates and transfer payments to local governments

Central government tax rebates and transfer payments to local governments totaled

3.989996 trillion yuan, 106.9% of the budgeted figure and an increase of 23.4%. This

figure consists of 507.838 billion yuan in tax rebates, an increase of 1.7%; 1.829993

trillion yuan in general transfer payments, up 38.3%; and 1.652165 trillion yuan in special

transfer payments, a 17.1 % increase. General transfer payments for making basic public

services more equally available amounted to 748.681 billion yuan; for compulsory

education, 106.501 billion yuan; for basic pensions and subsistence allowances, 275.098

billion yuan; for the new rural cooperative medical care system, 77.981 billion yuan; for

the award and subsidy system for village-level public works projects, 18.471 billion yuan;

for cities once dependent on now-depleted mineral resources, 13.5 billion yuan; and for

reforming taxes and fees on refIned petroleum products, 58.1 billion yuan.

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2) Implementation of main items in local budgets

Main revenue items

Domestic VAT revenue was 598.925 billion yuan, up 15.3%; business tax revenue,

1.350405 trillion yuan, up 22.7%; corporate income tax revenue, 673.854 billion yuan, up

33.5%; individual income tax revenue, 242.103 billion yuan, up 25.2%; revenue from

urban construction and maintenance tax, 260.809 billion yuan, up 50.2%; deed transfer tax

revenue, 276.361 billion yuan, up 12.1%; and non-tax revenue, 1.134275 trillion yuan, up

43.4%.

Main expenditure items

Local governments spent 1.511706 trillion yuan on education altogether, up 27.8%;

186.423 billion yuan on science and technology, up 17.3%; 170.158 billion yuan on

culture, sports, and media, up 22.2%; 629.617 billion yuan on medical and health care, up

33.1%; 1.064141 trillion yuan on social security and employment, up 22.6%; 349.367

billion yuan on guaranteeing housing, up 75.5%; 947.349 billion yuan on agriculture,

forestry, and water conservancy, up 22.4%; 764.101 billion yuan on urban and rural

community affairs, up 27.8%; and 714.126 billion yuan on transportation, up 78.6%. The

above expenditures include appropriations of local governments using tax rebates and

transfer payments from the central government.

An analysis of the above expenditures shows that in 2011 governments at all levels

spent a total of 3.8108 trillion yuan, a 30.3% increase, in areas that have a direct bearing

on people's wellbeing, namely education, medical and health care, social security,

employment, guaranteeing adequate housing, and culture; and 3.5629 trillion yuan in areas

that are closely related to people's lives, such as agriculture, water conservancy, public

transportation, energy conservation, environmental protection, and urban and rural

community affairs. Government spending on agriculture, rural areas, and farmers totaled

2.9342 trillion yuan, up 21.2%. This figure consists of 1.0393 trillion yuan for supporting

agricultural production; 143.9 billion yuan in direct subsidies to grain growers, general

subsidies for agricultural supplies, subsidies for superior crop varieties, and subsidies for

purchasing agricultural machinery; 1.624 trillion yuan for developing rural education,

health, and other social programs; and 127 billion yuan for expenses related to stockpiling

agricultural products and associated interest payments. It should be noted that expenditure

on ensuring and improving living standards or on agriculture, rural areas, and farmers do

not constitute separate budgetary items. For ease of deliberation, we have combined all

expenditure items concerned, so there is some overlap in the statement of expenditure.

2. Implementation of Budgets for Government-managed Funds

In 2011, revenue from government-managed funds nationwide came to 4.135963

trillion yuan, up 12.4%, and expenditure from them amounted to 3.964243 trillion yuan,

up 16.8%.

1) Budget for central government-managed funds

Receipts from central government-managed funds totaled 312.593 billion yuan,

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110.6% of the budgeted figure and a decrease of 1.6%. This figure includes 64.8 billion

yuan from the railroad construction fund, 13.602 billion yuan from port development fees,

31.745 billion yuan from lottery ticket proceeds, 21.741 billion yuan from the fund for

providing ongoing aid to residents relocated to make way for the construction of large and

medium-sized reservoirs, and 10 billion yuan from the central government fund for

repaying rural power grid loans. Adding the 79.487 billion yuan carried forward from

2010, utilized revenue from central government-managed funds totaled 392.08 billion

yuan in 201l.

Expenditure from central government-managed funds totaled 310.349 billion yuan,

85.8% of the budgeted figure and an increase of 2.9%. This total consists of two parts. The

first is 215.687 billion yuan of central government spending, down 5.6%, which includes

68.292 billion yuan on railroad construction; 7.335 billion yuan on port development;

19.125 billion yuan from lottery ticket proceeds, which was spent on social welfare, sports,

education, and other public service programs; and 10.526 billion yuan from the central

government fund for repaying rural power grid loans. The second part is 94.662 billion

yuan in transfer payments to local governments, up 29.2%. A total of 81. 731 billion yuan

was carried forward to 2012 from central government-managed funds.

2) Budgets for local government-managed funds

Revenue collected by local governments from funds under their control reached

3.82337 trillion yuan, an increase of 13.8%. This figure includes 3.316624 trillion yuan

from the sale of state-owned land use rights, 85.726 billion yuan from urban infrastructure

construction fees, 31.16 billion yuan from lottery ticket proceeds, and 68.813 billion yuan

from local education surcharges. Adding the 94.662 billion yuan in transfer payments from

central government-managed funds, total revenue from local government-managed funds

was 3.918032 trillion yuan.

Expenditure from local government-managed funds totaled 3.748556 trillion yuan, an

increase of 18.4%. This includes 3.293199 trillion yuan of spending from proceeds of the

sale of state-owned land use rights, consisting of 2.362997 trillion yuan paid out as

compensation for land expropriation, housing demolition, and resident relocation; 235.106

billion yuan for developing and improving farmland, strengthening rural infrastructure,

and subsidizing farmers; 19.746 billion yuan on education; 12.035 billion yuan for

building irrigation and water conservancy facilities; 66.858 billion yuan on low-income

housing projects; and 596.457 billion yuan on urban development allocated in accordance

with the provisions of the Law on Urban Real Estate Administration. A total of 30.14

billion yuan from lottery ticket proceeds was spent on social welfare, sports, education,

and other public service programs; 74.1 04 billion yuan was used to build urban

infrastructure; and 38.651 billion yuan from local education surcharges was earmarked for

education. Surplus revenue from local government-managed funds was carried forward to

2012.

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3. Implementation of the Central Government's State Capital Operations Budget

In 2011, revenue from the state capital operations of the central government totaled

76.502 billion yuan, 90.6% of the budgeted figure and an increase of 36.9%. The

difference between the actual and budgeted amounts was mainly because sales of state

shares of enterprises amounted to less than expected. Adding the 3.559 billion yuan

carried forward from 2010, utilized revenue totaled 80.061 billion yuan.

Expenditure on the central government's state capital operations came to 76.954

billion yuan, 89.6% of the budgeted figure and an increase of 42%. The difference

between the actual and budgeted amounts was mainly due to proceeds from the sale of

state shares of enterprises being less than expected, which resulted in a corresponding

reduction in expenditure. This figure includes 49.166 billion yuan for restructuring the

state sector and industrial restructuring, 2.312 billion yuan in subsidies for reforming

central government enterprises and making them profitable, 3.5 billion yuan for fostering

major scientific and technological innovations, 3.5 billion yuan for major energy

conservation and emissions reduction projects, 2.318 billion yuan for overseas investment,

955 million yuan for strengthening production safety, 8 billion yuan for enterprise mergers

and reorganizations, 2.609 billion yuan for supporting emerging industries, and 4 billion

yuan transferred to the public finance budget and spent on social security.

4. Implementation of a Proactive Fiscal Policy

We followed a proactive fiscal policy, further consolidated and expanded upon the

success in responding to the impact of the global financial crisis, spurred steady and robust

economic development, and kept overall price levels basically stable.

We made full use of the role of fiscal and tax policies to keep overall price levels

baSically stable. We supported increases in the supply of agricultural products, stabilized

the supply of fertilizers and refined petroleum products, increased support for hog

production, strengthened regulation of the markets for reserve commodities, gave policy

support to grain and edible oil sales in designated areas, expanded imports of daily

necessities and raw materials, and thereby promoted a balance between supply and

demand. We exempted vehicles transporting fresh farm products from road tolls, reviewed

road tolls, and lowered distribution costs. We implemented all policies to grant subsidies

to low-income groups in urban and rural areas, provided fuel subsidies to certain people

facing financial difficulties and some public service industries, and lessened the impact of

rising prices on disadvantaged groups.

We raised the incomes of urban and rural residents to increase their purchasing power.

We made the distribution of national income more reasonable, expanded government

subsidies, increased subsidies to farmers, strengthened agricultural infrastructure, and

made further progress in providing financial support for alleviating poverty through

development, in order to increase rural incomes. We raised subsistence allowances for

both urban and rural recipients as well as basic pensions of enterprise retirees, extended

trials of the new old-age insurance system for rural and urban residents, and implemented

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performance-based salary systems for compulsory education teachers and workers in

public health institutions and community-based medical and health care institutions,

thereby boosting people's purchasing power. We improved policies on providing subsidies

for rural residents to purchase home appliances and subsidies for trading in old home

appliances for new ones. We supported the development of goods distribution and

improved the consumption environment.

We improved the investment structure to shore up weak links in economic and social

development. The central government used its capital construction investment mainly to

support the construction of low-income housing projects and the development of

agricultural infrastructure, particularly water conservancy facilities, and education and

health infrastructure; energy conservation, emissions reductions, ecological conservation,

and environmental protection; economic and social development in Xinjiang, Tibet, and

Tibetan ethnic areas in Qinghai, Sichuan, Yunnan, and Gansu provinces; independent

innovation; and the development of strategic emerging industries. We gave priority to

ensuring funding for key ongoing projects, and began construction on the major projects

laid out in the Twelfth Five-Year Plan in an orderly manner.

We refined policies on structural tax reductions to guide business investment and

consumer spending. We raised the individual income tax threshold on salaries from 2,000

yuan to 3,500 yuan per month and adjusted the tax rate structure to reduce the tax burden

on low- and middle-income earners. We continued to implement a preferential income tax

policy for some small businesses with low profits and initiated a series of tax relief and

exemption policies, such as raising VAT and business tax thresholds, to reduce the burden

on small and medium-sized enterprises. We put into effect lower provisional import tariffs

on more than 600 resource products, basic raw materials, and key parts and components in

2011. We continued to implement preferential tax policies to promote the large-scale

development of the western region. We rescinded, reduced or remitted 77 charges and

funds to lighten the burden on businesses and consumers.

5. Progress in Fiscal and Tax Reforms

We continued to improve the structure of transfer payments and increased general

transfer payments. We improved the mechanism for ensuring basic funds for county-level

governments, and enhanced their ability to provide public services. We carried out the

reform to place county finances directly under the management of provincial-level

governments in 1,080 counties of 27 provincial-level administrative areas. We improved

public finance budgets, made budgets for government-managed funds more detailed, and

expanded the coverage of state capital operations budgets and the scope of compiling

budgets for social insurance funds on a trial basis. We eliminated all off-budget funds and

placed all government revenues under budgetary management. We improved budget

management systems, such as departmental budgeting, centralized treasury collection and

payment, and government procurement, and carried out performance-based management

throughout the course of compiling, implementing and evaluating budgets. We devised a

12

pilot plan for replacing business tax with VAT to promote development of the service

sector. We reformed the individual income tax system. We carried out trial reforms to

collect property tax on personal homes, and adjusted the business tax policy for selling

them. We carried out a nationwide reform to calculate resource taxes on crude oil and

natural gas based on their prices, and integrated the resource tax systems on crude oil and

natural gas for domestic and overseas-funded enterprises. We increased central

government subsidies to reform collectively owned factories operated by SOEs across the

country. We supported the reform of state-owned financial institutions and improved

performance assessment systems for financial enterprises.

6. implementation of the NPC Budget Resolution

In accordance with the relevant resolution of the Fourth Session of the Eleventh NPC,

as well as the guidelines of the NPC Financial and Economic Affairs Commission, we

implemented fiscal and tax policies conducive to transforming the pattern of economic

development, worked hard to ensure funding for key areas, strictly implemented budgets,

improved the budget management system, and refined the mechanism for ensuring basic

funds for county-level governments. We made fiscal management more scientific and

meticulous, strengthened fiscal and tax legislation, carried out work related to enacting the

Law on Vehicle and Vessel Tax and revising the Law on Individual Income Tax and

Provisional Regulations on Resource Tax, and made steady progress in revising the

Budget Law and the Law on Certified Public Accountants and in asset valuation

legislation. We made public finance budgets more detailed, and continued to increase the

funds for budgetary items available at the beginning of the year. We redoubled efforts to

manage the implementation of budgetary expenditure, and implemented budgets more

quickly. We conducted inspections of the implementation of major fiscal and tax policies;

strengthened oversight of key funds related to maintaining living standards, including

those for agriculture, rural areas, farmers, and medical reform; and constantly improved

oversight mechanisms that cover all government-managed funds and all stages in the use

of public finances. We deepened efforts to bring unauthorized departmental coffers under

control, and a permanent mechanism for preventing them from recurring began to take

shape. We pushed ahead with the work on releasing central budgets and final accounts to

the public, and added subsection-level headings to publicly accessible final accounts. A

total of 92 central government departments opened to the public their budget tables,

appropriations tables, and final accounts. Public finance budgets at the provincial level

were all made accessible to the public, and work was accelerated to release budgets of

local government departments and special expenditures of primary-level governments.

Relevant departments of the central and local governments released to the public

information relating to their spending on official overseas trips, official vehicles, and

official hospitality. We standardized management of debts held by financing corporations

run by local governments, and reviewed and verified the amounts of their debts. We

responded to the NPC Standing Committee's inquiries, reported to it on budget

13

implementation, and put into effect measures to improve implementation on the basis of

its response to our report. The State Council reported relevant developments to the

Standing Committee.

In general, we successfully implemented the 2011 budgets and made further progress

in all aspects of fiscal work. This was the result of scientific decisionmaking and correct

leadership of the CPC Central Committee and the State Council; the oversight, guidance,

and strong support of the NPC and the CPPCC National Committee; the close

collaboration and diligent work of all localities and departments; and the concerted,

strenuous efforts of all ethnic groups of the Chinese nation. At the same time, we are also

keenly aware of the following difficulties and problems concerning fiscal operations and

public finance work: the structure of the tax system needs to be rationalized, and fiscal and

tax policies are not playing an adequate role in transforming the pattern of economic

development and adjusting income distribution; the system of transfer payments can be

improved further, and their structure needs to be optimized; it has become more difficult to

restructure government spending, and the task of ensuring and improving living standards

is onerous; mechanisms for local governments to borrow money and repay debts are not

sound enough, and risks must not be overlooked; and losses and waste in the area of

public finance occur from time to time, which calls for improved fiscal management, and

government funds need to be used more efficiently. We attach great importance to these

problems and will continue to take effective steps to resolve them.

II. DRAFT CENTRAL AND LOCAL BUDGETS FOR 2012

1. Current Fiscal and Economic Situations Facing China

Our country's economic development faces a more complex situation in 2012, and

there will be a significant imbalance between revenue and expenditure.

Regarding revenue, many uncertainties exist in the global economic situation,

China's economic growth will slow, growth in corporate profits will fall, structural tax

reductions will be increased, and a higher individual income tax threshold on salaries and

adjustments to the tax rate structure will both have a lingering effect on this year's revenue.

We will carry out pilot reforms of replacing business tax with VAT, raise the income

threshold on special surcharges on oil sales, and extend and expand the preferential

income tax policy for small businesses with low profits. Added to this the higher VAT and

business tax thresholds implemented last year, and the result is that revenue will fall this

year.

As for expenditure, government spending on education needs to be expanded, and

considerable increases in government investment are needed to extend coverage of the

new old-age insurance system to all eligible yet uninsured rural and urban residents, to

increase basic pensions for enterprise retirees and government subsidies to the new rural

cooperative medical care system and the basic medical insurance system for non-working

14

urban residents, and to increase investment in low-income housing projects. All these

efforts will put great pressure on expenditure.

2. General Requirements for Compiling Budgets and Doing Public Finance Work

On the basis of the central leadership's decisions and arrangements, while compiling

the 2012 budgets and doing public finance work, we will comprehensively implement the

guiding principles of the Seventeenth CPC National Congress, the third through sixth

plenary sessions of the Seventeenth Central Committee, and the Central Economic Work

Conference; take Deng Xiaoping Theory and the important thought of Three Represents as

our guide; thoroughly apply the Scientific Outlook on Development; keep in mind the

theme of scientific development and the main thread of accelerating the transformation of

the pattern of economic development; and adhere to the general principle of making

progress while maintaining stability in all aspects of our work. We need to follow a

proactive fiscal policy; deepen reform of fiscal and tax systems; improve structural tax cut

policies; adjust the distribution of national income; further optimize the structure of

government spending; increase support for agriculture, rural areas, farmers, education,

medical and health care, social security, employment, culture, low-income housing, energy

conservation, environmental protection, and underdeveloped areas; strictly limit regular

expenditures; and maintain and improve living standards. We need to adhere to the

principles of managing fiscal matters in accordance with the law, taking all factors into

consideration when making overall plans, and increasing revenue and reducing

expenditure; manage public finances in a more scientific manner; use government funds

more efficiently; push forward economic restructuring and balanced regional development;

promote steady and robust economic development; keep overall price levels basically

stable; and maintain social harmony and stability, so we can greet the coming Eighteenth

National Party Congress with outstanding achievements in economic and social

development.

In following a proactive fiscal policy, we must focus on the following areas.

First, we need to improve structural tax cut policies to reduce the burden on

businesses and consumers. We will enforce the revised Law on Individual Income Tax,

and implement the policy of raising VAT and business tax thresholds and other policies

designed to relieve the tax and fee burden on small and micro businesses. We will

implement a preferential policy to halve the income tax on small businesses with low

profits. We will carry out pilot projects to replace business tax with VAT, and steadily

extend the trials to more areas in order to spur the development of the service sector,

particularly the modern service sector. We will reduce tariffs on some imported

commodities and increase imports of energy and resource products, advanced equipment,

and key parts and components. We will expand trials of a tax on the income of logistics

enterprises after deductions, improve the policy on urban land-use tax imposed on land for

warehousing major commodities, and eliminate VAT on vegetable wholesalers and

retailers, so as to reduce the tax burden on logistics enterprises and those who produce and

15

distribute agricultural products. We will earnestly implement all other tax relief and

exemption policies in accordance with the law. We will also review and eliminate some

administrative charges on enterprises.

Second, we need to increase people s incomes to boost their purchasing power. We

will put into effect a more proactive employment policy, and implement the minimum

wage system. We will increase government subsidies to raise the incomes of urban and

rural residents, particularly those in low- and middle-income brackets; reduce people's

burden of paying for education, medical services, and housing; and increase their

purchasing power. We will support the development of goods distribution networks, and

create a good consumption environment.

Third, we need to further optimize the structure of government spending to maintain

and improve living standards. We need to maintain a large scale of government spending

so that we can increase expenditures on ensuring and improving living standards; direct

more funds toward the primary level, rural and remote areas, and groups with financial

difficulties; and more quickly develop education, medical and health care, social security,

employment, low-income housing, public culture, and other social programs. We will

optimize the structure of investments to shore up weak links in economic and social

development, strictly control new projects to prevent redundant construction, and

seriously limit administrative expenses and other regular expenditures to bring down

administrative costs.

Fourth, we need to promote economic restructuring and balanced regional

development to spur faster transformation of the pattern of economic development. We

make full use of the significant role fiscal and tax policies play in economic restructuring,

constantly increase government investment, and improve fiscal and tax systems as well as

mechanisms that are conducive to transforming the pattern of economic development. We

will increase investment in science and technology, optimize the expenditure structure in

this area, and support independent innovation and improvements in the core

competitiveness of industries. We will push forward energy conservation and emissions

reductions, and act more quickly to develop new, renewable, and clean energies. We will

establish a sound cap-and-trade policy system for pollution rights. We will extend the

policy of subsidizing and rewarding grassland ecological conservation to cover all herding

and semi-herding counties designated by the state. We will increase financial support for

small and medium-sized enterprises, provide them with tax and fee cuts and exemptions,

and encourage them to operate prudently and achieve sustained development. We will

vigorously support the development of strategic emerging industries and high-tech

industries, promote optimization and upgrading of traditional industries, and stimulate

faster development of the modern service industry. We will implement the strategy of

using major cultural projects to spur the development of the entire industry. We will put

into effect fiscal and tax policies that promote balanced regional development, and

enhance the ability of areas with financial difficulties to ensure the implementation of all

16

policies devised to improve people's lives. We will expand trials of key small green cities

and towns, and vigorously yet prudently move ahead with urbanization.

Taking all factors into consideration, governments at all levels will concentrate

financial resources to accomplish several major tasks aimed at maintaining and improving

living standards in 2012. First, we will increase education spending to ensure budgetary

expenditure on education nationwide accounts for 4% of GDP. Second, ~e will accelerate

the development of the social security system, and make the new old-age insurance system

available to all eligible rural and urban residents. Third, we will deepen reform of the

pharmaceutical and health care systems, increase government subsidies to the new rural

cooperative medical care system and basic medical insurance for non-working urban

residents, speed up trial reforms in public hospitals, and make medical services more

affordable and accessible. Fourth, we will make steady progress in building low-income

housing, begin construction on more than seven million units of housing while completing

ongoing projects, and help ease housing difficulties of low-income urban residents,

first-time workers, and rural migrant workers. Fifth, we will vigorously promote cultural

development and prosperity, and ensure that growth in government spending on cultural

development exceeds the regular revenue increase, in order to better satisfy people's

cultural needs. Sixth, we will increase policy support to strengthen agriculture, benefit

farmers, and make the countryside prosperous; support construction of irrigation and water

conservancy facilities and other working and living infrastructure in rural areas; stimulate

innovation in agricultural science and technology; and promote increases in agricultural

production and farmers' incomes as well as the prosperity of the countryside.

3. Public Finance Budgets for 2012

On the basis of the general requirements for compiling budgets as well as the targets

for economic and social development in 2012 and economic and social policies decided

upon at the Central Economic Work Conference, we have set the following major targets

for the 2012 public finance budgets: total central government revenue should reach 5.592

trillion yuan, an increase of 9% over the actual figure for 2011 (here and below). Adding

the 270 billion yuan from the central budget stabilization fund, disposable revenue for

2012 should amount to 5.862 trillion yuan. Central government expenditure should total

6.412 trillion yuan, an increase of 13.7%. This consists of 1.8519 trillion yuan incurred at

the central level, up 12.1%; 4.5101 trillion yuan paid out as tax rebates and transfer

payments to local governments, up 13%; and 50 billion yuan used as reserve funds in the

central budget, the same as the budgeted figure for 2011. Expenditure exceeds revenue in

the central budget, leaving a deficit of 550 billion yuan, down 100 billion. The ceiling for

the outstanding balance on government bonds in the central budget stands at 8.270835

trillion yuan.

17

Figure 3

Budgetary Balance of Central Government Finances for 2012 Billions of yuan

7,000

6,000

5,000

4,000

3,000 5,862

2,000

1,000

~,~~~~ Central budget deficit

Revenue

(550)

Contribution from the central budget stabilization

fund (270)

Revenue in the central budget (5,592)

6,412

Expenditure

Reserve fimds (50)

Tax rebates and transfer payments to local governments

(4,510.1)

Central government spending (1,851.9)

Based on preliminary provISIOns for the local budgets compiled by the central

government, revenue collected by local governments will amount to 5.768 trillion yuan, an

increase of 10%. Adding the 4.5101 trillion yuan in tax rebates and transfer payments from

the central government, local government revenue will total 10.2781 trillion yuan. The

central government will issue 250 billion yuan worth of treasury bonds for local

governments. Local government expenditure will amount to 10.5281 trillion yuan, up

13.9%. The 50 billion yuan increase in local government bonds to be issued this year is

based mainly on the considerations that low-income housing projects need more

investment, and ongoing public welfare projects require follow-up investment following

the standardization of debt management in financing corporations run by local

governments. Revenue and expenditure budgets of local governments are compiled by

local people's governments and subject to approval by people's congresses at their

respective levels.

Combining central and local budgets, national revenue will be 11.36 trillion yuan, up

9.5%. Including the 270 billion yuan from the central budget stabilization fund, total

available national revenue is projected to be 11.63 trillion yuan. Total national expenditure

is budgeted at 12.43 trillion yuan, up 14.1 %. Total expenditure exceeds total revenue by

800 billion yuan (including the 550 billion yuan central government deficit), 50 billion

yuan less than last year and bringing the deficit down to approximately 1.5% of GDP.

1) Main items provided for in the central budget

(1) Main revenue items

On the basis of relevant targets set forth in the plan for national economic and social

development, we have considered factors that could increase or reduce revenue due to

adjustments in fiscal and tax policies, analyzed and calculated figures for all revenue items,

18

and set the following targets for major revenue items in the 2012 central budget: revenue

from domestic VAT will amount to 2.025 trillion yuan, up 10.8%; revenue from domestic

excise tax, 770 billion yuan, up 11%; revenue from customs duties as well as VAT and

excise tax on imports, 1.7528 trillion yuan, up 8.7%; revenue from corporate income tax,

1.112 trillion yuan, up 11 %; revenue from individual income tax, 340 billion yuan, down

6.4%; VAT and excise tax rebates on exports, 995 billion yuan, up 8.1%; and non-tax

revenue, 282.6 billion yuan, up 5.6%.

(2) Main expenditure items

In compiling the central expenditure budget, we have further optimized the spending

structure. The main expenditure items are arranged as follows.

The appropriation for education is 378.132 billion yuan, an increase of 16.4%. This

consists of 102.887 billion yuan of central government spending and 275.245 billion yuan

in transfer payments to local governments. We will appropriate 15 billion yuan, up 48.1%,

in subsidies to implement a host of policies and measures for promoting the development

of preschool education, with the focus on the central and western regions and poor areas of

the eastern region. We will allocate 105.754 billion yuan to improve the mechanism for

guaranteeing funding for rural compulsory education, push forward upgrading of weak

rural compulsory education schools, implement the plan to attract exemplary teachers to

work in rural compulsory education schools and the state programs to train primary and

secondary school teachers, and promote balanced development of compulsory education.

We plan to disburse 16 billion yuan in rewards and subsidies to carry out an initiative

designed to improve the nutrition of rural students attending compulsory education

schools in contiguous areas with particular difficulties. We will earmark 8.2 billion yuan to

exempt urban students in compulsory education from tuition and miscellaneous fees, and

make compulsory education equally available to children of rural migrant workers in cities.

We will appropriate 25.68 billion yuan, up 91.7%, to further strengthen vocational

education infrastructure and phase in a system to make secondary vocational education

free of charge; 20.697 billion yuan in subsidies to improve the policy system for providing

government financial aid to students from poor families; and 135.25 billion yuan, up 24%,

to advance Project 985 and Project 211 and support the development of local colleges and

universities.

The appropriation for science and technology is 228.546 billion yuan, an increase of

12.4%. This figure consists of 223.44 billion yuan of central government spending and

5.106 billion yuan in transfer payments to local governments. We will appropriate 45.6

billion yuan to ensure the implementation of major state science and technology projects.

With a total allocation of 32.459 billion yuan, we will increase investment in the State

Natural Sciences Fund, and give impetus to capacity building in key state laboratories and

basic research institutes. We will disburse 119.39 billion yuan, an increase of 19.7%, to

support research on cutting-edge technologies, research for public benefit, and R&D on

major generic key technologies. A total of 4.12 billion yuan will be earmarked to

19

strengthen R&D on and industrial application of key industrial technologies and to help

enterprises increase their innovation capabilities. We will launch a state seed fund for

applying scientific and technological advances to spur their translation into practical

productive forces. We will guide the development of local scientific and technological

work toward the creation of regional innovation systems with distinctive local features.

We will protect intellectual property rights more effectively and promote the development

of Chinese intellectual property rights.

The appropriation for culture, sports, and media is 49.384 billion yuan, up 18.7%.

This figure consists of 20.733 billion yuan of central government spending and 28.651

billion yuan in transfer payments to local governments. We plan to allocate 14.546 billion

yuan to develop the system of public cultural services, support free admission to public

cultural facilities such as museums and public libraries, and continue to implement key

cultural proj ects that benefit the people. We will appropriate 6.124 billion yuan, up 40%,

to strengthen protection of key national cultural artifacts, major cultural and historical sites,

cultural resources related to the early history of the CPC, and intangible cultural heritage;

2.75 billion yuan, up 37.5%, to strengthen the international broadcasting capability of key

media and support efforts to take Chinese culture to a global audience; and 3.4 billion

yuan, up 70%, to support the development of the culture industry.

The appropriation for medical and health care is 203.505 billion yuan, an increase of

16.4%. This figure consists of 8.331 billion yuan of central government spending and

195.174 billion yuan in transfer payments to local governments. We plan to allocate 105

billion yuan in subsidies, up 37%, to raise government subsidies for the new rural

cooperative medical care system and basic medical insurance for non-working urban

residents to 240 yuan per person per year, and appropriately increase the proportion of

costs that are reimbursable. We will improve the national system of basic drugs, and

deepen the comprehensive reform of community-based medical and health care

institutions. We will allocate 35.8 billion yuan to improve the mechanism for ensuring

funding for delivering basic public health services to rural and urban residents, and

continue to implement basic public health programs and prevent and control major

communicable diseases such as AIDS and tuberculosis. We will accelerate trial reforms in

public hospitals, with particular focus on county-level hospitals. We will support the work

of providing medical assistance to rural and urban residents with an appropriation of

11.483 billion yuan.

The appropriation for social security and employment is 575.073 billion yuan, an

increase of 21.9%. This figure consists of 57.063 billion yuan of central government

spending and 518.01 billion yuan in transfer payments to local governments. We plan to

allocate 77.1 billion yuan in subsidies to ensure all eligible rural and urban residents are

covered by the new old-age insurance system by July 1 this year. We will earmark 217.373

billion yuan in subsidies to continue to increase basic pension benefits of enterprise

retirees and improve the overall planning system for basic retirement pension funds for

20

enterprise employees at the provincial level. We will appropriate 92.888 billion yuan to

raise subsistence allowances to a suitable level, with per capita monthly benefits to be

increased by 15 and 12 yuan for urban and rural recipients respectively, and to further

improve social assistance systems targeted at orphans, people with disabilities, vagrants,

and beggars. We will disburse 28.837 billion yuan to raise subsidies and living allowances

for entitled groups as needed, 13 billion yuan to guarantee basic living conditions of

disaster victims, and 43.917 billion yuan to increase policy support for employment.

The appropriation for guaranteeing adequate housing is 211.755 billion yuan, an

increase of 23.1 %. This figure consists of 37.44 billion yuan of central government

spending and 174.315 billion yuan in transfer payments to local governments. We will

appropriate 178.746 billion yuan, an increase of 24.8%, to build low-income housing

projects, appropriately expand the scope of dilapidated rural houses eligible for

policy-backed renovation and raise the standard of subsidies from the central government,

and steadily push forward the construction of permanent housing for nomads.

The appropriation for agriculture, forestry, and water conservancy is 549.145 billion

yuan, up 14.8%. This figure consists of 42.744 billion yuan of central government

spending and 506.401 billion yuan in transfer payments to local governments. We will

advance the construction of small irrigation and water conservancy facilities in key

counties, appropriately raise construction and subsidy standards, and intensify efforts to

harness small and medium-sized rivers, reinforce dangerously defective small reservoirs,

and prevent and control geological disasters due to mountain torrents. Altogether,

allocations for agricultural and rural infrastructure development stand at 165.446 billion

yuan. We will appropriate] 69.338 billion yuan to improve the policy on subsidies for

superior crop varieties, scale up general subsidies for agricultural supplies and subsidies

for the purchase of agricultural machinery, increase the areas and crop varieties eligible for

subsidies on agricultural insurance premiums, and further increase subsidies for

afforestation. We will earmark 10.1 billion yuan, up 53%, to increase funding for

agricultural science and technology, improve the environment for fostering innovations in

this area, develop a modern seed industry and a system for spreading agricultural

technologies in villages, translate advances in agricultural science and technology into

practical productive forces, and promote wider application of agricultural technology. We

will appropriate 29.012 billion yuan to strengthen comprehensive agricultural

development, with the focus on main grain-growing areas and major grain-producing

counties. We will fully implement the subsidy and award policy for grassland ecological

conservation with an allocation of 15.058 billion yuan. We will significantly increase

investment in comprehensive poverty relief efforts to enhance self-development

capabilities of rural poverty-stricken areas and the poor population, and 37.286 billion

yuan of special government funds will be used to support these efforts, up 18.7%. We will

also appropriate 24.8 billion yuan in subsidies to continue to implement the government

award and subsidy system for village-level public works projects, the launching of which

21

is determined by villagers themselves, and to improve the mechanism of village-level

public service projects being run by villagers and subsidized by the government.

The appropriation for energy conservation and environmental protection is 176.91

billion yuan, up 9%. This figure consists of 6.344 billion yuan of central government

spending and 170.566 billion yuan in transfer payments to local governments. We will

appropriate 106.919 billion yuan, up 13.3%, to support the following energy conservation

and emissions reduction efforts: to continue the construction of key energy conservation

projects, strengthen energy conservation in key areas, intensify the implementation of the

project for promoting energy-efficient products for the benefit of the people, retire

backward production facilities, strengthen heavy-metal pollution prevention and treatment

as well as comprehensive environmental improvement in rural areas, and continue the

construction of sewer lines to complement urban sewage treatment facilities. We will

allocate 47.456 billion yuan, the same as last year, to consolidate progress in protecting

virgin forests and returning farmland to forests and grazing land to grasslands. We will

disburse 14.1 billion yuan to accelerate the development of new, renewable, and clean

energies; give impetus to the cleaner use of energy; and vigorously support the

development of a circular economy. We will also actively address global climate change,

and support efforts to meet action targets for controlling greenhouse gas emissions.

The appropriation for transportation is 356.593 billion yuan, up 8.1%. This figure

consists of 43.465 billion yuan of central government spending and 3 13 .128 billion yuan

in transfer payments to local governments. We will appropriate 236.744 billion yuan to

improve the overall transportation capacity, and build national and provincial trunk

highways, inland waterways, integrated passenger and freight transportation hubs, and

other public transportation infrastructure. We will allocate 65.946 billion yuan to continue

providing fuel subsidies for rural and urban public transportation and other public service

industries. We also plan to disburse 26 billion yuan for subsidies to local governments to

phase out tolls on government-financed Grade II highways.

The appropriation for resource exploration, electricity, and information is 87.726

billion yuan, up 6.1 %. This figure consists of 45.06 billion yuan of central government

spending and 42.666 billion yuan in transfer payments to local governments. We will

disburse 14.659 billion yuan, up 42.4%, to promote the development of small and

medium-sized enterprises in these areas, especially small and micro businesses; 39.674

billion yuan for the construction of resource exploration, electricity, and information

infrastructure; and 7 billion yuan to continue supporting technology R&D and

demonstrations of industrial applications in strategic emerging industries.

The appropriation for stockpiling grain, edible oils, and other materials is 97.419

billion yuan, up 9.4%. This figure consists of 60.957 billion yuan of central government

spending and 36.462 billion yuan in transfer payments to local governments. We will

continue to implement the policy of direct grain subsidies, and earmark 32.03 billion yuan

for grain risk funds. We will improve systems for purchasing and stockpiling grain, cotton,

22

and other main agricultural products, steadily raise the minimum purchase prices of wheat

and rice, and allocate 51.876 billion yuan for reserves of grain, edible oils, and other

important materials.

The appropriation for national defense is 650.311 billion yuan, an increase of 11.4%.

This comprises 647.92 billion yuan of central government spending and 2.391 billion yuan

in transfer payments to local governments. We will support modernization of national

defense and the military, improve training and living conditions of service men and

women, and enhance the armed forces' capability to accomplish diverse military tasks.

The appropriation for public security is 182.664 billion yuan, up 7.7%. This figure

consists of 114.289 billion yuan of central government spending and 68.375 billion yuan

in transfer payments to local governments. We will improve the system for ensuring

funding for procuratorial, judicial, and public security departments; steadily increase

subsidies to those at the local level; and support local governments, especially those in the

central and western regions, in clearing debts incurred from building infrastructure for

their procuratorial, judicial, and public security departments, in order to make them better

able to provide public services and administration. We will improve foodstuff inspection

and testing capabilities of primary-level supervisory authorities to ensure food safety.

(3) Central government tax rebates and transfer payments to local governments

Central government tax rebates and transfer payments to local governments will

amount to 4.5101 trillion yuan, up 13%. This figure consists of 518.855 billion yuan in tax

rebates, up 2.2%; 2.252619 trillion yuan in general transfer payments, up 23.1 %; and

1.738626 trillion yuan in special transfer payments, up 5.2%. General transfer payments

aimed at making basic public services more equally accessible will reach 858.365 billion

yuan, which includes 107.5 billion yuan in awards and subsidies for implementing the

mechanism to ensure basic funding for county-level governments, 37.1 billion yuan for

priority functional ecological zones, and 27.765 billion yuan in awards to major

grain-producing counties. General transfer payments for compulsory education will be

168.032 billion yuan; for basic pension benefits and subsistence allowances, 377.438

billion yuan; for the new rural cooperative medical care system, 106.348 billion yuan; for

awards and subsidies to village-level public works projects, 25.309 billion yuan; and for

reforming taxes and fees on refined petroleum products, 78.4 billion yuan.

An analysis of the above expenditures shows that in 2012 the central government will

spend a total of 1.3848 trillion yuan, an increase of 19.8%, in areas that directly affect

people's lives, namely education, medical and health care, social security, employment,

guaranteeing adequate housing, and culture. Central government spending on agriculture,

water conservancy, public transportation, energy conservation, environmental protection,

urban and rural community affairs, and other areas that are closely related to people's

wellbeing will amount to 1. 5124 trillion yuan. Most central government tax rebates and

general transfer payments to local governments will also be used to maintain and improve

living standards. Appropriations from the central budget for agriculture, rural areas, and

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farmers will total 1.22866 trillion yuan, up 17.9%. This figure consists of 472.42 billion

yuan of expenditure on agricultural production; 162.8 billion yuan in direct subsidies to

grain growers, general subsidies for agricultural supplies, subsidies for superior crop

varieties, and subsidies for the purchase of agricultural machinery; 531.39 billion yuan to

develop rural education, health care, and other social programs; and 62.05 billion yuan for

stockpiling agricultural products and associated interest payments. A total of 402.6 billion

yuan will be appropriated for central government investment in capital construction.

Overview of the central budget stabilization fund

The fund had a balance of 87.8 billion yuan at the beginning of 2011. During budget

implementation, it was replenished with surplus revenue and unspent budgeted

expenditure, giving a total increase of 289.2 billion yuan. The outstanding balance of the

fund stood at 377 billion yuan at the end of last year. After the transfer of 270 billion yuan

to the budget at the start of2012, 107 billion yuan remains.

2) Main items provided for in local budgets

Main revenue items

Revenue from domestic VAT will reach 664 billion yuan, up 10.9%; from business tax,

1.482 trillion yuan, up 9.7%; from corporate income tax, 755 billion yuan, up 12%; from

individual income tax, 226.7 billion yuan, down 6.4%; from urban construction and

maintenance tax, 292 billion yuan, up 12%; from deed transfer tax, 305 billion yuan, up

10.4%; and non-tax revenue, 1.2485 trillion yuan, up 10.1 %.

Main expenditure items

The appropriation for education is 1.790024 trillion yuan, up 18.4%; for science and

technology, 211.03 billion yuan, up 13.2%; for culture, sports and media, 197.15 billion

yuan, up 15.9%; for medical and health care, 726.46 billion yuan, up 15.4%; for social

security and employment, 1.236729 trillion yuan, up 16.2%; for guaranteeing adequate

housing, 402.4 billion yuan, up 15.2%; for agriculture, forestry and water conservancy,

1.081678 trillion yuan, up 14.2%; for urban and rural community affairs, 858.605 billion

yuan, up 12.4%; and for transportation, 779 billion yuan, up 9.1 %. The above

expenditures include appropriations of local governments using tax rebates and transfer

payments from the central government.

Local revenue and expenditure budgets are compiled by local people's governments

and subject to approval by people's congresses at their respective levels.

4. Budgets for Government-managed Funds

1) Budget for central government-managed funds

Revenue from central government-managed funds will total 299.035 billion yuan,

down 4.3%. This figure includes 68.04 billion yuan from the railroad construction fund,

9.2 billion yuan from port development fees, 21.835 billion yuan from the civil aviation

infrastructure development fund and airport administration and development fees, 34.92

billion yuan from lottery ticket proceeds, 23.48 billion yuan from the fund for providing

ongoing aid to residents relocated to make way for the construction of large and

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medium-sized reservoirs, and 10.5 billion yuan from the central government fund for

repaying rural power grid loans. Adding the 81.731 billion yuan of revenue carried

forward from last year, total disposable revenue from central government-managed funds

will be 380.766 billion yuan.

Expenditure from central government-managed funds will be 380.766 billion yuan, up

22.7%. This total consists of 249.733 billion yuan of central government spending, up

15.8%, and 131.033 billion yuan in transfer payments to local governments, up 38.4%.

Expenditure at the central level includes 68.04 billion yuan on railroad construction; 6.444

billion yuan on port development; 13.408 billion yuan on civil aviation infrastructure

development as well as airport administration and development; 31.951 billion yuan of

lottery ticket proceeds used to finance social welfare, sports, education, and other public

welfare programs; and 10.968 billion yuan to repay rural power grid loans through the

central government fund.

2) Budgets for local government-managed funds

Revenue collected through local government-managed funds will reach 3.180641

trillion yuan, down 16.8%. This figure includes 2.701066 trillion yuan from the sale of

state-owned land use rights (down 18.6%), 72.249 billion yuan from urban infrastructure

construction fees, 30.441 billion yuan from lottery ticket proceeds, and 77.004 billion

yuan from local education surcharges. Adding the 131.033 billion yuan in transfer

payments from central government-managed funds, revenue from local

government-managed funds will amount to 3.311674 trillion yuan.

Expenditure from local government-·managed funds will come to 3.311674 trillion

yuan, down 11.7%. This total includes 2.824105 trillion yuan from proceeds of the sale of

state-owned land use rights, of which 1.941571 trillion yuan will be spent on

compensation for land expropriation, housing demolition, and resident relocation; 153.492

billion yuan on developing and improving agricultural land, building rural infrastructure,

and subsidizing farmers; 30.594 billion yuan on education; 29.797 billion yuan on

building irrigation and water conservancy facilities; 62.489 billion yuan on low-income

housing projects; and 606.162 billion yuan on urban development. Spending from local

government-managed funds also includes 31.249 billion yuan from lottery ticket proceeds

used to finance social welfare, sports, education, and other public welfare programs;

63.744 billion yuan from urban infrastructure construction fees; and 66.599 billion yuan of

education spending from local education surcharges.

Combined revenue from funds managed by central and local governments will reach

3.479676 trillion yuan, down 15.9%. Adding the 81.731 billion yuan carried forward from

last year, available revenue from government-managed funds will total 3.561407 trillion

yuan. Expenditure from these funds will amount to 3.561407 trillion yuan, down 10.2%.

5. Budgets for State Capital Operations

1) Budget for the central government's state capital operations

In 2012, the budget for the central government's state capital operations will be

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further expanded to include enterprises affiliated to some ministries and commissions, and

more funds will be used to ensure and improve people's living standards.

Revenue from the central government's state capital operations will reach 84.4 billion

yuan, up 10.3%. This figure includes 82.3 billion yuan of profits and 2 billion yuan of

proceeds from the sale of state assets. Adding the 3.107 billion yuan carried over from last

year, available revenue from the central government's state capital operations will total

87.507 billion yuan.

Expenditure on the central government's state capital operations will be 87.507 billion

yuan, up 13.7%. Breaking it down, 8 billion yuan will be used for mergers and

reorganizations of central government enterprises, 13.3 billion yuan for restructuring the

state sector and industrial restructuring, 11 billion yuan to foster major scientific and

technological innovations, 8 billion yuan for energy conservation and emissions

reductions, 8 billion yuan to support enterprises in "going global," 22.5 billion yuan to

subsidize the reform of enterprises, 4.5 billion yuan to develop emerging industries, 2.01

billion yuan from the sale of state-owned shares of enterprises to replenish the national

social security fund, 5.197 billion yuan for other expenditures related to SOE reforms and

development, and 5 billion yuan (up 25%) to be transferred to the public finance budget

and used for social security and other areas related to ensuring people's living standards.

2) Budgets for local governments' state capital operations

Revenue from local governments' state capital operations will total 40.249 billion

yuan. This includes 20.898 billion yuan of profits, 7.62 billion yuan of dividends, 7.991

billion yuan from the transfer of state assets, and 3.602 billion yuan of other receipts from

state capital operations.

Expenditure on local governments' state capital operations will amount to 40.249

billion yuan. Included in this sum is 3.046 billion yuan for mergers and reorganizations of

enterprises, 16.698 billion yuan for restructuring the state sector and industrial

restructuring, 2.811 billion yuan for spurring scientific and technological innovations and

industrialization, 1.679 billion yuan for energy conservation and emissions reductions,

7.02 billion yuan for subsidizing the reform of enterprises, and 4.91 billion yuan for other

expenditures.

Adding up central and local governments' budgetary appropriations, total revenue

from state capital operations will be 124.649 billion yuan, and adding the 3.107 billion

yuan carried forward from last year, disposable revenue will amount to 127.756 billion

yuan. Total expenditure on state capital operations will reach 127.756 billion yuan.

Combining all budgetary appropriations for education from public finances and

government-managed funds as well as other government outlays in this area, total

government education spending will reach 2.198463 trillion yuan in 2012, which is over

4% ofGDP.

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III. ADHERING TO LAW-BASED PUBLIC FINANCE MANAGEMENT

AND MAKING MANAGEMENT MORE SCIENTIFIC

TO ENSURE SUCCESSFUL IMPLEMENTATION OF 2012 BUDGETS

1. Strengthening and Improving Macro-control Through Fiscal Policy

We will closely follow developments and changes in the economic situation, oversee

and inspect implementation of a proactive fiscal policy, and strike a balance between

maintaining steady and robust economic development, restructuring the economy, and

managing inflation expectations. We need to maintain continuity and stability in our fiscal

policy, make macro-control using fiscal policy more targeted, flexible, and

forward-looking, and stress fiscal sustainability. We need to give full play to the role of

fiscal policy in our efforts to promote economic restructuring; boost consumer spending;

support scientific and technological innovation, energy conservation, and environmental

protection; develop strategic emerging industries and the modern service industry;

promote coordination among regions and balanced urban and rural development; and

make economic development more sustainable and cost-effective. We will make good use

of the role fiscal policy plays in stabilizing prices. We will strive to ensure that grain

output remains stable and even grows, and increase the supply of major agricultural and

subsidiary products. We will strengthen the reserve and release of important commodities

and materials, and support imports of daily necessities and important raw materials. We

will develop a modern system for distributing agricultural products, reduce the tax burden

on logistics companies and those who produce and distribute farm products, improve the

road tolling policy, and effectively lower distribution costs. We will improve the

mechanism to link social aid and social security benefits with price rises, and implement

subsidy policies targeted at urban and rural subsistence allowance recipients, childless and

infirm rural residents who receive the five forms of government support, and junior

college and secondary specialized school students from poor families.

2. Deepening Reform of Fiscal and Tax Systems

We will improve the system of transfer payments by further raising the scale and

proportion of general transfer payments, eliminating and consolidating some special

transfer payments, and using transfer payments more effectively. We will improve fiscal

management systems at and below the provincial level, refine the mechanism for ensuring

basic funding for county-level governments, further balance the distribution of financial

resources at and below the provincial level, and increase the ability of county-level

governments to deliver basic public services. We will deepen reform of the budget

management system, improve public finance budgets, make budgets for

government-managed funds more standardized and transparent, expand the coverage of

budgets for state capital operations, and improve the budgeting system for social insurance

funds. We will extend the reform of preparing departmental budgets to the county level,

and introduce the system for the Treasury's centralized revenue collection and expenditure

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payments at all levels of governments and their subsidiary agencies that prepare their own

budgets. We will push ahead with the government accounting reform, and phase in a

system for reporting government financial affairs. We will act more quickly to create an

effective performance-based budget management system. We will improve the VAT

system, and continue the experiments on replacing business tax with VAT. We will refine

the excise tax system to encourage energy conservation, emissions reductions, and rational

consumption. We will continue to reform resource taxes to promote resource conservation

and environmental protection. We will study and design a plan for reforming taxes on

owning and selling homes, and steadily advance pilot reforms of the property tax. We will

reform the urban construction and maintenance tax and deepen reform of environmental

protection taxes and fees. We will continue to review and consolidate administrative

charges and government-managed funds in accordance with the principle of rectifying

taxes and eliminating fees.

3. Making Public Finance Management More Scientific and Meticulous

We need to strengthen the legal framework for managing public finances, do a good

job of revising the Budget Law and Law on Certified Public Accountants, and continue

legislative work concerning a law on the environmental protection tax, an asset valuation

law, regulations on state capital operations budgets, and other laws and administrative

regulations. We will make our budgets more detailed, further reduce the size of

expenditure budgets compiled for relevant departments and projects, and make sure funds

are available for more budgetary items at the beginning of the year. We will strengthen

management of basic expenditure budgets, promote compilation of itemized rolling

budgets, and improve the mechanism for evaluating key items before including them in

the budget. We will tighten management over the implementation of budgetary

expenditure, and make budgetary spending more timely, balanced, effective, and secure.

We will expand performance evaluation trials for budgetary expenditure, and all central

government departments, provinces, cities, and counties should, in principle, carry out

such trials. We will improve foundational work on fiscal management and its development

at the primary level.

We will strengthen efforts to manage local government debts and prevent risks. In

accordance with the principles of managing debts by type, taking different approaches to

different situations, and clearing them in a step-by-step manner, we will continue to deal

with existing debts prudently, and make clear who is responsible for repaying them. We

will continue to straighten out and standardize financing corporations run by local

governments, and resolutely prohibit governments at all levels from guaranteeing or

promising the payment of debts in any form in violation of regulations. In addition, we

need to combine short-term response measures with long-term institution building, and put

in place a sound system for managing local government debts. We will strictly control new

debts of local governments, set up a mechanism to control the scale of their debts and a

mechanism to warn when they get too large, and place debt-generated revenue and debt

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repayments under budgetary management.

We will push forward efforts to make government budgets and final accounts more

open and budgetary work more transparent. We will make more and detailed departmental

budgets and final accounts available to the public. We will release to the public

information regarding government agencies' spending on official overseas trips, official

vehicles, and official hospitality as well as their administrative overheads, and make

special expenditures of primary-level governments publicly accessible. We will exercise

strict fiscal oversight, and intensifY supervision and inspection of the implementation of

major decisions of the central leadership and the use of funds for ensuring and improving

living standards and for work related to agriculture, rural areas, and farmers in order to

ensure that all policies are put into effect.

4. Striving to Increase Revenue and Reduce Expenditure

On the basis of implementing and refining structural tax cut policies, we will

strengthen revenue collection and supervision in accordance with the law, resolutely stop

and rectifY unauthorized tax cuts and exemptions, crack down hard on tax evasion and

fraud, and strive to ensure that all taxes due are collected. We will guarantee funding for

key expenditure items; strictly control regular expenditures and spending on official

overseas trips, official vehicles, and official hospitality; tightly regulate forums,

symposiums, celebrations, and other activities as well as the construction of office

buildings and other facilities for Party and government agencies; and work earnestly to

lower administrative costs. We will encourage Party and government agencies to foster a

conservation culture. We will practice thrift in everything we do, observe strict financial

and economic discipline, economize wherever possible, and firmly oppose extravagance

and waste.

Fellow Deputies,

It is vital that we successfully implement the 2012 budgets. Under the leadership of

the Party Central Committee with Comrade Hu Jintao as General Secretary, we will hold

high the great banner of socialism with Chinese characteristics, follow the guidance of

Deng Xiaoping Theory and the important thought of Three Represents, thoroughly apply

the Scientific Outlook on Development, willingly accept the oversight of the NPC, and

listen to comments and suggestions from the CPPCC National Committee with an open

mind. We will work diligently and break new ground to ensure complete implementation

of the budgets, so we can make positive contributions to achieving all the targets for

economic and social development in 2012 and welcome with proud achievements the

coming Eighteenth National Congress of the CPC.

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