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The outbreak of SARS has sent a strong signal to the Chinese Government that the focus of the pro-active fiscal policy should shift from supporting economic growth to sustainable development, experts said.

Zhang Liqun, a senior researcher with the Development Research Centre under the State Council, said the pro-active fiscal policy, characterized by increasing government expenditure, mainly on investment in infrastructure projects to spur domestic consumption demand, was introduced in 1998 as a major effort to offset the negative impact of the Southeast Asian financial crisis in 1997.

The central government has so far issued a total of 660 billion yuan (US$79.5 billion) worth of long-term treasury bonds and plans to issue another 140 billion yuan (US$16.9 billion) in bonds this year.

The pro-active fiscal policy has played an important role in fuelling the country's economic development during the past five years, Zhang said.

But as the country's economy begins to heat up, the active role of government investment has begun to subside, he said.

As a result, the weakness of government investment featuring low efficiency is beginning to loom.

The pro-active fiscal policy also failed to pay sufficient attention to some key public areas such as public health, social security and environmental protection, Zhang said.

"The outbreak of SARS has helped improve the government's function and the structure of government expenditure," he said.

Governments at all levels have allocated about 10 billion yuan (US$1.2 billion) for the prevention and treatment of the disease.

The government also announced a series of tax incentives for those industries severely hit by SARS (severe acute respiratory syndrome).

These measures played an important role in curbing the spread of the disease and minimizing its negative impact on the economy, said Yuan Gangming, a senior economist with the Chinese Academy of Social Sciences.

"In the future, the State financial authorities should pay more attention to solving problems which cannot be solved by the market, including public health, social security and environmental protection, while government expenditure directed at expanding demand should be reduced," he said.

Yuan added that fears that a reduced treasury bond investment would have a negative impact on the economy were unfounded.

"Market forces have begun to impact greatly on the country's economic development," he said.

During the past five years, the ratio of State investment through treasury bond issuance to the entire fixed assets investment dropped, but the growth of the entire fixed assets investment grew steadily.

"The pro-active fiscal policy should help create a good environment for companies, especially private companies, so that market factors could play a more important role," Yuan said.

The government should try to regularize the market and improve the tax environment, he said.

New tax reform schemes such as uniform rates of income tax for domestic and foreign-funded companies and basing value-added tax levies on consumption rather than on production should be launched when the time is right, he said.

Along with the increased role of market factors, polarization has begun to deepen, Zhang said.

"Companies that perform well are becoming even better, while companies that perform poorly are becoming even worse."

The income gap between different people and different areas is also widening, he said.

"It has become an important task for the pro-active fiscal policy to solve the economic problems brought about by this polarization and to maintain social stability," he said.

Zhang Xueying, a senior economist with the State Information Centre, said: "If a country's economy developed rapidly and a majority of the country's people did not enjoy the benefits, the economic development will be badly affected."

In the coming two or three years, China's new leaders will have to give key emphasis to solving the problem of laid-off workers, the rural issue, pensions issue and the unequal income distribution, he said.

"The State should increase input for social security and raise the salaries of State employees and the incomes of laid-off workers, jobless people and the retired," he said.

The government also needs to increase financial support for rural areas and farmers. "Agriculture is the base of China's economic development," said Zhang.

The government should strictly implement the "tax-for-fees" reforms in rural areas to increase farmers' incomes and increase input to improve the work and living conditions in those areas, he said. Zhang was full of praise for the efforts of some local governments to obtain employment through financial expenditure for laid-off workers.

The three economists agreed that by necessity the country had to maintain a pro-active fiscal policy by issuing more treasury bonds in the next few years.

Maintaining the continuity and stability of the fiscal policy was crucial to China's economic development, Zhang Liqun said.

"A continuation of the pro-active fiscal policy would not pose major risks to China," he said.

No one can underestimate the country's solid development foundation formed by the reform and opening-up, the comprehensive effects of the country's efforts to expand domestic demand and the central government's ability to regulate the overall economy, he said.

Presently, government deficit accounts for about 2.7 per cent of gross domestic product (GDP), well below the 3 per cent internationally recognized alarm level.

The outstanding national debt is a far smaller concern, which accounts for 18 per cent of the GDP, as compared with the 60 per cent level which rings alarm bells.

But Zhang Peisen, a senior researcher with the Taxation Research Institute under the State Administration of Taxation, said the country could not implement the policy long-term.

An overburdening level of government debts, that could possibly be brought about by the pro-active fiscal policy, will cast a shadow over the country's future economic development, he said.

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