China will use fiscal policy to optimize economic structures this year, Minister of Finance Liu Kun said on March 24 at the China Development Forum 2019 in Beijing.

“While the proactive fiscal policy will moderately expand domestic demand, it will stick to the main task of supply-side structural reforms,” Liu said.

He said the world’s second-largest economy is now tackling difficulties in optimizing economic structures to achieve high-quality growth, a process in which fiscal policies play an important role.

On one hand, the country will use taxation and other fiscal policies to facilitate the clearing-up of overcapacity in more industries and the displacement of market entities of low competitiveness with vigorous ones, Liu said.

On the other hand, he said, government investment in basic research and public scientific activities will continue to increase, which could direct social capital and resources into strategic key areas.

The central government’s budget for science and technology is set at 354.3 billion yuan ($52.8 billion) this year, up 13.4 percent year-on-year, according to the ministry.

The authorities will also continue to expand infrastructure investment and optimize its structure, aiming to boost the supply of services, such as education and medical care, as well as to support the new energy vehicle industry.

Michael Spence, a professor at New York University and the winner of the 2001 Nobel Prize in economics, said at the forum that the Chinese government’s investments have supplemented the deficiency in private sector investments.

Spence said government investments will only be sustainable and reasonable when a country adopts the right policies to ensure economic growth.

Apart from facilitating supply-side structural reforms, Liu pledged this year’s plan would “notably reduce” the tax burden on manufacturers.

China has announced a plan to reduce tax and fee burdens on enterprises by nearly 2 trillion yuan this year. According to Liu, tax cuts will represent about 70 percent of the total cut, while the rest will come from reductions in social insurance contributions and administrative fees.

“The focus will be reducing the tax burden on the manufacturing sector and micro and small enterprises,” he said.

Manufacturers will see a notable decrease in their taxes, as the value-added tax cuts, which take effect on April 1, will reduce the VAT rate of manufacturing and other industries by 3 percentage points to 13 percent.

Moreover, tax reduction and exemption policies for micro and small enterprises took effect on Jan 1, benefiting more than 95 percent of all corporate taxpayers in China, Liu said.

“For the next step, we will roll out policies as soon as possible to ensure the tax and fee cuts will be put into place, and make market entities — especially small and micro enterprises — really feel the benefits,” he said.

As the tax and fee cut plan and downside pressure entail slower fiscal revenue growth this year, the country does face challenges of maintaining the balance between spending and revenue, Liu said.

However, he said that local governments raising debts in “hidden ways” — which typically involves violations of laws or rules — will be strictly forbidden to contain risks.