If anyone doubts that Premier Wen Jiabao is going to run China's economy very differently from his predecessor, Zhu Rongji, just look at the budget.
One of Mr Zhu's less helpful legacies was a huge government budget deficit, financed by a rapid run-up in government debt. Another was a fiscal system that forces local governments to pick up two-thirds of all public expenditure, while giving them less than half of all public revenue. This system has bankrupted local governments and forced them into frantic property speculation, and the imposition of illegal taxes and fees on farmers, to make ends meet.
Mr Wen has already announced a firm resolve to cut the deficit, and in this he will almost certainly succeed. Bailing out bankrupt local governments, however, will be a tougher task.
In the five years before Mr Zhu became premier, (1993-97), China's budget deficit averaged 1.8 per cent of gross domestic product. During the five years of his premiership, it averaged nearly double that, 3.4 per cent of GDP, and government debt soared from 7 per cent to 24 per cent of GDP.
This was not mere profligacy. Mr Zhu had a lot of difficult problems to deal with - a costly restructuring of state enterprises, a sick financial system and an economy left reeling after the 1997-98 Asian financial crisis. Lots of money had to be spent to solve them.
Moreover, the system Mr Zhu inherited disguised much public revenue and expenditure by funnelling it through state enterprises and 'off-budget' accounts. Much of the increase in the budget deficit during his tenure was simply a matter of bringing these hidden costs into the light. By forcing the government to recognise these costs and financing them with explicit debt, on which interest must be paid, Mr Zhu made Beijing's fiscal system much more accountable.
But he also made it much more vulnerable. The debt explosion was harmless because inflation stayed around zero and the government enjoyed very low interest rates, often less then 3 per cent. An increase in inflation and interest rates, however, could quickly impose crippling debt-service costs on the government. Inflation is rising, so the risk is real.
