The fiscal deficit narrowed further in July, while fiscal policy remained a drag on growth at the beginning of the third quarter

Overview

The report analyzes China's fiscal revenue, expenditure, real estate-related government revenue, and broad financing conditions in July. Faster revenue growth and a marked slowdown in expenditure caused the fiscal deficit to continue narrowing, indicating that fiscal policy has not yet been significantly stepped up. Goldman Sachs expects the government to accelerate the use of existing fiscal resources over the coming months while retaining the option of additional easing if growth slows further.

Core views

Budgetary fiscal revenue growth continued to accelerate. Revenue rose 11.7% year over year in July, up from 8.7% in June; on Goldman Sachs' seasonally adjusted basis, non-annualized month-over-month growth was 3.7% in July, compared with 2.8% in June. This improvement occurred against a backdrop of declining PPI inflation and weakening economic activity growth and was mainly driven by tax revenue: year-over-year tax revenue growth increased from 10.8% in June to 13.9%, more than offsetting the shift in non-tax revenue from 2.9% growth to a 5.4% decline. The acceleration was mainly attributable to value-added tax, consumption tax, and personal income tax, while corporate income tax revenue still rose 22% year over year in July. The report also cites anecdotal evidence that some local governments facing greater fiscal pressure have recently tightened tax collection and administration, while the market is assessing the impact of new taxes related to income from offshore trusts and products issued overseas. Fiscal expenditure slowed markedly, further widening the gap with revenue growth. Budgetary fiscal expenditure rose 0.5% year over year in July, down from 4.0% in June; seasonally adjusted non-annualized month-over-month growth shifted from 2.5% in June to a 0.3% decline in July. Slower growth in spending on social security and employment, urban and rural community affairs, and energy conservation and environmental protection more than offset faster growth in spending on agriculture, forestry, and water affairs. Goldman Sachs estimates that budgetary infrastructure-related fiscal expenditure fell 3.6% year over year in July, a steeper decline than the 1.8% drop in June and broadly consistent with the widening year-over-year contraction in infrastructure investment. Real estate-related government revenue remained weak, although its year-over-year decline narrowed from June. Land sale revenue fell 27.1% year over year in July, better than the 42.1% decline in June; on a seasonally adjusted non-annualized month-over-month basis, it shifted from an 8.9% decline in June to 5.1% growth in July. Budgetary real estate-related tax revenue fell 1.1% year over year, also improving from the 12.3% decline in June. Combining the two, Goldman Sachs estimates that government revenue directly derived from the real estate sector fell 17.8% year over year in July, compared with a 31.6% decline in June. Although home prices in some major cities have shown preliminary signs of improvement, most activity indicators, including land sales, housing starts, and real estate investment, have remained weaker than market expectations this year. Given the prolonged real estate downturn, particularly weak construction activity and still-tight financing conditions for many developers, the report continues to expect full-year land sale revenue to decline by approximately 20%. Combining the general public budget and government-managed fund budget, total government revenue rose 6.9% year over year in July, up from 1.8% in June, while the year-over-year decline in total government expenditure narrowed from 12.0% to 4.4%. Goldman Sachs' seasonally adjusted effective fiscal deficit ratio as of July was -3.7% of GDP on a 3-month moving-average basis and -4.5% on a 12-month moving-average basis, compared with -3.9% and -4.7%, respectively, in June. After further incorporating additional off-budget financing channels, its augmented fiscal deficit ratio in July was -7.2% of GDP on a 3-month moving-average basis and -9.8% on a 12-month moving-average basis. The 3-month measure was unchanged from June, while the 12-month measure narrowed further from -10.2% in June. Based on this, the report concludes that fiscal policy support did not strengthen significantly in July and remained a drag on growth at the beginning of the third quarter. Policy signals have shifted toward faster implementation, but there is a lag before measures take effect. The report notes that the July Politburo meeting sent stronger easing signals; the State Council plenary meeting on August 17 called for further efforts to achieve the full-year economic and social development targets; and at an August 21 press conference, the Ministry of Finance pledged to accelerate the use of funds, intensify efforts to expand domestic demand, and strengthen supervision and guidance for regions where expenditure progress has remained slow. The Ministry of Finance also stated that it would introduce pragmatic and effective incremental policies in the second half based on macroeconomic conditions. Goldman Sachs believes that the time required for policy coordination and local implementation partly explains why fiscal support has not yet been significantly stepped up. As of the end of July, Goldman Sachs estimates that RMB7.1 trillion in government funds remains available for the rest of the year. This includes RMB5.7 trillion in unused new government bond issuance quota, accounting for 48% of the RMB11.9 trillion full-year quota; RMB800 billion in new policy-based financial instruments this year, up from RMB500 billion last year; and a year-over-year increase of more than RMB600 billion in outstanding fiscal deposits. The report expects the government to accelerate bond issuance and the expenditure of raised funds over the coming months while advancing the implementation of the new policy-based financial instruments. If the economy slows further and the full-year growth target of 4.5% to 5.0% comes under pressure, the government may still introduce additional easing. These measures may cause the fiscal impulse to gradually shift from being a drag on growth in the second quarter to a modest driver in the second half, although the transition may be slower than Goldman Sachs previously anticipated.

Analysis framework

The report first breaks down the year-over-year and seasonally adjusted month-over-month changes in budgetary fiscal revenue and expenditure, and then analyzes the contributions of tax revenue, non-tax revenue, and major expenditure components. It subsequently combines land sale revenue with real estate-related taxes to assess the impact of the property downturn on government revenue. The report then progressively incorporates the general public budget, government-managed fund budget, and additional off-budget financing channels, using the effective fiscal deficit and augmented fiscal deficit to measure the strength of fiscal support. Finally, it evaluates the path of the fiscal impulse in the second half based on the remaining bond quota, policy-based financial instruments, fiscal deposits, and recent policy statements.

Methodology notes

• Macroeconomic framework

  Augmented Fiscal Deficit (AFD)

  Goldman Sachs' proprietary measure incorporates additional off-budget financing channels beyond budgetary revenue and expenditure to provide a more comprehensive assessment of the government financing gap and the strength of fiscal policy support for economic growth.

• Quantitative/factor/portfolio theory

  Seasonal adjustment and moving averages

  The report applies Goldman Sachs' seasonal adjustments to fiscal data and examines both 3-month and 12-month moving averages to reduce interference from seasonality and monthly volatility and distinguish between short-term stability and the medium-term deficit-narrowing trend.

• Macroeconomic framework

  Fiscal impulse analysis

  The report uses the fiscal deficit and changes in it to assess the marginal boost or drag from fiscal policy on economic growth, concluding that the fiscal impulse may gradually shift from a negative impact in the second quarter to a modest positive impact in the second half.

Key data

• Budgetary fiscal revenue growthJuly 2026: +11.7% year over year and +3.7% seasonally adjusted, non-annualized month over monthThe corresponding figures for June were +8.7% year over year and +2.8% month over month.
• Tax revenue growthJuly 2026: +13.9% year over yearThe June figure was +10.8% year over year.
• Non-tax revenue growthJuly 2026: -5.4% year over yearThe June figure was +2.9% year over year.
• Corporate income tax revenue growthJuly 2026: +22% year over yearThe report states that its growth remained high.
• Budgetary fiscal expenditure growthJuly 2026: +0.5% year over year and -0.3% seasonally adjusted, non-annualized month over monthThe corresponding figures for June were +4.0% year over year and +2.5% month over month.
• Budgetary infrastructure-related fiscal expenditureJuly 2026: -3.6% year over yearThe June figure was -1.8% year over year, indicating a steeper decline.
• Land sale revenue growthJuly 2026: -27.1% year over year and +5.1% seasonally adjusted, non-annualized month over monthThe corresponding figures for June were -42.1% year over year and -8.9% month over month.
• Real estate-related tax revenue growthJuly 2026: -1.1% year over yearThe June figure was -12.3% year over year.
• Government revenue directly derived from real estateJuly 2026: -17.8% year over yearGoldman Sachs estimates that the June figure was -31.6% year over year.
• Full-year land sale revenue forecastApproximately 20% year-over-year declineBased on the prolonged real estate downturn, weak construction activity, and tight developer financing conditions.
• Total government revenue and expenditureJuly 2026: total revenue +6.9% year over year and total expenditure -4.4% year over yearThe corresponding June figures were +1.8% and -12.0%.
• Effective fiscal deficit ratioAs of July 2026, -3.7% of GDP on a 3-month moving-average basis and -4.5% on a 12-month moving-average basisThe corresponding June figures were -3.9% and -4.7%.
• Augmented fiscal deficit ratioAs of July 2026, -7.2% of GDP on a 3-month moving-average basis and -9.8% on a 12-month moving-average basisThe corresponding June figures were -7.2% and -10.2%; the short-term measure was unchanged, while the medium-term measure narrowed.
• Remaining government funding capacity for the yearRMB7.1 trillionGoldman Sachs' estimate as of the end of July 2026.
• Unused new government bond quotaRMB5.7 trillionEquivalent to 48% of the RMB11.9 trillion full-year quota.
• New policy-based financial instrumentsRMB800 billionThe previous year's figure was RMB500 billion.
• Increase in outstanding fiscal depositsYear-over-year increase of more than RMB600 billionThis constitutes part of the government funds available for the remainder of the year.
• Full-year economic growth target4.5%-5.0%If this target comes under pressure due to a further growth slowdown, the report believes the likelihood of additional easing will increase.

Impact & implications

The report believes that strong revenue, weak expenditure, and a narrowing augmented fiscal deficit in July collectively indicate that fiscal policy has not yet been significantly stepped up and therefore continued to drag on economic growth at the beginning of the third quarter. As government bond issuance and fund utilization accelerate and the RMB800 billion in policy-based financial instruments is implemented, the fiscal impulse is expected to shift to modest support in the second half. However, policy coordination, local implementation, and the pace of expenditure mean that this transition may be more gradual than previously expected.

Risks

• The prolonged real estate downturn, particularly weak construction activity and still-tight developer financing conditions, may continue to weigh on land sale revenue.
• Policy coordination and local implementation require time, and the pace of fiscal fund deployment and improvement in the fiscal impulse may be slower than previously expected.
• If economic growth slows further, the full-year growth target of 4.5%-5.0% may come under pressure.

What to watch

• The pace of government bond issuance and actual expenditure of raised funds over the coming months.
• The implementation pace of the RMB800 billion in new policy-based financial instruments.
• Improvement in implementation among regions where fiscal expenditure has remained slow following strengthened supervision and guidance.
• Changes in land sales, housing starts, real estate investment, and land sale revenue.
• Whether the Ministry of Finance introduces incremental policies for the second half if growth continues to slow.