China’s budget deficit has reached a record level in the first five months of the year. That’s because the government spent more money fighting coronavirus outbreaks in parts of the country.

Taxes were also cut to support the economy during the strict lockdowns in the major business and port city of Shanghai, among other things, causing revenues to fall.

Government revenues from January to May amounted to 10.9 trillion yuan or about 1.5 trillion euros. Revenues were more than exceeded by expenditures of 13.8 trillion yuan (nearly 2 trillion euros). The deficit of 2.9 trillion yuan (about 400 billion euros) is more than 40 percent larger than at the start of the corona pandemic in 2020. Last year there was still a small budget surplus in the same period.

In recent months, China has struggled with the largest coronavirus outbreak in the country in more than two years. As a result, the government had to spend more money to maintain the lockdowns in cities such as Beijing and Shanghai and to provide extra support for health care. The drop in revenues and higher spending will force local governments to either further increase their already hefty debt or accept weaker economic growth.

The Chinese government aims to grow the economy by 5.5 percent this year. That is the lowest percentage in more than thirty years. Last year the economy grew by 8.1 percent. Many economists at major banks believe that China will not meet the target due to strict corona policy and have already lowered their growth forecasts for the world’s second-largest economy.

As the Chinese real estate market also shows little sign of improvement, the decline in real estate income will also continue to weigh on government finances. Government revenues from land sales fell nearly 29 percent year-on-year in the first five months. Deed taxes, which are paid when real estate is bought or sold, fell more than 28 percent over the period. Tax revenues from car purchases also fell by almost 29 percent due to weak consumer spending.