UPDATE 1-China targets 2011 budget deficit of 2 pct of GDP

* Targeted deficit down from 2.5 pct of GDP in 2010

* Revenue, expenditure easily outstripped targets last year

* Spending on low-income housing to rise 35 pct

* Income from resource taxes seen up 22 pct

* Local government debt to be flat, could create pressures

BEIJING/SHANGHAI, March 5 (Reuters) – China will target a
budget deficit of 900 billion yuan ($137 billion) this year, or
2.0 percent of GDP, the finance ministry said on Saturday,
aiming to continue to shrink its deficit even as it steps up
social spending.

The budgeted deficit for this year compares with an actual
gap of 1 trillion yuan in 2010, which accounted for 2.5 percent
of gross domestic product. In 2009, the deficit came in at 2.8
percent of GDP, as Beijing primed the pump of the economy
through fiscal spending.

The ministry had originally reported a deficit of about 650
billion yuan for 2010, well below its original target of 1.05
trillion yuan, but contributions to the budget stabilisation
fund and bringing forward some local government expenditures for
2011 enabled it to come in close to the original target.

In its 2011 budget, unveiled at the opening of the annual
session of parliament, the finance ministry said China’s central
and local governments would together aim for revenue growth of
8.0 percent and expenditure growth of 11.9 percent this year,
both slowing from 2010.

Last year, revenues increased 21.3 percent and expenditures
rose 17.4 percent, the ministry said, easily outstripping the
original targets of 8 percent and 11.4 percent, respectively.

Tax revenue has grown rapidly in the past few years as the
economy has boomed, and authorities intensified efforts to
collect taxes.

The ministry is looking for domestic VAT to rise 11 percent
this year to 2.3 trillion yuan, while property taxes are
expected to bring in 11 percent more than a year ago and
resource taxes are seen rising 22 percent.

SPENDING

On the expenditure side, the ministry plans to increase
spending on education, social security and employment by 14
percent, while that on low-income housing will rise 35 percent.

Spending on police and domestic surveillance will also hit
new heights, with “public security” outlays planned to reach 624
billion yuan — 23 billion yuan more than the defence budget.

While the central government’s finances are seen as being in
good shape, provincial and other local governments could
continue to face a tougher time raising the money they would
like to spend to help fuel local economic growth, analysts said.

The finance ministry said it was planning to sell 200
billion yuan in debt on behalf of local governments this year —
the same as last year.

At the same time, local governments could see income from
the sale of land use rights, which make up a large portion of
their revenue, take a hit as authorities try to cool the
property market through limits on the purchase of property for
investment purposes, analysts said.

That in turn could prompt local authorities to raise more
funds via the financing vehicles through which they have racked
up significant amounts of debt, which some experts say risks
leading to a mountain of defaults down the road.

“Two hundred billion yuan in local government debt is a
relatively moderate amount,” said an analyst with a large
securities firm in Beijing.

“If it were up to local governments, that number would be
higher, because they face more pressure than the central
government.”

(Reporting by Koh Gui Qing in Beijing and Steven Bian in
Shanghai; Writing by Jason Subler; Editing by Daniel Magnowski)