March 5 (Bloomberg) -- China will scrap agricultural taxes and boost spending on rural infrastructure and education, Premier Wen Jiabao said, moves aimed at narrowing an income divide that threatens social stability in the world's fastest- growing major economy.

China will increase agricultural spending by 14.2 percent, or 42.2 billion yuan, to 339.7 billion yuan ($42.3 billion), Wen said in his annual work report to China's parliament today. He set an economic growth target of 8 percent for 2006 and said the government will seek to cap inflation at 3 percent.

China's economy grew 9.9 percent last year to overtake the U.K. as the world's fourth largest, powered by record exports and investment in manufacturing. Average incomes in rural areas, where three-fifths of China's 1.3 billion people live, are a third of those in towns and cities and growing more slowly.

``We need to resolutely work to reorient investments by shifting the government's priority in infrastructure investment to the countryside,'' Wen said.

The changes announced included the scrapping of China's agricultural tax, which Wen said had been collected by the nation for 2600 years. The reform of rural taxes and fees has benefited farmers by eliminating 33.6 billion yuan of agricultural taxes and over 7 billion yuan in charges, he said. Starting this year, the government will earmark 103 billion yuan annually to township governments to meet the needs for rural compulsory education.

`Epoch-Making Significance'

``This is a change of epoch-making significance,'' Wen said.

The government will increase agricultural subsidies and lending, spend more on agricultural projects, maintain minimum grain prices and spend 103 billion yuan a year on rural education, Wen said.

China's economic growth has averaged 9.6 percent annually for the past 25 years. The rural-urban income gap has doubled since the nation began adopting pro-market policies in the late 1970s. Purchases of consumer goods by rural residents fell to 32.9 percent of total consumption last year, from 65.7 percent in 1980, according to government statistics.

The per capital disposable income of urban residents is expected to rise by 6 percent in 2006, Ma Kai, chairman of the National Development and Reform Commission, said in his work report today. Rural income per capita last year rose 6.2 percent from a year ago to 3,255 yuan. China aims to create 9 million new jobs for urban residents and keeping the urban unemployment rate at 4.6 percent, Ma said.

Protests

China witnessed 87,000 protests involving more than 100 people last year -- more than 200 per day, according to the Ministry of Public Security in Beijing. The number rose from 74,000 the previous year and 10,000 in 1994, many fueled by anger over pollution or the seizure of farmland for development.

China abolished the national agricultural tax on Jan. 1, aiming to lessen the financial burden on farmers. The nation has 200 million people living on less than $1 a day, according to World Bank 2004 estimates.

``Developing China's rural areas is crucial to the nation's future,'' said Ip Kwok Him, a delegate to the congress and vice chairman of the Democratic Alliance for the Betterment and Progress of Hong Kong, a political party in the city.

China's government last month unveiled a package of tax cuts, spending plans and new laws under the slogan of a ``new socialist countryside,'' the centerpiece of President Hu and Premier Wen's efforts to close the income divide.

The government plans to divert more than 100 billion yuan of revenue previously earmarked for urban projects to schools, irrigation and medical services in rural areas this year.

The ruling Communist Party hopes to ``boost rural productivity, improve infrastructure construction, promote social development and deepen democracy in the countryside as well as increase the living standards of farmers,'' the official Xinhua News Agency said March 3, citing Chen Xiwen, deputy director of the Office of the Central Financial Work Leading Group.

To contact the reporter for this story: Allen T. Cheng in Beijing at acheng13@bloomberg.net.

Last Updated: March 4, 2006 21:53 EST