Public Expenditureson Social Programs and Household Consumption in China

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.This paper shows that increasing government social expenditures can make a substantive contribution to increasing household consumption in China. The paper first undertakes an empirical study of the relationship between the savings rate and social expenditures for a panel of OECD countries and provides illustrative estimates of their implications for China. It then applies a generational accounting framework to Chinese household income survey data. This analysis suggests that a sustained 1 percent of GDP increase in public expenditures, distributed equally across education, health, and pensions, would result in a permanent increase the household consumption ratio of 1¼ percentage points of GDP.

From internal imbalances to global imbalances: a survey on the causes of China’s export-led growth

“…Chamon and Prasad (2010, p. 99) report that the top two deciles alone accounted for over half of total savings in 2005, and that these results do not change if households are sorted by an estimated measure of permanent income. In line with these findings, Baldacci et al (2010) present estimates that average propensities to consume out of lifetime income are much higher for low income households.…”

“…Blanchard and Giavazzi, 2006;Qi and Prime, 2009;Baldacci et al, 2010;Barnett and Brooks, 2010;OECD, 2010). Higher government consumption is found to have a positive impact on consumption via three channels: First, through its direct effect; second, through its mediating effect on households precautionary saving (Qi and Prime, 2009;Barnett and Brooks, 2010); and third, through income redistribution to low income households, due to their higher propensity to consume (Baldacci et al, 2010;Yang et al, 2011;Yang 2012). …”

“…According to Barnett and Brooks (2010, p. 11), "each additional yuan in government health spending boosts urban consumption by 2 yuan" due to the reduction of precautionary saving. Baldacci et al (2010), on the basis of a panel of 24 OECD countries for the period 1990-2008, estimate the impact of government social expenditures on household savings, controlling for standard explanatory variables. They find that "a 1 per cent of GDP increase in total social spending is likely to reduce household saving by 0.14-0.24 per cent of GDP" (p. 9).…”

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“…Also, pension impacts are relatively larger for urban than rural households. However, the actual impact on consumption is greater in rural regions, because of lower income levels and higher propensities to consume there (Baldacci, et al 2010). Overall, these estimates imply that a 3% of GDP increase in social sector spending would increase consumption in the PRC by US$115 billion, which is approximately 1% of the $10 trillion consumption expenditures in the US.…”

“…This re-emphasizes the point that there is plenty of room to raise social protection expenditures in a number of middleincome countries in Asia. A recent study (Baldacci, et al 2010) estimates that social expenditure reforms in the PRC would have both an "income effect" and an "insurance effect" on current consumption. The income effect reflects the increase in lifetime resources arising from transfers of education and health, while the insurance effect reflects the decrease in precautionary savings.…”