The changing pattern of government expenditure reflects the structural transformation of the Chinese economy and society over the reform period, in particular the transition from a planned to a market economy. From the point of view of public finances, a transition to a market economy is essentially a complex redistribution of claims to income and of responsibilities for expenditure by the state, enterprises, and households.
Under central planning, enterprises and other units performed many functions that in other economies are the responsibility of government agencies or civil associations, including households. The government determined prices, output levels, and invest- ment, issues that are left to enterprises and households in a market economy.
In the prereform period, it made little substantive difference to public finances whether an expenditure item was financed by enterprises or directly by the government. Following the separation of enterprise budgets from government budgets, the division of financing between enterprises and government assumed major importance to outcomes across a wide range of the economy, as expenditure liabilities carry responsibilities for financing them.
The reassignment of responsibilities for expenditure items during the transition period has been far from smooth. It has been deeply affected by the inability of many state enterprises to function without government subsidies. The current expenditure pattern and many of its difficulties indicate that the process of transi- tion has a long way to run (table 2.4).
Budgetary expenditure is only one of three components of government expenditure over the reform period, albeit the largest. The other two are off- budget expenditure, financed mainly from off-budget revenue, and the subsidies
Table 2.4 Composition of Government Budgetary Expenditure, 1978–2004
(percentage of government budget)
Culture, Pensions, Capital Enterprise education, and social welfare,
Year construction capital health and relief Administration Subsidies
1978 40.3 5.9 10.0 1.7 4.4 1.0
(12.5) (1.8) (3.1) (0.5) (1.4) (0.3)
1979 34.6 (1.3) 10.3 1.7 4.5 6.2
(11.0) 4.1 (3.3) (0.5) (1.4) (2.0)
1980 28.2 3.0 12.7 1.7 5.4 9.6
(7.7) (0.8) (3.5) (0.4) (1.5) (2.6)
1981 22.6 2.0 15.1 1.9 6.2 14.0
(5.3) (0.5) (3.5) (0.4) (1.5) (3.3)
1982 21.9 1.9 16.0 1.7 6.6 14.0
(5.1) (0.4) (3.7) (0.4) (1.5) (3.3)
1983 24.5 0.9 15.9 1.7 7.3 14.0
(5.8) (0.2) (3.8) (0.4) (1.7) (3.3)
1984 26.7 0.6 15.5 1.5 7.4 12.8
(6.3) (0.1) (3.7) (0.4) (1.7) (3.0)
1985 27.7 (0.2) 15.8 1.6 6.5 13.1
(6.2) 0.7 (3.5) (0.3) (1.5) (2.9)
1986 27.0 (0.1) 17.2 1.6 7.6 11.7
(5.8) 0.5 (3.7) (0.3) (1.6) (2.5)
1987 23.1 0.5 17.8 1.7 7.9 13.0
(4.4) (0.1) (3.4) (0.3) (1.5) (2.5)
1988 19.9 0.4 19.5 1.7 8.9 12.7
(3.3) (0.1) (3.3) (0.3) (1.5) (2.1)
1989 17.1 0.4 19.6 1.8 9.3 13.2
(2.8) (0.1) (3.3) (0.3) (1.5) (2.2)
1990 17.8 0.4 20.0 1.8 9.8 12.3
(3.0) (0.1) (3.3) (0.3) (1.6) (2.1)
1991 16.5 0.4 20.9 2.0 10.1 11.0
(2.6) (0.1) (3.3) (0.3) (1.6) (1.7)
1992 14.9 0.3 21.2 1.8 11.3 8.6
(2.1) (0.0) (3.0) (0.2) (1.6) (1.2)
1993 12.8 0.4 20.6 1.6 11.5 6.4
(1.7) (0.1) (2.8) (0.2) (1.5) (0.9)
1994 11.0 0.3 22.1 1.6 12.6 5.4
(1.4) (0.1) (2.7) (0.2) (1.6) (0.7)
(continued)
Table 2.4 (continued)
Culture, Pensions, Capital Enterprise education, and social welfare,
Year construction capital health and relief Administration Subsidies
1995 11.6 0.5 21.5 1.7 12.8 5.3
(1.3) (0.1) (2.5) (0.2) (1.5) (0.6)
1996 11.4 0.5 21.5 1.6 13.1 5.7
(1.3) (0.1) (2.5) (0.2) (1.5) (0.7)
1997 11.0 0.6 20.6 1.5 12.3 6.0
(1.4) (0.1) (2.6) (0.2) (1.5) (0.7)
1998 12.9 0.4 20.0 1.6 12.3 6.6
(1.8) (0.1) (2.7) (0.2) (1.7) (0.9)
1999 16.0 0.4 18.3 1.4 11.6 5.3
(2.6) (0.1) (2.9) (0.2) (1.9) (0.9)
2000 13.2 0.4 17.2 1.3 11.3 6.6
(2.3) (0.1) (3.1) (0.2) (2.0) (1.2)
2001 13.3 0.1 17.8 1.4 11.6 3.9
(2.6) (0.1) (3.5) (0.3) (2.3) (0.8)
2002 14.3 0.1 18.0 1.7 13.5 2.9
(3.0) (0.0) (3.8) (0.4) (2.8) (0.6)
2003 13.9 18.3 2.0 13.9 2.5
(2.9) 0.0 (3.8) (0.4) (2.9) (0.5)
2004 12.1 18.1 2.0 14.3 2.8
(2.5) 0.0 (3.8) (0.4) (3.0) (0.6)
Source:http://www.stats.gov.cn.
Note:Figures cover 49–66 percent of government budgetary expenditure over the reform period.
Figures in parentheses show percentage of GDP.
associated with nonperforming loans of the state-owned commercial banks refinanced by the government. The composition of these two types of expendi- tures has been different from that of budgetary expenditure. The implication is that the pattern of expenditure has depended crucially on how it was financed.
Several noteworthy features are evident from table 2.4:
• The share of capital construction fell, from more than 40 percent in 1978 to 12 percent in 2004 (from 12.5 percent to 2.5 percent of GDP). A similar trend holds for the budgetary contribution to enterprise circulating capital.
At least some of the apparent decrease reflects a shift in financing from the budget to bank loans or the off-budget account. However, part of the decrease is real and reflects the transfer of economic decision making from the government to enterprises.
• The share of culture, education, and health expenditures rose steadily between 1978 and 1994, before decreasing over the next five years. Spending as a percentage
of GDP has risen since 1995, a change that is in line with the shift in responsibility for providing social goods from enterprises and other units to the government.
• The share of expenditure accounted for by administration rose sharply, partly as a result of the method of valuation of the cost of administration. Wages and salaries account for much of this cost. A general phenomenon in transition economies is a shift in the share of national income going to salaries and wages.
This begins in the nongovernment sector, with the phasing out of centralized wage determination, a process that began in China in the mid-1980s.5 The widening wedge between government and nongovernment wages and salaries forced the government to follow suit. The increase in the cost of government administration also reflects an increase in the number of employees warranted by the increased complexity of government tasks in a market economy.
• The share of expenditure going to subsidies, mostly on goods, rose sharply in the 1980s, as the government attempted to compensate for some of the price effects of the liberalization of agricultural and other markets. The increase was followed in the 1990s by an almost equally sharp decline.
• The share of expenditure on pensions, social welfare, and relief was remarkably small, partly because social insurance, which covers about 20 percent of the labor force and cost the government 4.2 percent of GDP in 2004, is off budget.
Including this spending, total expenditure on pensions, social welfare, and relief came to 4.6 percent of GDP, a much smaller percentage than in developed market economies.
The expenditure side of the budget generally has more powerful conse- quences in combating poverty and reducing inequality than the revenue side.
The impact of government expenditure on inequality depends in particular on the magnitude of expenditure on items with a direct impact on personal income or expenditure, including how they are distributed, as well as on spending on services such as health and education, which affect individuals’ ability to partic- ipate in the economy and society. Spending categories that directly affect poverty include pensions, social welfare, subsidies on consumer goods, and off- budget expenditure on social insurance. In 2004 expenditure on these items rep- resented 13.0 percent of GDP, which is substantial though well short of the levels in developed market economies.
There are problems with both the composition of government expenditure by functional categories and its distribution across the population. Spending on education and health reveals the problems (table 2.5). These figures may be underestimates, because they do not include off-budget spending on education and health, which is of particular importance in rural areas. Furthermore, the series stops at 2003 and thus misses the substantial increase in expenditure on education and health in rural areas over the past three years. Even after taking these problems into account, public expenditure on education has been low, falling well short of the national target of 4 percent of GDP. Moreover, rural/urban discrepancies are large.
Far more striking is the very low budgetary expenditure on health, which accounts for just 2.8–3.0 percent of expenditure (0.5–0.7 percent of GDP). This level of spending is exceptionally low by international standards. The problem of low expenditure on health is compounded by its highly skewed distribution.
According to the Ministry of Health, about 80 percent of medical facilities are in urban areas, where 40 percent of China’s population lives. Rural areas, where 60 percent of China’s population lives, have just 20 percent of medical facilities (Peoples Daily Online, January 11, 2005).
Similar discrepancies exist in social insurance, which by design targets urban residents in regular employment and relatively well-paid jobs. A growing percentage of the urban labor force is employed in small establishments in the services sector, generally without any labor contract or social insurance cover.
To deal with these problems, the government needs to take several steps:
• Reduce out-of-pocket expenses on medical care, by extending urban medical insurance and rural cooperative medical insurance and providing direct govern- ment subsidies.
• Raise expenditure on education, especially in rural areas and on the schooling of children from migrant households in urban areas.
• Reduce the glaring discrepancy between social security coverage in urban and rural areas. High on the list of priorities should be the institution of comprehen- sive social assistance for the rural population, similar to Minimum Living Standard Assistance (MLSA) for the urban population.