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Household consumption in china is low and show decline trend in the past few years. Over 50% of its GDP contribute by industrial and emerging maker countries but only 37% contribute by the household consumption in year 2008. It means that China having a high level of savings. The weak wage growth and limited redistribution of firm's profit can be explained why there is a decline in household income follow by the consumption. In recent years, people from rural area rapidly migration into urban areas maintain the high supply of labor while the rate is faster than increase in demand, which may cause increase in unemployment. Moreover, underlying cause of the higher savings rate is apparently the greater uncertainty facing the household sector following structural changes in the economy like global crisis and recession.
Figure : China's Household Consumption
As to expend domestic demand in China and consumer's confidence, its important to improve social needs. In the stimulus package, China government spent RMB 270 billion on social development in year 2008 which is 19.2 percent more in year 2007 and increase to RMB 330 billion in year 2009 (22 percent more). This action benefits rural and urban household and the social security will be reinforce. Standard of the minimum retirement pension will be increase in this fiscal policy and provide special subsidies for certain regions.
Furthermore, free compulsory education is available in both rural and urban areas. In additional, school heating subsidies for rural primary and secondary school in certain regions have been rise and free textbooks has been provided to rural students. Moverover, government also give financial assitance to student from poor families in most of the education level in the nation. New primary and secondary school with improved sanitation facilities has been develop and living facilities in rural school also has been improved.
On the other hand, a new type of medical care system has been established in all rural areas in the country which will cover more than 800million residents. Besides that, with the stimulus package, it provide assistance to rural women who give birth in hospital, example like assitance to RMB 300 per person and RMB 400 per person for central region and western region respectively. Nonworking residents also covered in the plan which government increase the number of pilot cities to provide basic medical insurance for them.
Table : Investment portfolio of China's stimulus package (RMB 100million)
Social Expenditures Impact
Consumption and saving portion depend mainly on the life time resources, which is net present value of income plus net current wealth. On the other hand, expected future growth of income will reduce current savings, while an increase in the ratio of working to nonworking can increase current savings.
Figure : Average Propensities to Consume Out of Lifetime Resources
In the recent research, specific evidence state that extending social services will increase household consumption rate. According to Barnett and Brooks (2010) "China provincial data from CEIC", spending on health had an impact on household behavior. Uban household consumption will be increase by 2 yuan when increase 1 yuan in government health spending. Besides that, there are also empirical analysis based on 24 OECD country over year 1990-2008 suggest that lower household spending may be associated with government spending on education, health care and pensions.
Table : Impact on Household Saving
(As percent of GDP) of a 1 Percent of GDP increase in Government Expenditure
From the table, it show different impact on different social spending, each 1 percent increase in government spending on health will reduces about 2percent of household saving, while increase 1 percent of government spending of education and social security will reduces 1.26 percent and 0.68-0.72 percent of household savings respectively. In general, spending on health care will have large negative impact on savings compare to education and social security.
In details, as mention earlier, level of household lifetime resource will affect consumption, and when there is increase in social expenditures, it will also affect the consumptions. Household make their portion of consumption denpend not only current income, but also the expected future income. The stimulus package include an expansion of government spending on greater portion social expenditures which currently need to borne by households and this will increase household lifetime resoucrces and their current consumption. In another senses, there will be a possibility for the household to borne lower health and education cost in future, therefore they may cut their saving to cover these expenses.
Figure : Household Final Consumption Expenditure in 4 Countries
The net household consumption impact can be reflects by the resources transfer from government savings to household, which will increase household incomes and thus lead to an increase in current household consumption. If this expenditure is financed by income taxes revenue, the impact will be smaller. Besides income effect, another prospective which is insurance effect also can reduce household's savings due to increase in average propensity of lifetime resources of household.
Table : Household Consumption Impact of Expenditure Reforms
Table above shows the impact of expenditures to the total household consumption, which calculated by adding the income effect and also insurance effect. The resulting total consumption impacts range from 1.6 percent of GDP for pensions, 1.3 percent for health and 0.8 percent for education. The result indicates that every 1 percent of GDP increase in social expenditures and it allocated evenly in these 3 categories, it will bring a permanent increase in household consumption of 1.2 percent of GDP. From the table, we also can suggest that if allocate higher portion expenditures to health and pension side, we can expect to see higher growth in household consumption.