Cut a fairer pie

Increased public spending on social security, healthcare and education is key to narrowing the income gap

The 20th Communist Party of China National Congress proposed that "we will build an institutional framework under which primary distribution, redistribution and tertiary distribution are well coordinated and mutually complementary". The fourth plenary session of the 20th CPC Central Committee emphasized that "we will improve the redistribution mechanisms such as taxation, social security and transfer payments" when outlining the tasks for improving the income distribution system. Improving the income distribution system and significantly narrowing the income gap is not only a phased requirement for the continuous improvement of the quality of people's lives during the 15th Five-Year Plan (2026-30) period, but also a long-term goal of Chinese modernization.

Since the launch of reform and opening-up in 1978, China's economy has grown rapidly, and residents have primarily benefited from this development through an "expanding pie" of economic growth. However, income inequality also increased during this period. The urban-rural income ratio (with rural income as the baseline of 1) rose from 1.98 in 1982 to 3.14 in 2007, while the Gini coefficient, which reflects overall income disparity, climbed from 0.285 in the early years to 0.491 by 2008.

After peaking, both indicators began to decline following the implementation of policies designed to improve income distribution. By 2024, the urban-rural income ratio had fallen to 2.34 and the Gini coefficient to 0.465. Despite this progress, income inequality remains relatively high. It is widely recognized that a society achieves a relatively equitable income distribution only when the urban-rural income ratio falls below 2.0 and the Gini coefficient drops under 0.4.

There is therefore an urgent need to advance income distribution reforms under the current conditions.

The trends in two key indicators have begun to diverge, indicating that the narrowing of the urban-rural income gap no longer contributes to overall income distribution improvement to the same extent as before. Prior to the peak in income inequality around the end of the first decade of the 21st century, movements in these two indicators were closely aligned. Following policy adjustments aimed at improving income distribution, the urban-rural income gap has narrowed more sharply and consistently, whereas the decline in the Gini coefficient has been more modest, and largely stagnated since dipping to a low of 0.462 in 2015.

This trend suggests that progress in income distribution within urban areas has lagged. Data from the United Nations University World Institute for Development Economics Research show that between 2015 and 2020, the national and rural Gini coefficients fell by 3.9 percent and 5 percent, respectively, while the urban Gini coefficient actually rose by 1.4 percent. This disparity is closely tied to structural employment issues, notably the displacement of jobs due to automation and inadequate protection of workers' rights in platform-based employment. Without effective policy responses, the expanding reach of artificial intelligence is likely to exacerbate these imbalances.

Against this backdrop, redistribution should be prioritized. Strengthening its role is essential to advance goal — and problem-driven development during the 15th Five-Year Plan period and through 2035.

Labor market polarization and widening income inequality are fundamentally market failures. Enhancing the market-driven allocation of labor inevitably involves "creative destruction", which is evident in the labor market's lack of an automatic "trickle-down effect": Workers at the technological frontier benefit from innovation gains, while low-skilled workers suffer job losses due to technological substitution. Moreover, unlike other factors of production, human labor should not be treated as a commodity subject to simple "market clearing". Therefore, building a government-led social protection system and providing inclusive basic public services are essential institutional measures to address such market failures.

In the age of AI — a profoundly disruptive technology — this "creative destruction" acts as a double-edged sword. On the one hand, the technology can significantly enhance workers' capabilities and create new employment opportunities. On the other hand, it may reduce labor demand and eliminate existing jobs. Between 2012 and 2024, China's urban areas created 167 million new jobs but also lost over 53 million positions, resulting in a net increase of 113 million jobs. As AI and other new technologies continue to advance, workers across sectors are potentially vulnerable. Therefore, the redistribution system must be leveraged to ensure broader and more inclusive social protection.

Currently, China's Gini coefficient remains above 0.4, which signals that primary distribution alone cannot fully address income disparities. Consequently, it is necessary to strengthen redistribution measures, refine social policies and advance institutional frameworks in order to establish a sustainable mechanism for equitably sharing the "pie".

International experience further reinforces the critical role of redistribution. Most OECD countries, for instance, demonstrate the effectiveness of robust redistribution systems in substantially lowering income inequality. Before redistribution, the average market-income Gini coefficient across these countries stood at 0.473. After implementing measures such as taxes and transfer payments, the figure for disposable income per capita fell to 0.324.

The immediate objective of improving income distribution is to narrow the income gap, while its broader aim is to reduce — and ultimately eliminate — disparities in quality of life, ensuring that all share more equally in the gains of modernization.

Redistribution policy should therefore go beyond income adjustments to strengthen the provision of essential public services. As Wagner's Law observes, higher levels of national development generally correspond to a larger share of government social spending in GDP — a form of redistribution carried out through basic public services.

China's Human Development Index has risen substantially over the past three decades, largely due to rapid economic growth. To further enhance development quality in the future, however, increased public investment in areas such as education and health will be even more decisive.

The experience of OECD countries demonstrates that taxation and transfer payments are the dual pillars of redistribution, each serving distinct functions. An analysis of 2018 data from 23 member countries reveals that transfer payments are roughly 3.5 times more effective than taxation in reducing income inequality. This underscores the dominant role of public spending — particularly in social security, healthcare and education — in narrowing the income gap, while taxation primarily serves to secure fiscal space and implement structural adjustments targeting higher-income groups.

For China, building a more effective redistribution system will require raising the share of direct taxes, optimizing the tax structure, closing gaps in social security — particularly in pensions — and expanding the supply of public services. By broadening both the scope and substance of public goods and making more effective use of transfer payments to safeguard and improve living standards, the ultimate aim is to adjust income distribution, ensuring that fair sharing of the "pie" helps to make it bigger. This represents an essential pathway toward organically integrating equity with efficiency.

The author is an academician at the Chinese Academy of Social Sciences. The author contributed this article to China Watch, a think tank powered by China Daily.

The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.