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Limited fiscal maneuverability

By Si Tingting (China Daily)
Updated: 2009-06-29 08:23

A shopping center in Shanghai. The government is mulling measures to boost household income to spur spending.

While job cuts and dwindling paychecks are generally seen as a byproduct of financial meltdowns, China is thinking out of the box and talking about possibilities to raise household income in the midst of the biggest economic crisis since the Great Depression of the last century.

In an announcement on May 25, the State Council listed as many as nine steps to fast track its payment system reforms to boost household income, especially that of medium-and low-income groups.

The measures to encourage spending include an improved social security net, reduced precautionary savings, imposition of minimum wage requirements and increased income for rural and low-income households through fiscal transfer, the statement said.

"I think it is part of the Chinese government's intention to shift to producing for the domestic market from the export-oriented industries," Nobel Prize winner in Economics James Mirrlees told China Business Weekly during his recent visit to Beijing to chair a forum called "Promote Sharing Growth" at the University of International Business and Economics.

"For public expenditure programs, what I particularly think of are the ones that increase people's income, which can effectively increase people's demand for goods and services," Mirrlees said. The Nobel laureate believed that government should give their savings to the people, who are more likely to spend than the government.

"It's better for the government to increase people's consumption by increasing their consumer incomes than to do more investment, which involves higher risks," he said. The major problem now is that people as well as the government are putting a lot of their savings in financial assets, which perform rather badly, banking included, said Mirrlees.

Much of the GDP growth since the mid-1990s has been a result of government-organized massive investment drives - in infrastructure, urban construction and urbanization. This government-heavy growth has done the most damage to China's consumption potential, pushing the country further to a dependency on the markets of the rich nations. Exports, still a backbone of China's economy, contracted for the first time in seven years recently due to slackening demand overseas. Therefore, the government is now turning its focus on people's spending to fight recession.

So far, the aid given to rural farmers to boost spending, involving a rebate scheme for white goods, or home appliances, has already displayed initial positive results. Rural spending, driven by the government rebate policy on home appliance purchases and other commodities, grew by 16.7 percent in April, 2.8 percentage points higher than urban growth, according to figures from the National Bureau of Statistics.

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