Economist Sees Room for Slashing Taxes

Increasing government spending would be a disservice to society rather than a benefit if Beijing wants to create a consumption-led economy, one economist says in a recent research report.

“The so-called ‘structural optimization,’ which refers to rising domestic consumption as a percentage of the national economy, owes primarily to the government hiking spending rather than households increasing consumption,” Industrial Bank chief economist Lu Zhengwei says in his report.

The government “should have left all the money used for its stimulus to consumers” by cutting taxes, he said.

Statistics show that domestic consumption has been rising and contributing more to the country’s economic growth.

In the first three months, GDP grew by 8.1 percent compared with the same period last year. The consumption increase alone accounted for 6.1 percentage points of that growth, the highest level since 1994.

A breakdown of consumption shows that domestic spending was partly offset by a year-on-year drop in external demand, National Statistics Bureau chief Ma Jiantang wrote in an article published in the Communist Party’s official journal, Qiushi.

“The strong growth in internal demand effectively made up for the shortfall in external demand” and “played a key role in keeping the economy grow fast and steady,” he said.

But Lu said this was mainly because the government had spent more and much faster than the general public.

The growth of government expenditure grew faster than that of household consumption in twenty-two out of the past thirty-four years, he said. On average, it surpassed household consumption growth by 1.4 percentage point from 1978 through 2011, he said.

Such rapid expansion of government consumption usually means the government has to hire more workers and tighten controls over more sectors of the economy. This would turn out to be detrimental to the economy in the long run, Lu said.

Chen Fashan is a Caixin intern reporter.