The Expansion of Social Spending and the Rise of Household Consumption in China

Expanding domestic demand and raising the household-consumption share are central to strengthening the endogenous momentum of China's growth and advancing economic rebalancing. This paper re-examines whether a weak social safety net is the principal constraint on household consumption in China. Drawing on long-run evidence on the expansion of social spending, the evolution of institutional arrangements, and changes in the household-consumption share, the paper argues that China's low consumption cannot be attributed solely to deficiencies in the social safety net. Rather, it reflects the combined effects of labor-market dynamics, a rising labor-income share, the easing of financial repression, and changes in the stratified structure of social protection. Since 2010, social insurance expenditure as a share of GDP has increased markedly, bringing China's overall level of social spending closer to that of some upper-middle-income economies. Over the same period, the household-consumption share has reversed its prolonged decline and begun to rise, suggesting that expanded social spending has helped reduce precautionary saving and support household consumption. Further analysis shows, however, that China's social spending system continues to exhibit substantial hierarchical disparities and structural imbalances across pensions, health insurance, unemployment insurance, and social assistance. These features limit its redistributive capacity and weaken its consumption-enhancing effects. The key to raising the household-consumption share therefore lies not in short-term stimulus, but in a sustained expansion of social spending, an improved expenditure structure, and greater equity, portability, and predictability in social protection. A more comprehensive and sustainable social security system is essential for supporting consumption growth and China's broader economic transformation.