The Study On China’s Defense Fiscal Policy

Defense is important support strength of safeguarding national sovereignty and conducting external struggle. This dissertation is aimed to answer such a question, how to allocate the fixed national resources between defense field and non-defense field to maximize national interests, that is, can effectively ensure the defense needs within the range of affordability and at the same time achieve the harmonious development of economy and defense.Defense finance size and compositon are vital to safety and development. This dissertation is based on relative findings on defense finance, and use econometrical methods to do empirical study on factors that influence the scale of China’s military spending from the demand view, so that can find out the direction of defense expenditure investment. From the supply view, this dissertation use the method of deviation analysis of great powers’defense burden to estimate the most suited scale of China’s defence expenditure through international comparisons. Furthermore, under the conditions of determined defense scale, optimize defense expenditure struction and management methods can improve the efficiency of defense expenditure, through the comparison with developed countries, can find out ways that have some reference for China. The above is the thinking of this dissertation.The main contents and conclusions of this study are the followings:As a symbol in the1991Gulf War, the form of war is developed into information warfare which is characterized by high-tech technology, networking, integration and diversification of war modes, that is, defense economy has entered into a new era with advanced technology. The study starts from this starting point.Defense is characterized as pure public goods. Additionally, it has such special features as huge private transaction costs, potential utility and mandatory provision, which make it necessary to be provided by government. At the same time, except that military spending can provide the public goods of national safety, it has other funtions, such as, ensure the development of defense modernization and informationization, optimize resource allocation and supervise defense economic activities, and coordinate defense construction and economic development. National resources are certain during a short time, so increase of resources into defense field can result in resources into ecomonic development or other public expenditures decrease. But in the long term, defense development has such spillover effects as safety, technology, talents and management methods on other fields, and is important to technical innovation and economic structure upgrade.It is necessary to have a clear recognition of China’s public finance of defence development history. This dissertation uses two methods to calculate the real scale of China’s defense expenditure, which are the traditional CPI substitution method and innovative use of both PPI and CPI substitution method. The latter method is based on the different proportions of personnel fee, costs for maintenance of activities and costs for equipment. Results of the latter method are more close to reality, and have smaller scale compared with the first method. The reason is that prices of industrial products grow faster than comsumption goods with the growth of production and human capital costs, which make decrease the real purchasing power of defense expenditure. So under the condition of certain expenditure, costs for equipment should increase to develop modern defense. Secondly, geometric method and semi-log model method are used to calculate nominal growth rate and actual growth rate of China’s defense expenditure since the founding of new China, and analyze its fluctuant features. In general, during the period of fast development of economy, inflation is a normal state. Thus, in order to ensure the consistency of defense development, its increase rate should increase with the inflation rate, on one hand it can compensate historical shortage, on the other hand, with the inflation rate is increasing, the growth rate of defense expenditure should be improved.It is necessary to make clear factors and its incidence which have effects on the military expenditure. This dissertation makes use of econometric methods to make empirical analysis. According to geopolitical theory and China’s real conditions, ten explanatory variables are selected, including GDP and other nine country’s military expenditure, such as USA, Russia, Taiwan district of PRC, Indonesia, Malaysia, Japan, Philippines, India and Vietnam, and divide the former five countries into potential conflict countries or districts and the latter four countries into direct conflict countries. The results show that, in the longterm, China’s military expenditure has long-term cointegration relationship with the selected variables. And in the longterm, factors which have the largest impact are potential conflict countries or districts, direct conflict countries and GDP. In the short term, the orders are direct conflict countries, GDP, and potential conflict countries or districts. In addition, the Granger causality test shows that GDP and military fee are each other’s Granger reason, which means that development of defense economy has spillover effects on domestic social and economy development.China’s optimal military expenditure scale is an important content of the whole study. Historical research and comparison with main countries or districts show that China’s defense level is low. Include India at the first time, the dissertation uses dispersion analysis of leading powers to calculate China’s optimal military expenditure scale. The result is the optimal military expenditure scale is between2.09%and2.83%, the mid-value is2.46%. China’s defense burden is possible to be2.5%, which conforms to international practices and is sustainable. But this is an ideal number, according to China’s practical conditions; the real number should be adjusted.On the basis of findings on defense expenditure structure, this dissertation studies the development situation and problems of China’s defense structure. Through the comparison with USA’s military structure, China should increase the costs of equipment and maintenance, increase military expenditure essentially. On the aspects of optimizing the management of military expenditure, managements on defence budget, public finance of defence and military treatment should be improved. It is possible to learn from USA’s advanced experiences and set up China’s PPBE system with China’s charateristics and improve the supervision and practice mechanisms.Finally, this dissertation draws conclusions to improve the efficiency of China’s public finance of defence policies. Firstly, proceed from country’s safety benefit to establish defense policies according to national comprehensive interests. Secondly, proceed from defense demand to decide suitable defense scale which fits the development of economy. Thirdly, proceed from military demand structure to improve defense expenditure structure which fits combat power generation maximization. Fourthly, proceed from the real situation of China and improve the management of defense expenditure.