Research On The Impact Of Public Expenditures Of Education Health And Social Security On Household Consumption

During the last ten years, Chinese household consumption rate has been sliding down to below world average and gradually become a bottleneck of further economic growth and improvement of living standard. Since the global economic crisis in 2008, the demand from foreign countries has been shrinking, making domestic demand become more important to economic growth. In October 2010, Chinese government declared that it would continue follow the strategy of expanding domestic demand. Actually, since last ten years several policies have already been carried out in order to increase domestic demand but they have not fixed the core problem. Luckily, recent research shows that household consumption may influence public expenditures on education, health and social contributions, which shines light on a new approach.Armed with Modigliani's theory of Life Circle Hypothesis, Leland's theory of Precautionary Saving and Keynes's theory of Deficient Effective Demand, this paper first discusses the two-way effect on household consumption of public expenditures on health, education and social security. On one hand, the benefits to household will increase consumption rate via increasing household life-circle income, decreasing the need of saving and reducing inequality. On the other hand, public expenditures will decrease household consumption rate via increasing tax burden and replacing consumption. The total effect depends on the amount and source of public expenditure programs. Then this article establishes an econometric model to estimate the effect of public expenditures of health, education and social contributions on household consumption rate. The data includes 274 observations from 71 countries in 7 years. The estimation method applied is robust cluster regression. The findings include: as public expenditure on health increases from a low level, the household consumption rate first increases and then decreases. When other explanatory variables are controlled, a public expenditure of 4.72% of GDP on health program will make household consumption rate reach maximum. The public expenditure on social security program has a similar impact, whereas the most effective rate is 5.05% of GDP. However, the impact of public expenditure on education is not significant. Chinese public expenditure on health has been less than 1% of GDP and the public expenditure on social security is less than 2.3%, which are both less than the ideal expenditure rates that bring highest possible household consumption rate. With the aim of increasing household consumption rate, it is wise to increase the public expenditures on these two areas, prepare suitable source to finance the expenditure and carry out supplementary policies to achieve best results.