A Study On The Effects Of Public Expenditure To Urban-rural Income Gap In China

Since the reform and opening up, China has made remarkable achievements on therapid growth of its economy, but at the same time, the gap between urban and rural incomedistribution has become an increasingly serious problem. A rational solution of theproblem of income distribution is crucial to the sustainable economic development andsocial harmony and stability. Since the market mechanism would sometimes fail or invalidin the regulation of urban and rural income distribution gap, the use of fiscal expendituremeans by government is needed to ensure the fairness of the starting point, the process andthe result.There is a contradiction between the China’s increasing income gap and China’sincreasing fiscal expenditure, this article attempts to identify the reasons for China’sincreasing urban-rural income gap on the aspect of the financial expenditure. First, theproblem is being analyzed theoretically on the foundation of modern economic theory.Second, the VAR model, impulse response analysis and co-integration analysis are beingused to reveal the relationship between the overall financial expenditure and theurban-rural income gap. The relationships between the classified financial expenditure andthe urban-rural income gap are also analyzed by using the same tools. This articlecompared the structure and characteristics of financial expenditure between the countrieswhich have already built their own public finance systems and China after the fiscalrevenue and expenditure classification reform in2007. The results of this study show that:from1990, China’s fiscal expenditure did not play the function of improving the incomedistribution, but has actually expanded the income gap between urban and rural areas.Specifically, from1990to2011, economic construction costs narrowed the income gapbetween urban and rural areas in both long-term and short-term due to the expenditure onagriculture, but this effect is quite small; education spending narrowed the income gapbetween urban and rural areas in the long run due to the accumulation of human capital,but it expanded the gap in the short term; administrative fees and social securityexpenditure expanded the income gap between urban and rural areas both in long-term andshort-term. The international comparison shows that: the type of China’s fiscal expenditurestructure is still "Production and Construction", which is not suitable for the stage of economic development, the transformation of government’s functions and the appeals ofthe people in China. The corresponding policy recommendation of this article is that:further reform to the direction of public finance should be applied; the function of fiscalexpenditure narrowing the income distribution gap should be strengthened. The efficiencyand welfare of the society would be improved if the economic equity could be realized.