Research On The Effect Of China’s Fiscal Policy On Domestic Demand

Economic turmoil intrigued by the2008financial crisis has overwhelmed the world, slowing down the overall economic growth. Chinese economy, which struggles with falling exports, housing bubble, weak consumption, foreign exchange reserves’dilemma and so on, is no exception. Faced with such complicated situation, many scholars put that the imbalance in domestic demand structure is the root of current economic difficulties.Compared with the world’s major economies, Chinese economy shows too low a consumption rate coupled with too high an investment rate and this trend seems to continue deteriorating. Existing research on simply increasing domestic demand may ignore the chain reaction in practice, for example, policies aimed at stimulating consumption may effect investment and further domestic demand structure. So in order to solve structure imbalance, it is vital to increase domestic demand based on reasonable control of consumption to investment proportion.Among macroeconomic policies,fiscal policy can directly control government demand through government budget and affect the demand from the private sector, mak i ng i tse I f the pr i or cho i ce to effect domest i c demand structure. What’s more, when we compare the different impact of the same item of fiscal policy on consumption and investment at the same time,it helps to know about the impact of fiscal policy on domestic demand structure.Firstly,this paper summar i zes the basic theory of fiseal policy and domest i c demand structure,including the type,objectives,tools,function mechanism and the macroeconomic effects of fiscal policy, as we I I as index of domestic demand structure.Second I y, after data are sorted vert i ca I I y and horizontally since the reform and opening up, the status quo and the deteriorating trend of China’s domestic demand imbalance are concluded and briefly analyzed. Then, with data on tax, treasury, government purchase and transfer expenditure from1994to2012, consumption and investment are expressed in the VAR model and further explored for dynamic effect by the impulse response analysis tool.Finally, on the basis of the third chapter summary, conclusions are made that the fourfiscal policy tools can remarkably effect domestic demand structure in the short term. Meanwhile, long-term reform proposals are offered to the strengthen the effect of fiscal policy on domestic demand structure, like adjustment on the tax system,re-orientation on the treasury function and increase in civil expenditure.