Comparing the Role of Government in the Economies of China and the United States

October 13, 2016 4:24 pm Last Updated: October 26, 2016 4:51 pm

The size of China’s government is enormous. By 2007 China’s fiscal revenues had reached 5.1 trillion yuan ($770 billion), which accounted for 21 percent of GDP and was equivalent to 370 million urban residents’ annual disposable income — or the annual net income of 1.23 billion farmers.

Imperial China’s Fiscal Revenue

How does China’s fiscal revenue under Communist Party rule compare with the era under imperial rule? In 1766, during the mid-Qianlong era, the government’s fiscal revenue was 49.37 million taels of silver.

The Dutch East India Company conducted detailed investigations around 1760 on income and consumption of people in Beijing and Guangzhou. According to historical archives, the annual income of an ordinary Beijing citizen was about 24 taels. Therefore, 49.37 million taels of silver was equivalent to 2.05 million ordinary Beijing citizens’ annual income. The income of just 2.05 million Beijing citizens was sufficient to support the entire Qianlong government. Obviously, it was a small government.

Of course, some people might say that we cannot compare any country’s government revenues and spending with a period of the past, because those were traditional agricultural economies, and government revenues were therefore low. Modern economies, however, are complex and depend on various kinds of government assistance. This reasoning makes a certain amount of sense. So, let’s use a different example.

United States’ Fiscal Revenue

Let’s use the United States, a modern country, as comparison with today’s China. The U.S. financial securities markets, intellectual property sector, and private enterprises are the most developed in the world. In addition, it also plays the role as world police. Therefore, its government spending would not be lower than any other country’s.

In 2007 the U.S. federal government’s fiscal revenue was $2.4 trillion, or 18 percent of GDP, and was equivalent to 85 million average American citizens’ annual disposable income. That is to say, in order to support the U.S. government’s spending, it took 85 million Americans’ disposable income. This is far lower than the 370 million Chinese urban residents required to support the Chinese government in 2007.

China has 540 million urban residents, and 800 million farmers. Their total disposable income in 2007 was 10.7 trillion yuan ($1.62 trillion). The Chinese government’s fiscal revenue was 50 percent of Chinese citizens’ total disposable income.

By contrast, total disposable income in the United States was $8.4 trillion. The $2.4 trillion government fiscal revenue was equal to one quarter of U.S. citizens’ disposable income.

Thus, the Chinese government is much larger than the U.S. government in terms of fiscal budget.

Private Wealth Structure Comparison

Chinese citizens do own wealth, including real estate, corporate equity, financial securities, bank deposits, and so on. But these citizens are mainly urban residents. Chinese farmers do not own land, nor do they have much savings. They have little wealth.

According to a National Development and Reform Commission (NDRC) estimate, by the end of 2005, the total asset value of Chinese urban residents was 20.6 trillion yuan ($3.11 trillion). If adding 15 percent to adjust for inflation, it would have been 27.6 trillion yuan ($4.17 trillion) by the end of 2015, less than one third of the 88 trillion yuan worth of state-owned assets and state-owned land.

The total of China’s private and state-owned assets was 115.6 trillion yuan ($17.5 trillion), equivalent to 4.7 times of GDP. In contrast, the U.S. government basically does not own income producing assets. It only holds a small amount of land. By the end of 2007, total private assets in the United States were $73 trillion, 5.4 times of GDP and slightly higher than China’s ratio of total assets versus GDP.

Although the ratio of total assets and GDP of the two countries is roughly the same, wealth distribution between the people and the government is completely different. In China, more than 76 percent of assets are owned by the state, with people owning less than a quarter. In the United States, assets are basically in the hands of the people.

Of China’s 115.6 trillion yuan of wealth in 2007, only 27.6 trillion ($4.17 trillion) belonged to people, the remaining 88 trillion yuan ($13.3 trillion) was owned by the state. If in 2008, China’s asset value and GDP increased by 10 percent, then private citizens earned 2.76 trillion yuan, and the government earned 8.8 trillion yuan. The government’s share of asset appreciation from economic growth was three times greater. This is the reason why asset appreciation has so little effect in driving China’s domestic demand or raising internal consumption.

Where Did the Government’s Money Go?

I mentioned above that the government’s fiscal revenue was 5.1 trillion yuan ($770 billion) in 2007, and state-owned assets and appreciation of land was at least 9 trillion yuan ($1.36 trillion). State-owned enterprises had profits of 1.6 trillion yuan ($240 billion). The government had a total income 15.7 trillion yuan ($2.37 trillion). How was the money spent?

According to former Finance Minister Xie Xuren, in 2007, the Chinese government’s direct spending on people such as healthcare, social security and employment benefits totaled about 600 billion yuan ($90.6 billion). This was equivalent to 15 percent of total expenditures and 2.4 percent of annual GDP. Divided by 1.3 billion people, the per capita of social expenditures was 461 yuan ($69), which is equal to 3 percent of urban residents’ per capita disposable income.

In the United States, government spending on the same three categories in 2015 was about $1.5 trillion, or 61 percent of total federal spending, and 11.5 percent of GDP. The per capita spending was $5,000 when divided by the 300 million U.S. population, and it was equivalent to 18 percent of Americans’ per capita disposable income.

It is not that the Chinese government does not spend money, but that it lacks real oversight of the budget process. The Chinese government tends to waste money on high-profile infrastructure projects and government office buildings, and invests in industries with high resource consumption, high pollution and low job-creation. In addition, this all provides a breeding ground for corruption.

Because in China there is too much asset wealth and income in the hands of the government, it is difficult for the masses of people to earn more and consume more, and for service industries to develop around people’s livelihoods. Thus, where would demand and investment for tertiary industries come from?

Chen Zhiwu is a professor of finance at Yale University. This is an abridged translation of his Chinese-language article posted on the website Aisixiang, and widely republished on the Chinese-language internet in early 2008. Given that it had not previously been translated into English, and still bears important lessons about the Chinese economy today, it is presented here.