Ma Haitao and Yao Dongmin: Better Leverage the Role of Fiscal Policy in Promoting Consumption
Consumption is the ultimate goal of economic activity and a vital engine of economic growth. Expanding domestic demand is not only a major strategic deployment for accelerating the construction of a new development pattern and promoting high-quality development; it is also an inevitable requirement for meeting the people’s ever-growing needs for a better life. Since the 18th National Congress [1], the income levels of Chinese residents have continuously risen, the spheres of consumption have steadily expanded, and the structure of consumption has undergone continuous optimization and upgrading. Standing at a new historical starting point, the report to the 20th National Congress proposed to “focus on expanding domestic demand, giving full play to the fundamental role of consumption in economic development and the key role of investment in optimizing the supply structure.” Furthermore, the Third Plenary Session of the 20th CPC Central Committee [2] emphasized the need to “improve long-term mechanisms for expanding consumption, reduce restrictive measures, and reasonably increase public consumption.” Faced with the complex situation of sluggish domestic consumer demand and increasing uncertainties in external demand, this year’s Government Work Report listed “vigorously boosting consumption, increasing investment efficiency, and expanding domestic demand in an all-around way” at the top of the annual work tasks. It proposed the “implementation of a more proactive fiscal policy” and emphasized “directing more funds and resources toward ‘investing in people’ and serving the people’s livelihood, supporting the expansion of employment, promoting income growth and burden reduction for residents, and strengthening consumer incentives to form a virtuous cycle of economic development and livelihood improvement.” Finance is the foundation and important pillar of state governance; further leveraging the functions and role of finance in boosting consumption is a key measure to promote the continuous recovery and improvement of the economy.
Continuous and Systematic Empowerment of Consumption to Release Vitality
Since the 18th National Congress, China has utilized systematic fiscal policies as a grasp [3] to construct a multi-dimensional policy system and promote the upgrading of consumption quality.
The state has improved the income distribution and social security systems to solidify the foundation of resident consumption. Reform of the income distribution system has achieved significant results, with the middle-income group continuing to expand. Reforms to the individual income tax system—including the addition of special additional deductions, adjustments to expense deduction standards, and modifications to tax brackets—have lightened the tax burden on low- and middle-income groups. As the pattern of national income distribution is optimized and adjusted, the consumption potential of residents is being continuously released. Simultaneously, the integration and upgrading of the social security system have improved residents’ consumption expectations. In 2014, China merged the New Rural Social Pension Insurance and the Urban Resident Social Pension Insurance to establish a unified basic old-age insurance system for urban and rural residents. The number of participants in this system grew from 501 million in 2014 to 545 million in 2023. Since 2016, the basic pensions for retirees have been adjusted upward and unified annually; the minimum standard for the basic pension for urban and rural residents nationwide increased from 70 yuan per person per month in 2014 to 123 yuan in 2024. A refined social security system has effectively stabilized the income expectations of urban and rural residents, enhancing the consumption expectations and purchasing power of residents, particularly low- and middle-income groups.
The state has comprehensively utilized structural fiscal policy tools to tap into the potential of bulk consumption. Through policy tools such as tax incentives and special subsidies, the burden on consumers has been lightened, thereby stimulating consumption. For example, in the “Two News” [4] fields—large-scale equipment updates and consumer goods trade-ins—ultra-long-term special treasury bond funds have been continuously arranged to drive equipment iteration and consumption upgrades. In 2024, 150 billion yuan was invested to support over 4,600 equipment update projects in industry, energy utilization, transportation, and old elevators, effectively driving a 15.7% year-on-year increase in investment in equipment and instrument procurement, contributing 67.6% to total investment growth. Another 150 billion yuan was invested through fiscal subsidies and consumption vouchers to support trade-ins in sectors such as automobiles and home appliances, precisely lowering the cost of replacement for residents and driving over 1.3 trillion yuan in sales of related consumer goods.
Supply and demand sides have worked in coordination to cultivate new growth points for service consumption. China has successively introduced a series of fiscal policy measures to promote service consumption and improve its scale and quality. Supply has been expanded through tax incentives: since 2019, the VAT additional deduction for consumer services was increased from 10% to 15%, and income from community elderly care, childcare, and domestic services has been exempted from VAT, with only 90% of such income counted toward taxable income. Fiscal subsidies have also focused on improving service quality. Capital support is provided in key areas: subsidies are granted per bed for the construction of elderly care facilities, and vocational skills training subsidies are provided to domestic service enterprises. These measures tap into the potential of basic consumption while issuing cultural and tourism vouchers from the demand side to stimulate the vitality of "improvement-oriented" consumption. According to data from the National Bureau of Statistics, the proportion of per capita service consumption expenditure in China rose from 39.7% in 2013 to 46.1% in 2024, making service consumption a major driver of overall consumption growth.
The leverage effect of fiscal funds has been utilized to activate new drivers of green consumption. Fiscal support policies have been innovated and refined, and green consumption incentive mechanisms have been strengthened. The green tax system has been improved, utilizing differential tax designs to promote green consumption. Since 2018, China has implemented the Environmental Protection Tax Law, which forces enterprises to take the initiative in adding and technologically transforming environmental protection facilities to increase the supply of green products. Meanwhile, the consumption tax system has been optimized to guide consumers toward low-energy and low-pollution products. Furthermore, products listed in the preferential corporate income tax catalogs for energy-saving, water-saving, and environmental protection equipment are eligible for a 10% credit of the investment amount against the enterprise's tax liability for that year. Government procurement also leads the trend of green consumption. In 2019, multiple departments jointly released the Notice on Adjusting and Optimizing the Government Procurement Execution Mechanism for Energy-Saving and Environmentally Labeled Products, implementing category list management and enforcing preferential or mandatory procurement based on these lists and certifications. In 2023, China’s preferential procurement of environmentally friendly products reached 57.51 billion yuan, accounting for 84.9% of the procurement scale for similar products. Furthermore, in the field of new energy vehicles (NEVs), it has been mandated that NEVs should account for no less than 30% of newly added and updated official government vehicles, helping to cultivate new growth points for green consumption.
Coordinating Fiscal Resources for Precise Support of Consumption
Currently, the income levels of Chinese residents have significantly improved, the scale of the consumer market continues to expand, and consumption levels are rising steadily. However, consumption potential has not yet been fully released, and overall resident consumption faces issues such as a relatively singular structure and a lack of consumer confidence. In recent years, fiscal funds have continuously tilted toward key livelihood areas such as education, healthcare, and social security. Yet, compared to the expectations of the masses and the needs of social development, some weak links remain. For instance, grassroots medical service capabilities are relatively thin, community elderly care facilities have insufficient coverage, and the allocation of public service resources between urban and rural areas or different regions remains imbalanced. Simultaneously, the design of the tax system still requires improvement.
Boosting consumption is the key to smoothing the economic cycle. It is necessary to better leverage the supportive and guiding roles of finance, focusing on solving the pain points and difficulties that hinder consumption growth. We must further optimize the allocation of fiscal resources, exert coordinated efforts on both the supply and demand sides, and implement precise policies in areas such as income security, tax system optimization, service supply, and expectation management. This will strengthen consumer incentives, boost consumer confidence, and enhance residents’ willingness and capacity to consume.
The orientation of fiscal expenditure must be strengthened to solidify the foundation of resident consumption. Enhancing consumption capacity fundamentally relies on solidifying the income base, and the key lies in precise policy support for the most vulnerable. Efforts should focus on key groups, optimizing the structure of fiscal expenditure, strengthening social protection and expectation guidance, and breaking the income bottlenecks that restrict the expansion of consumption. First, increase the intensity of transfer payments and enhance the effectiveness of protection for key groups. Focusing on low- and middle-income groups and flexible employees [5], we should promote the precise allocation of fiscal resources directly to the grassroots. This includes supporting local governments in establishing special arrangements for consumption subsidies, livelihood assistance, and temporary "bottom-line" [6] safety net projects, and refining a layered and categorized transfer payment system. Increase fiscal investment in key livelihood areas such as trade-ins, reducing the burden of childcare, and improving housing to enhance policy precision and synergy. Second, improve the supply of basic public services to alleviate the pressure of "expectational expenditure" for residents. Drive fiscal investment toward education and childcare, grassroots healthcare, and community elderly care. Support local governments in expanding the coverage and accessibility of inclusive public services through government procurement and fiscal subsidies, thereby effectively reducing the long-term expenditure burden on households and bolstering consumption confidence. Third, strengthen employment support and income orientation to expand income-generating paths for key groups. Focusing on college graduates and rural migrant labor, promote the implementation of "work-relief" [7] programs, public welfare positions, and skills training to expand employment capacity at the grassroots and in emerging fields. Encourage local governments to guide small, medium, and micro-enterprises to absorb employment through wage subsidies, entrepreneurship support, and financing interest discounts.
The tax structure should be refined to enhance the incentive function of taxation for consumption. Speed up the reform of the tax system to better play the dual roles of income regulation and consumption guidance. First, improve the individual income tax system. Continue to optimize special additional deduction policies and implement precise tax cuts to effectively reduce the tax burden and continuously increase people's disposable income and consumption capacity. Rationally increase the proportion of individual income tax paid by high-income groups to enhance the targeted nature of tax regulation, effectively narrowing the income gap and promoting a new pattern of virtuous interaction in consumption. Second, promote the shift of consumption tax collection to later stages in the value chain and steadily delegate it to local governments. On the basis of meeting tax administration conditions, promote reforms in a categorized and orderly manner. Priorities should be given to luxury goods and other categories where tax sources are concentrated and distribution channels are clear, shifting collection from the production stage to the retail stage to effectively guide the return of consumption to domestic markets and release potential demand. Simultaneously, rationally divide the ownership of consumption tax revenue by allocating a portion to local governments, thereby enhancing grassroots financial regulation capabilities. This will encourage localities to increase investment in consumption infrastructure and improve public service supply, creating a convenient, comfortable, and accessible consumption environment.
The guiding role of government investment should be leveraged to improve the supply capacity of consumer services. Further adjust the direction of fiscal fund allocation and improve the targetedness and effectiveness of capital investment in key projects. First, reasonably balance the allocation structure of central budget investment and local government special bonds between economic development and livelihood protection. Strengthen support for the construction of livelihood facilities in key areas like education, healthcare, and elderly and childcare, increasing the supply of high-quality public services and promoting coordinated regional development by tilting resources toward the central, western, and rural regions. Second, accelerate the coordinated layout and construction of new types of consumption infrastructure. Support the construction of logistics distribution, digital networks, and smart service terminals required for emerging consumption models, promoting the transformation of traditional commercial facilities into multi-functional, experiential spaces to meet the needs of consumption upgrades. Third, give full play to the leverage effect of fiscal funds in mobilizing social capital. Through project guidance, risk sharing, and capital matching, guide social capital to actively participate in investment in the public service sector.
Fiscal and financial coordination should be strengthened to boost consumption confidence through expectation management. Diversify consumption financing channels to enhance residents' consumption power and willingness. First, improve mechanisms for fiscal interest subsidies, risk compensation, and government guarantees. Provide a certain percentage of interest subsidies for eligible consumer credit to lower borrowing costs for residents. Establish risk compensation funds to share part of the risk for financial institutions, encouraging them to increase credit lending to key areas such as service consumption, green updates, community elderly care, and digital living. Second, establish special credit products or policy-based financing tools supported by the state, combining precise support with market-oriented operations to provide low-interest, convenient financing for specific consumer projects. Third, leverage the guiding role of fiscal funds to encourage financial institutions to develop small-scale, appropriate consumer finance products for "new citizens" [8] and younger groups. Through fiscal subsidies, risk sharing, and other supporting measures, financial resources can be driven more precisely and efficiently toward the consumption end, forming a virtuous mechanism of fiscal "bottom-lining," financial amplification, and market response.