What level of consumption is the country at?
There are many indicators to measure the level of consumption, such as the CPI, but the CPI is used to reflect the price level. In general discussion, the intuitive impression of “low domestic consumption level and high consumption level in western countries such as the US” refers to the total consumption or per capita consumption level, not the price factor, so we measure the consumption level by the consumption rate (final consumption as a percentage of GDP) and the resident consumption rate (resident consumption as a percentage of GDP).
According to the 2020 national economic performance published by China’s National Bureau of Statistics, China’s final consumption rate in 2020 is close to 55%, while the final consumption rate in developed countries in general is around 80% (see the figure below).
List of final consumption rates in selected countries over the past decade (Source: Wind Information)
Taking the countries listed in the above chart as examples, these countries are roughly divided into three categories: developed countries such as the US, Japan and Korea, countries with similar GDP per capita to China such as Russia, Brazil and Poland, and emerging market countries adjacent to China such as India, Thailand and Vietnam. As can be seen, whether compared to high level developed countries, countries with the same level of GDP per capita development, or neighboring countries with similar cultural geography, China’s final consumption rate is very low and about 25 percentage points lower compared to countries with the same GDP per capita.
A more telling figure is the resident consumption rate (below). Deducting the government consumption component of final consumption and calculating only the resident consumption rate, the gap between China’s consumption levels and those of other countries decreases to about 20 percentage points, but again, it is the lowest among countries at the same level and geographically neighboring countries.
A look at the consumption rates of selected countries over the past decade (Source: Wind Information)
Thus, no matter how one compares, mainland China’s resident consumption rate is on the low side.
Although there are differences in the consumption rates of residents in different countries due to different socio-cultural and economic development stages, the reasonable consumption needs of residents in mainland China are not being met, given that the current domestic consumption levels are far lower than those of major economies and lower than those of countries with the same level of development and similar cultures.
Consumption is the starting point and the destination of the economy, on the one hand, it is related to the people’s livelihood and happiness of a country, after all, if even a reasonable consumption cannot be satisfied, how can we talk about happiness? On the other hand, consumption is also related to the quality of economic development. As the first driver of economic growth, the lack of consumer demand has become the biggest “blockage” in economic development, especially in the past two years, the lack of demand has become one of the main reasons for slow economic growth.
Of course, there are always two sides to the coin, the low consumption rate also represents the huge potential and vast space for China’s economic growth, whether compared with developed countries or countries at the same level of development, China’s consumption rate has at least 20 percentage points of room for improvement, such a real room for growth, is the most favorable support for future economic growth. From this perspective, we can understand why many local governments will include “consumption” as a growth target for the first Time this year, and understand the importance of “expanding domestic demand” for the economy, employment and people’s livelihood.
So, where did the Chinese people’s income go?
In terms of both absolute and consumption levels, it is an indisputable fact that consumption in mainland China is low, and consumption is the number one driver of economic growth, and the importance of consumption is undeniable under the current development strategy that focuses on “internal circulation and domestic and international double circulation”. Therefore, how to make residents willing to consume, more consumption has become the focus of policy. The primary solution is to find the reason why consumption is so low?
There are so many factors affecting consumption that it is almost impossible to exhaust them, and various disciplines such as economics, sociology and psychology have studied consumption, such as social Culture, supply of consumer goods, psychological factors, debt situation, age structure, etc. But the most important factor affecting consumption is the debt situation. However, the most important factor affecting consumption is income. The absolute income theory, first proposed by Keynes in his General Theory of Employment, Interest and Money, states that consumption increases with income. Other theories such as relative income theory, persistent income theory and Life cycle theory are more about redefining the concept of “income”.
Under the premise that “income is the most important factor affecting consumption”, one might say that the low level of domestic consumption is more due to low income. However, there are common doubts about this. First, from the reform and opening up to now, the country has undergone more than 40 years of rapid development, and the economic development achievements are globally remarkable. Secondly, from the comparison of the consumption level of the previous countries, the same level of development of the country, why consumption is also far higher than China?
First, let’s address the first query.
In July 2020, the National Bureau of Statistics of the Communist Party of China released a set of data, mentioning that “China’s per capita gross national income exceeded $10,000, reaching the world’s upper-middle income level”, which caused a great range of discussions, and some unknown netizens equated it with their own income and felt that they “dragging the country’s feet”. Of course, this is not true. The initial distribution of GNI (gross national income) contains three parts: government income, enterprise income and residents’ income, and after the initial distribution, through the adjustment of taxation, social security and other redistribution methods, personal income is the “residents’ disposable income” in the general sense.
Whether in the initial distribution or redistribution, the share of the resident sector in the overall national income has been declining, and although it has rebounded after the financial crisis in 2008, the overall trend is down, and the income distribution as a whole is tilted toward the government. It can also be seen that the consumption rate of the population has maintained a consistent trend with the share of the residential sector in income. In other words, compared to the past, the same $10,000 of national income obtained is distributed in such a way that residents receive less, thus affecting consumption.
In addition to the level of residents’ income that affects consumption, income disparity is another important factor related to income. When income reaches a certain level, the share of consumption in income gradually decreases (diminishing marginal propensity to consume) and its consumption rate becomes lower. Therefore, the higher the income gap at the same income level, the lower the consumption rate will be.
Changes in the Gini coefficient for selected countries between 2009 and 2015 (Source: Wind Information)
From the data in the chart above, the Gini coefficient, which reflects income disparity in mainland China, has decreased in recent years, but is still substantially higher than other countries.
Can we raise income by cutting taxes?
Since the most important factor affecting consumption is income, it is obvious that the most effective means to expand domestic demand and promote consumption is to start with income, that is, to increase income and reduce the income distribution gap. Related to these two words and the most can cause the network explosion is to reduce taxes, especially to reduce personal income tax.
However, some scholars have estimated that, according to the information released by the Ministry of Human Resources and Social Security and the data of the Ministry of Finance, the current taxpayers of personal tax account for perhaps only 1.5% of the 1.4 billion population, or about 20 million people. From the standpoint of 1.4 billion consumers, tax reduction for only a part of the population has limited effect on expanding domestic demand and promoting consumption, and should be a multi-measure approach, with some people focusing on raising income, some people regulating the income gap through tax increase or decrease, and some people encouraging the role of “third distribution”. Specifically.
First, to increase the proportion of residents’ income in the national income, the important thing is to increase the proportion of labor compensation in the national income. To this end, in the recently released 14th Five-Year Plan, it is mentioned that “the share of labor remuneration in the initial distribution will be increased”. In other words, the wages of the majority of workers are expected to increase faster than the level of economic development.
Second, the income gap will be adjusted by means of secondary distribution such as taxation and social security. Secondary distribution has a very important role in flattening the income gap in primary distribution, but China needs to improve both tax regulation and social security in flattening the gap between the rich and the poor.
Take social security as an example, in a 2017 study on income redistribution system by the Institute of Income Distribution of Beihang University, the Gini coefficient of market income in 18 EU countries was 0.443, and with social security, the Gini coefficient of disposable income in these countries dropped to 0.29. In terms of the decline, the social security policies of EU governments led to a 40% decrease in their average Gini coefficient In contrast, China’s Gini coefficient fell by only 12.3%.
The third is to increase the distribution and play the role of the “third distribution”, also known as the “philanthropy mechanism”. The third distribution is about social responsibility, which is an important supplement to the second distribution, in which the rich voluntarily contribute part of their wealth to help the poor improve their living, Education and medical conditions, reflecting the higher spiritual pursuit of the members of society and realizing social values. The third distribution is about social responsibility.
Of course, as mentioned earlier, income is the most important factor affecting consumption, but not the only one. Rather, we need to plan systematically to realize the potential of consumer demand by reforming the income distribution system, improving the social security system, and adjusting future consumption expectations and income expectations.
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