Sheng Songcheng: How to Vigorously Boost Consumption from the "Government Work Report"

This article believes that in terms of policy prioritization, "vigorously boosting consumption" is placed before investment for the first time, highlighting the priority of consumption in macroeconomic policy; at the theoretical level, it clearly identifies consumption as a key area for breaking through the shortfall in domestic demand, marking an important shift in economic development concepts. Of course, this does not mean neglecting the role of investment, but rather emphasizes the coordinated development of consumption and investment to jointly promote the expansion of domestic demand.

\* This article is based on the speech by Sheng Songcheng, a professor at China Europe International Business School and former director of the Statistics and Analysis Department of the People's Bank of China, at the Global Wealth Management Forum "2025 International Economic Situation and Market Outlook" seminar on March 26.

The "Government Work Report" proposes, " vigorously boosting consumption, improving investment efficiency, and comprehensively expanding domestic demand. Promoting better integration of consumption and investment, accelerating the 补上 of domestic demand, especially the shortfall in consumption, making domestic demand the main driving force and stabilizing anchor for economic growth."

It is noteworthy that the policy statement "vigorously boosting consumption, improving investment efficiency, and comprehensively expanding domestic demand" has significant theoretical innovation and practical significance. Its embryonic form can be traced back to the Politburo meeting in September last year and the Central Economic Work Conference in December, and was further reinforced in the "Government Work Report." The importance of this statement is reflected in: First, in terms of policy prioritization, "vigorously boosting consumption" is placed before investment for the first time, highlighting the priority of consumption in macroeconomic policy; Second, at the theoretical level, it clearly identifies consumption as a key area for breaking through the shortfall in domestic demand, marking an important shift in economic development concepts. Of course, this does not mean neglecting the role of investment, but rather emphasizes the coordinated development of consumption and investment to jointly promote the expansion of domestic demand.

1. Consumption will play a more important role in this year's economic growth

From the perspective of macroeconomic operation, although the GDP growth targets for last year and this year are both set at around 5%, the structural characteristics of economic growth are undergoing significant changes. An analysis of the contribution of the "three drivers" (investment, consumption, and net exports) reveals that in recent years, the contribution rate of domestic demand (including consumption and gross capital formation) to economic growth has shown a continuous downward trend. It should be noted that in the national economic accounting system, there is a statistical difference between "gross capital formation" and the commonly understood "investment," but for ease of understanding, this article uses the convention to refer to both as investment.

Particularly noteworthy is the trend in net exports. As an indicator of "net exports of goods and services" in GDP accounting, its contribution rate has shifted from negative to positive, with a contribution rate exceeding 30% to economic growth for the entire year of 2024, and reaching over 45% in the third and fourth quarters. Considering the uncertainties in the international economic and trade environment, especially the impact of geopolitical factors, it may be difficult to maintain such a high contribution rate from net exports this year This raises higher requirements for expanding domestic demand, especially for boosting consumption. Against this backdrop, the "Government Work Report" clearly states the need to "promote a better combination of consumption and investment."

To visually demonstrate China's consumption level, I selected 10 typical countries that account for 63.16% of global GDP (including China, Japan, the United States, Germany, Argentina, etc.) for horizontal comparison. The data shows that when these countries' per capita GDP is in the range of $10,000 to $15,000, the average consumption rate reaches 73.22%. In contrast, China's per capita GDP in 2023 has reached $13,000, but the consumption rate is only 56.8% (2024 data has not yet been released), which is about 20 percentage points lower than the international average level. This gap fully illustrates that China's consumption level is still insufficient.

II. Strengthen the Redistribution Adjustment Efforts for the Household Sector

(I) Theoretical Mechanism of Income Distribution and Consumption Boost

The core factor determining the consumption level is not nominal income, but the actual disposable income after redistribution adjustment. Here, "redistribution" includes tax adjustments, transfer payments, social insurance, etc. From the perspective of national income distribution, China has undergone significant structural changes: in the past, the income share of the household sector after redistribution was higher than that of the primary distribution, but in the past two decades, this relationship has reversed, and the income share of households after redistribution is now lower than that of primary distribution.

International comparisons show that in 2022, the disposable income of China's household sector accounted for 60.8% of GDP (2023 data has not yet been released), significantly lower than Japan's 70.3%, Germany's 69.5%, and much lower than the United States' 84.9%. This difference in income distribution patterns is one of the deep-seated reasons for China's long-term low consumption rate (56.8% in 2023).

(II) The Interactive Relationship Between Consumption Upgrade and Industrial Transformation

The "Government Work Report" proposes to "strengthen the livelihood orientation of macro policies," pointing out that "the focus of economic policies is shifting more towards benefiting people's livelihoods and promoting consumption, using consumption to boost economic circulation, and leading industrial upgrades through consumption upgrades, creating new economic growth points while ensuring and improving people's livelihoods." Among them, "leading industrial upgrades through consumption upgrades" has profound theoretical connotations and practical value. Taking the United States as an example, in the early 1960s, when per capita GDP reached $19,000, the consumption rate was 77%. Currently, as per capita GDP has risen to $83,000, the consumption rate has increased to 82%. This evolution process confirms the leading role of consumption in industrial upgrades: from the technological iteration from 3G to 5G, as well as China's new energy vehicle industry's "curve overtaking," all benefit from the scale effect and demand traction of the consumption market China has a super-large market advantage with a population of 1.4 billion, and consumption upgrades will provide continuous momentum for the development of new productive forces.

(3) International Comparison of Social Security Systems and Policy Implications

This comparative study focuses on social security expenditures in major developed countries. Among them, economies such as the European Union, Japan, and the United States generally adopt the proportion of unified social security fiscal expenditure to GDP as a measurement standard. To more comprehensively assess the level of social security in China, this study constructs a four-level statistical caliber: Caliber 1 is the proportion of basic social security expenditure to GDP; Caliber 2 is the proportion of social security + healthcare expenditure to GDP; Caliber 3 is Caliber 2 + housing security expenditure (including affordable housing projects, home purchase subsidies, public facility maintenance and renovation, etc.); Caliber 4 is Caliber 3 + education (the broadest livelihood expenditure caliber). Even when using the broadest Caliber 4 for international comparison, the proportion of livelihood expenditure to GDP in China remains significantly lower than that of developed economies. This empirical research result strongly supports the strategy proposed in the "Government Work Report" to "strengthen the livelihood orientation of macro policies," highlighting the necessity of promoting consumption through improving people's livelihoods to cultivate new growth points.

The current stimulus policies such as replacing old consumer goods and consumption vouchers are short-term demand management tools and are difficult to form a sustainable consumption growth mechanism. In the long term, it is necessary to promote institutional reforms in areas such as taxation. There is still room for optimization in the tax burden of China's middle-income group. The current individual income tax system sets a tax rate of 10%-20% for the annual income group of 100,000 to 300,000 yuan, which may suppress consumption potential. It is recommended to focus on reducing the tax burden on middle and lower-income groups, as this group has a higher marginal propensity to consume and is the main force in expanding consumption. Specific reforms could consider raising the basic deduction standard and lowering the tax rates for the middle-income brackets, while also ensuring a good assessment of fiscal sustainability.

(4) Policy Recommendations

Based on the current economic situation and the demand for consumption promotion, the following two policy recommendations are proposed:

First, optimize the individual income tax system. It is recommended to moderately raise the individual income tax threshold from the current 5,000 yuan/month to 8,000 yuan/month. Calculations show that this adjustment will reduce tax revenue by about 30 billion yuan/year, accounting for only 0.17% of the projected total tax revenue in 2024. At the same time, it is recommended to reduce the tax rate for the annual income range of 100,000 to 200,000 yuan from 10% to 5%, and for the range of 200,000 to 300,000 yuan from 20% to 15%. The above plan is expected to reduce taxes by about 130 billion yuan annually, which is equivalent to 13% of the scale of a special government bond issuance, but it has a significant "direct consumption" effect, effectively enhancing the disposable income and consumption expectations of the middle and low-income groups.

Second, improve the social security system for key groups. Given the large scale of flexible employment personnel in China (about 80 million, accounting for 21% of the total employed population), it is recommended to focus on strengthening the following 保障措施: first, accelerate the implementation of childcare subsidy policies; Second, improve the social insurance system for flexible employment; third, steadily increase the level of pension benefits. By strengthening the intensity of transfer payments, effectively enhance the social security level of specific groups, and boost their consumption confidence and expectation stability.

III. Service Consumption Has Significant Potential

From the perspective of consumption structure, service consumption occupies an important position. In this regard, the "Government Work Report" clearly states the need to "loosen access, reduce restrictions, and optimize regulation" to expand the supply of diversified services such as health care, elderly care, childcare, and housekeeping. This policy direction indicates that promoting consumption requires not only efforts from the demand side but also addressing structural issues on the supply side. Currently, there is still a significant supply shortage in areas such as elderly care, childcare, housekeeping, and health care in China, which directly restricts the release of consumption potential.

Service consumption accounts for 52% of total household consumption in China, a figure that is significantly lower than the 65% in the United States. Specifically, household consumption can be divided into two main categories: service consumption and goods consumption (total retail sales of social consumer goods). Notably, from 1970 to 2023, all areas of service consumption in the United States have shown significant growth: medical care spending increased 64 times, while entertainment services and financial insurance services grew 52.8 times and 47.7 times, respectively. This structural change not only reflects the increase in the proportion of service consumption but also indicates an upgrade trend in household consumption towards high-end service areas such as health, culture, and finance.

The structural contradictions facing China's consumption sector urgently need to be addressed, especially in responding to population aging, improving childcare services, and alleviating the trend of declining birth rates. There is an urgent need to fill the gaps through the transformation and upgrading of the service industry. Recently, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the "Special Action Plan to Boost Consumption," which proposed 30 specific measures, particularly emphasizing the need to steadily promote the opening up of the service industry, focusing on pilot openings in telecommunications, healthcare, education, and other fields. This policy direction is of breakthrough significance: compared to the opening up of the manufacturing industry, the degree of opening up in China's service industry is relatively lagging. The promotion of pilot openings in the long-underdeveloped education, healthcare, and telecommunications sectors reflects the determination to deepen service industry reform.

It is important to emphasize that the reform and opening up of the service industry is equally important as that of the manufacturing industry. Only through structural reform in the service industry can we truly achieve quality upgrades in the service sector, thereby stabilizing economic growth, improving income expectations, and promoting the industry towards new productive forces. This development path is not only a key measure to boost consumption but also an important breakthrough for achieving high-quality economic development.

Author of this article: Sheng Songcheng, Source: China Wealth Management 50 Forum, Original Title: Sheng Songcheng: How to Vigorously Boost Consumption from the "Government Work Report"

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