Still No Healthy Budget Allocations in China

MARCH 7, 2011   THE WALL STREET JOURNAL

By TOM ORLIK

How do you get 1.3 billion people to spend more? Make them feel better about their future.

On this front the Chinese government certainly has the right idea: Spending on universal education and health care is seen as critical to achieving a higher level of domestic consumption. Increased welfare spending is also a way to give households a bigger share in the benefits of China's development.

The problem is, Beijing just isn't spending enough. The Chinese public's response is to squirrel away cash to pay for health care and education. China's savings rate hovers around 30% of household income—not a natural state of affairs.

But the Ministry of Finance's report on the implementation of the budget for 2010—released to coincide with the annual National People's Congress this week—shows that budget allocations for spending on health and education remain lackluster.

A shrinking budget deficit isn't a good start. The target for the year is a deficit at 2% of GDP, down from 2.5% last year. If the government wants to raise the share of domestic consumption in the economy, it should be spending more, not less.

Health-care spending last year was just 1.2% of gross domestic product. True, that is more than twice the level of 2005, when the government made improving the quality and coverage of health and education services a priority, but it still puts China below emerging-market peers such as Brazil and South Africa.

On education, the situation is a little better: The 2010 budget shows public spending at 3.1% of GDP, though that's still below the average for middle-income countries in recent years, World Bank data show. And China's education spending has suffered from a tilt toward university and vocational education—rather than more egalitarian primary schooling, says Stephen Green, economist at Standard Chartered.

The direction of travel is right: Spending on health care and education is growing at a faster rate than GDP. But without a step change, China will still find itself in the bottom half of the middle-income class, and households will be hard-pressed to turn from savers to spenders.