| Abstract | China’s public expenditure accounts for more than 20% of GDP every year since 2000 (Chang et al., 2016). But such a large amount of public expenditure is ultimately allocated in various sectors of the economy. For example, infrastructure investment often refers to government purchases of output in sectors such as construction. What is the impact on economy if these money turns to education or other sectors? To understand how fiscal policy affects economy, a number of related questions are worth pondering: does the fiscal multiplier stay the same? Are residents’ welfare affected? And how does the industrial structure change?
Considering and answering the above questions is of special significance to the current Chinese economy. Fiscal policy has always been at the heart of the Chinese government’s policy toolkit. Over the years, the central economic work conference communiqué is focus on the next fiscal policy focus point. For example, the central economic work conference held at the end of 2017 proposed to “adjust and optimize the structure of public expenditure”. It is not hard to find that optimizing the allocation of public expenditure and improving the efficiency of fiscal policy are the core policy issues concerned by the Chinese government in recent years. In order to cope with the current complex and volatile international economic situation and to achieve high-quality development and successfully overcome the “middle-income trap”, undoubtedly the fiscal policy will be more “proactive”. Especially in the context of the implementation of structural tax reduction, how to optimize the allocation of public expenditure is particularly important.
Therefore, we build a multi-sector general equilibrium model to analyze the total allocation and structural effects of public expenditure, so as to try to give preliminary answers to the questions mentioned in the first paragraph. In order to clarify whether the allocation of public expenditure in different sectors may have different influences, it is necessary to clearly depict the economic correlation among these sectors. Therefore, we introduce the recent research on production network (Acemoglu et al., 2012; Acemoglu et al., 2016; Acemoglu et al., 2017; Baqaee & Farhi, 2019; Liu, 2019) into the analysis of financial policies. In a sense, this paper can be regarded as a preliminary attempt to introduce production network into financial policy analysis. Under the general assumption, we prove that the allocation of financial expenditure among different sectors does not have the total effect, but only has the structural effect. To be specific, allocation of public expenditure does not change GDP, Fiscal Multiplier as well as consumer welfare. Only the industrial structure is affected by such allocation. One policy implication of this paper is that the goal of “steady growth” and “structural adjustment” can be achieved at the same time. Then consider the total industry allocation from the perspective of “restructuring”. Given that the unreasonable allocation of public expenditure may be one of the reasons for the distortion of China’s industrial structure it is no doubt to release a new development dividend if the allocation can be adjusted to achieve the optimization of industrial structure without affecting its driving effect on GDP. The policy experiment in this paper shows that, in order to optimize the industrial structure, the public expenditure is transferred from the restricted industries with “high pollution and high energy consumption” to the high-tech industries. The adjustment of public expenditure by 1RMB can increase the added value of high-tech industries relative to restricted industries by 0.8967RMB.
Compared with the existing research, the possible marginal contribution of this paper is as follows: firstly, it provides a simple reference for the multiplier effect of departmental public expenditure. The neutral proposition proposed in this paper gives the condition that the multiplier effect of public expenditure is ignored when the multiplier effect of public expenditure is studied in the case of inter-departmental input-output correlation, and thus complements the existing researches on Fiscal Multiplier. Secondly, it provides new thinking for studying the role of fiscal policy in the upgrading of industrial structure. This paper decomposes the structural effect of department public expenditure: the total effect is separated and the influence of the adjustment of its department allocation on the industrial structure is investigated separately. In this sense we provide theoretical basis for how to implement “steady growth” and “structural adjustment” in China.
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