Why Western economies have budget crises and China doesn't
- By John Ross
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China.org.cn, August 3, 2011
This investment fall, by creating recession, produced a decline in personal and company income and therefore a fall in tax revenue – this was the primary reason for budget deficits. The crucial issue, both for economic development and to close the budget deficit, is therefore how to relaunch growth.
China's situation was different and explains why it ran no significant deficit. China no longer administratively runs its economy, as it did before economic reform began in 1978, but it still has a sufficiently large state sector that this could be, and was, instructed to increase investment. As the key banks are state owned they could be instructed to increase lending to companies – in the US the opposite occurred and lending to companies fell sharply. The rapid economic growth initially generated by China's state companies in turn stimulated the private sector.
The result, during the crucial period 2008-2009, is shown in Figure 2. Instead of China's investment falling it rose by $420bn. Consequently there was no recession. Under the impact of the increase in jobs and incomes created by the stimulus package, China's household expenditure also rose by $160bn. Therefore despite the combined effect of a fall in net exports and inventories of $160bn China's GDP in 2009 rose by $440bn.
As there was no recession there was no fall in tax revenue and no major budget deficit. As this process continued, by 2011 China's GDP had increased by over 30 percent, $2.3bn in current price terms, compared to pre-crisis level. In contrast by the 2nd quarter of 2011 US GDP was still 0.4 percent below its 2007 peak level.
In the US and Europe the budget deficits were increased by government attempts to restart growth. China could instruct its state companies to invest and its state banks to lend, but the state sector in the US and Europe is too small for this to be effective. Only indirect means, such as quantitative easing (printing money) and budget deficits were available as policy tools. Both proved ineffective in restarting rapid growth. But the latter policy worsened the deficits. China, due to the rapid growth resulting from the investment stimulus, had no significant budget deficit.
