Welfare spending and fiscal sustainability: segmented-trend panel-regression analysis of Chinese provinces

As a developing country, China has not yet moved in the direction of Western-style welfare states. Nevertheless, China’s debt burden is on the rise. Three provincial governments, 99 city governments, and thousands of county governments were at the edge of insolvency in 2013, reporting debt ratios exceeding 100 percent. To address regional inequalities, the central government introduced various social welfare schemes. Although there is some consensus that China’s public debt is sustainable, the link between unsustainable debt accumulation and welfare spending remains unexplored. Using a segmented-trend panel-regression analysis on 31 Mainland China Provinces, we find that unsustainable provincial debt trends are closely linked to provincial social expenditures. Since essential social expenditures are captured by some fundamental predictors of the provincial debt, the remaining unsustainable debt trends are mainly driven by rising welfare spending. This suggests that policymakers need to exercise care when designing welfare policies to avoid painful corrections.