How to balance welfare and economic growth
THE laws of economics say social welfare should be in accordance with the economicdevelopment level of a country. Welfare programs that are beyond a country's developmentlevel are not good for economic development, as has happened in Greece. On the otherhand, if the economy develops rapidly without corresponding improvement in people's livingstandards and public welfare, people will not feel a "sense of gain", which in turn will have anegative impact on economic development.
First, excessive welfare beyond a country's development level will impede accumulation andharm welfare programs in the future. In economics, production is the top priority and itdecides consumption. A society has to improve its production level if it wants to improve itsconsumption level. Production here refers to extended production, because only expandingthe scale will breed competition and provide unfailing supply. The expansion of scale shouldbe high-quality and high-level expansion of production through innovation and improvement ofthe industrial structure.
Second, welfare is not a free lunch. Welfare at any level needs economic support. High levelsof welfare in countries such as Sweden depend on high taxation and high deficit. But the high-level welfare in Greece depends on high debt. High welfare supported by high taxationreduces development funds for enterprises, impeding the development of enterprises. And ifenterprises lose energy, the entire economy will suffer. High taxation also affects individuals'desire and capacity for consumption and thus under- mines people's expandproduction.
The Laffer Curve, a possible representation of the relationship between rates of taxation andthe hypothetical resulting levels of government revenue, shows that people are reluctant toengage in production activities if taxation is very high.
to High taxation enables people to enjoymore material welfare, but it also imposes a mental burden on them. And high welfare underhigh debt will cultivate inertia and create many social problems as has happened in Greece.
Third, excessive welfare will breed dependence and result in waste of social resources.Although high welfare comes from individual taxpayers' contribution, it seems like a publicwelfare provided by the state. It will result in many social problems, such as waste of socialresources, voluntarily unemployment and retirement in advance. Once people get used to thiskind of depend- ence, economic development will be undermined.Fourth, welfare provided by the state is a redistribution of social resources. But suchredistribution has many disadvantages. For example, it could lead to rent-seeking and distortmarket signals.
However, economic development will also be undermined if the authorities fail to provideenough welfare for the people. There is a lesson to be learned here from the plannedeconomy. China's social welfare level today is not high; there is much room for improvement.So to strike the right balance between welfare and economic development, we should abideby the following principles:
One, it has to be clarified that the basic and final goal of China's economic development is thewell-being of the Chinese people. And since China is the world's second-largest economy, itshould pay more attention to improving public welfare. The Fifth Plenum of the 18thCommunist Party of China Central Committee said the national GDP and urban and ruralresidents' incomes have to be doubled by 2020 compared with the 2010 level, and hence theauthorities should focus on coordinated development to improve public services. Two, the distribution of public welfare should be fair and transparent. The public welfaredifferent social groups enjoy today is unbalanced, especially when it comes to urban and ruralareas. Therefore, the authorities should make efforts to rectify the imbalance.