The relative importance of the Chinese stimulus package and tax stabilization during the 2008 financial crisis

The general presumption in the policy literature has been that China's sustained high growth since 2008 and the global financial crisis (with a dip in Q1 2009) have been heavily reflections of the November 2008 4-trillion Renminbi stimulus package. Less attention has been paid to the revenue side of the government account, even though immediately following the onset of the crisis, government revenues fell after growing at roughly 30% annually pre-crisis. The issue we address in this article is the relative importance of expenditure stimulus and tax stabilization after the onset of the 2008 crisis. We use a Keynesian macroeconomic model of China recast in changes form to quantitatively evaluate the relative importance of the stimulus and automatic tax stabilization components. Our simulation results indicate that without the stimulus package, the economic growth in 2009 would have been only 6.8%, and without slowed growth of government revenues, the growth rate in 2009 would have been only 6.0%. Our conclusion is that while increases in government spending and revenue reduction stimulus from automatic revenue responses both contributed to the speedy recovery of the Chinese economy from the crisis, the tax side may have contributed more than the expenditure side.