Analysis of China’s Fiscal Deficit Policy Since the Reform and Opening Up Between 1978 to 2021

Since the beginning of Reform and Opening Up, China has gradually introduced fiscal deficit policies with the aim of supporting economic growth, improving social welfare, and addressing challenges such as economic cyclical fluctuations. The aim of this thesis is to evaluate China's fiscal deficit policy between 1978 and 2021, and the focus of this thesis is the impact of fiscal deficits from 1978 to 2021 on household consumption, private investment, and economic growth. The study begins by thoroughly comparing fiscal policies between Western countries and China. It establishes a theoretical foundation by referencing existing fiscal deficit theories and research findings. The research encompasses the period from 1978 to 2021 and investigates China's fiscal revenue and expenditure trends. It also estimates the fiscal stance and impulses during this timeframe. Furthermore, the study conducts a qualitative analysis of China's fiscal budgeting process, revealing a lack of transparency. Notably, China's budget process differs significantly from that of the European Union, such as in the participants in the budget process, the budgetary framework, core budgetary institutions, transparency and accountability measures, as well as the size and sources of the budget. The thesis employs econometric models such as the Engle-Granger Cointegration and the Error Correction Model (ECM). The following conclusions have been drawn: (1) In the short run, the fiscal deficit had a positive but not significant effect on household consumption. (2) In the short run, the fiscal deficit had a positive but not significant effect on private investment. (3) In the short run, a fiscal deficit had a positive but not significant effect on economic growth.