China shifts focus to social welfare spending amid trade tensions with US

In response to ongoing trade tensions with the United States and the challenges posed by US President Donald Trump’s tariffs, China has made a notable shift in its fiscal policy. The country has dramatically increased social welfare spending, marking the highest level of expenditure on social programs in nearly two decades. This pivot toward supporting domestic consumption and boosting household well-being comes as China faces a record budget deficit and an economic slowdown exacerbated by the trade war.

According to data released on July 28, government spending on social welfare-related outlays reached nearly 5.7 trillion yuan ($795 billion) in the first half of 2025, representing a 6.4 per cent year-on-year increase. This marks the highest level of social welfare expenditure since 2007. The increase in social spending is almost double the rise in total government expenditure under the general public budget. In comparison, infrastructure-related spending saw a 4.5 per cent decrease from the previous year, signalling that the government is prioritising welfare over traditional investments in large-scale infrastructure projects.

The uptick in social spending is part of a broader strategy to support domestic demand and counter the economic impact of US tariffs. Analysts suggest that the shift in fiscal policy is critical as China seeks to mitigate job losses and bolster its social safety net, which has been under pressure due to the trade conflict.

New initiatives to boost birth rates and employment support

In a direct effort to support families and improve employment prospects, the Chinese government has unveiled a nationwide cash handout program for couples. Starting later this year, families with children under the age of three will receive annual subsidies of 3,600 yuan ($501.5) per child. The initiative aims to address China’s declining birth rates, which have been exacerbated by rising living costs and limited childcare options.

The decision to ramp up social welfare comes as government officials look to bolster domestic demand in the face of a declining export market. China’s shipments to the United States have slumped due to the ongoing trade war, with tariffs as high as 51 per cent on Chinese goods. Citigroup estimates that the cost of the child welfare program could reach up to 117 billion yuan ($16.30 billion) in the second half of 2025, while Morgan Stanley predicts it could cost around 100 billion yuan ($13.93 billion) annually.

In addition to childcare subsidies, the government has also increased spending on social security and employment, with outlays rising by almost 8 per cent in the first half of 2025. A record low employment sentiment index, as revealed by the People's Bank of China’s recent survey, underscores the need for additional government support in this area.

Strained government revenues and shifting priorities

Despite the increased spending on social programs, government revenues have been under strain. Tax revenue for the first half of the year fell by 1.2 per cent year-on-year, amounting to 9.29 trillion yuan ($1.29 trillion). The most significant drop came from the vehicle purchase tax, which plunged 19.1 per cent, reflecting the impact of a government decision to extend the suspension of the levy on new energy vehicles through 2027. This shift to electric cars has also weighed heavily on consumption taxes, particularly those levied on gasoline and diesel.

Meanwhile, local governments have been cautious in issuing new bonds, with 56 per cent of the annual quota for special local bonds already used up. This is lower than the 61 per cent average in previous years, as provinces are now prioritising social welfare programs over infrastructure projects. Despite this, China remains committed to major infrastructure projects, including the construction of a 1.2 trillion yuan ($167.18 billion) mega-dam in Tibet, though analysts suggest the scope for new infrastructure expansion may be shrinking.

The government’s strategy of prioritising social spending over traditional growth drivers, such as infrastructure, reflects the pressing need to shore up domestic demand and maintain stability in an increasingly uncertain global environment.

(With inputs from agencies)