Consumption in China is unusually low and has continued to decline as a share of GDP over
the past decade. A key policy question is how to reverse this trend, and rebalance growth
away from reliance on exports and investment and toward consumption. This paper
investigates whether the sizable increase in government social spending in recent years
lowered precautionary saving and increased consumption. The main findings are that
spending on health, but not education, had an impact on household behavior. The impact,
moreover, is large. A one yuan increase in government health spending is associated with a
two yuan increase in urban household consumption.