For China, enlarging its middle-income group holds the key to upgrading its economic structure, boosting domestic demand and coping with trade protectionism and unilateralism. This has become a priority for the Chinese government.

Although the Chinese middle-income group has witnessed considerable growth in recent years, it still accounts for a relatively low proportion of the total population, around 35 percent. The aim is to create an olive-shaped structure in which the middle-income group is the largest.

Besides, some members of the middle-income group are vulnerable to mounting pressures concerning employment, healthcare, old-age care, education and housing, which partly comes from the fact that the Chinese economy is undergoing a thorough upgrading. As a result, the relatively small proportion and low resilience of the middle-income group is hindering China's coordinated and sustainable development.

From the perspective of fiscal expenditure, three ways could be considered by the government to deal with this issue: increasing the proportion of public service expenditure under the precondition that tax burdens on firms and individuals are not to be raised; equalizing fiscal expenditure in public services; and enhancing the efficiency of public service fiscal expenditure.

China should readjust its income structure by restructuring its fiscal expenditure. Expenditure on education, healthcare, social security and other public services should form a larger share of total government expenses and GDP, and such expenditure should be equalized to enlarge the middle-income group.

The crowding out effect in the public sector should be minimized, which means that the government needs to both add and subtract.

Spending on economic construction and public administration must be lowered to ensure more expenditure on public services.

Meanwhile, fiscal transparency and the efficiency of governments at various levels need to be enhanced. Multiple sources of investment can be invited by opening up the market in areas of diversified and multilayered demands, such as medical insurance and old-age care.

Institutional arrangements should be put in place toward this end as equalization of public sector expenditure could close income disparity, promote balanced development among regions and urban-rural areas, and create better conditions for the upward mobility of the middle-and low-income population.

In middle-income-dominated countries such as the Nordic countries, fiscal resources are allocated to equalize living conditions or basic public services. But the situation is quite different in China since there are still sharp regional and urban-rural gaps in public sector spending.

Therefore, besides increasing investment in education, healthcare and social security, the central government should establish a more equalized fiscal institution and improve the transfer payment system.

China should initiate reform to enhance expenditure efficiency, which will make sure that each yuan spent by the government can generate more public services for the people.

The public expenditure administration system reform should begin with performance management. Safeguarding people's basic livelihood and equalizing access to public services should become major indicators in the performance assessment of public spending efficiency. The public expenditure budget should be more law-based, scientific and inclusive, and measures should be adopted in budget formulation to make the texts plain and easy to understand. And the government purchasing system should be exercised across the board in sectors related to public services.

Another dimension of spending administration reform involves coordinated readjustment of the structure of taxation and government spending.

To be specific, public sector spending should be increased under the precondition that the tax burden on companies and individuals is not raised.

Research on the highest marginal tax rates of 145 countries conducted by the Shanghai Institute of Finance and Law last year shows that the majority of 45 countries whose highest marginal tax rates reach 45 percent are developed countries or welfare states.

Considering China's current social welfare situation, a 45 percent marginal tax rate would put China's business environment into a quite disadvantaged position.

What China should do is further cut taxes, speed up the transition from an indirect taxation structure to a direct-tax-dominated mix and push for coordinated reform of optimizing taxation and fiscal expenditure spending at the same time to provide a powerful guarantee for sustainable public expenditure.

Whether public sector spending can materialize into high quality public services depends on the efficacy of the public service system. On the precondition of securing equalized access to public service, we should strive to explore a sustainable fiscal path by innovating operation models and diversifying participant entities of public service provision.

The author is director of the Center of International Economics and Exchanges at the China Institute for Reform and Development.

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.