$1.8 Trillion Deficit: China Records Largest Budget Gap as Welfare Spending Surges

China posted a record government budget deficit last year as social welfare spending accelerated at its fastest pace in more than half a decade, underscoring a quiet shift in fiscal priorities amid prolonged trade tensions with the United States.

According to calculations by Bloomberg based on data released Friday by China’s Ministry of Finance, broad government expenditure exceeded revenue by ¥12.7 trillion ($1.8 trillion) in 2025, marking the largest fiscal shortfall on record. Overall spending rose nearly 4% year on year, while combined outlays on social programs—including education, healthcare, and social security—jumped 9.5%, the strongest increase since 2017.

The figures highlight Beijing’s balancing act as it attempts to support household demand and economic stability without reigniting the borrowing risks that have long plagued local governments.

A Shift Beneath the Surface

At first glance, China’s fiscal expansion appears restrained. Total government spending under its two main budgets reached about ¥40 trillion last year, roughly 5% below what officials had projected at the start of the year. In fact, China last spent more than planned in 2018, during the first U.S.-China trade war under President Donald Trump.

Yet beneath that restraint, the composition of spending has shifted meaningfully.

Authorities channeled more resources into welfare and household support, reflecting growing concern over weak domestic consumption, demographic pressures, and uneven economic recovery. Measures rolled out during the year included nationwide cash handouts aimed at encouraging couples to have children, as well as increased funding for healthcare and social insurance programs.

The pivot comes as Beijing seeks to reduce its reliance on exports and investment while nurturing consumption-led growth—an objective that has proven difficult to achieve.

Trade Tensions Shape Fiscal Choices

The spending increase unfolded against the backdrop of renewed trade frictions with the United States, where higher tariffs raised the risk of export disruptions. Anticipating external headwinds, Chinese policymakers moved early in the year to bolster domestic demand, front-loading fiscal support in the first half of 2025.

Broad expenditure rose most sharply during that period as officials sought to cushion the economy from potential fallout linked to U.S. trade policy.

However, analysts note that the headline growth in spending overstates its direct impact on economic activity.

“A significant portion of last year’s fiscal outlays did not go toward stimulating growth,” one economist said, pointing to efforts to address hidden debt risks at the local level.

Local Government Debt Still a Priority

A substantial share of government spending was directed toward refinancing off-balance-sheet borrowing accumulated by provincial and municipal governments. These liabilities—often tied to infrastructure projects and financing vehicles—have long been a source of concern for policymakers and investors alike.

By allocating funds to debt restructuring rather than new stimulus, Beijing signaled that financial stability remains a core priority, even as it expands social spending.

The approach reflects a broader strategy: provide targeted support to households while avoiding a debt-fueled stimulus reminiscent of earlier cycles.

Growth Support Falls Short

Despite the fastest overall spending growth since 2020, the fiscal push did not translate into a full-scale growth boost. Consumer confidence remained fragile, and private investment continued to lag, limiting the multiplier effect of government outlays.

Exports, by contrast, remained relatively resilient, helping to offset domestic weakness. That resilience may give policymakers less urgency to unleash aggressive stimulus this year.

“With exports holding up better than expected, the government is likely to expand spending only modestly in the near term,” analysts said, noting the difficulty Beijing faces in boosting revenue while managing debt risks.

Looking Ahead: Cautious Expansion Expected

As China moves into the new fiscal year, expectations are building that budget growth will remain measured. Revenue pressures persist due to slowing property activity and uneven corporate profits, while the campaign to defuse local government debt shows no signs of easing.

Still, welfare spending is expected to stay elevated as authorities grapple with an aging population, low birth rates, and the political imperative to support household incomes.

The record deficit underscores a key reality for China’s policymakers: even as they preach fiscal discipline, sustaining social stability and domestic demand increasingly requires deeper public spending.