Optimal Size of China's Fiscal Expenditure and Policy Evaluation: 1978-2006

In perspective of maximizing the economic growth rate, this article examines the optimal size of China's fiscal expenditure with theoretical and empirical methods. Based on exploring the Congested Public Goods Model and the Pure Public Goods Model, we estimate that during the year of 1978-2006 the optimal size of China's fiscal expenditure is about 20-25% of GDP. According to this criterion, China's fiscal spending policies can be divided into three development stages: (1) the higher size phase (1978-1992); (2) the lower size phase (1993-2000); (3) the optimal size phase (2001-2006)