Making Sense of China’s Government Budget

By: Brian Hart, Bonny Lin, Matthew P. Funaiole, Samantha Lu, Hannah Price, Matthew Slade

Updated March 26, 2026

Every year, at the convening of China’s legislative “Two Sessions,” the Chinese government releases a new budget that plays a major role in shaping the trajectory of the world’s second-largest economy. In March 2026, China issued a budget report laying out projected revenues and expenditures in 2026 and detailing China’s fiscal performance in 2025. These documents are hard to decipher, and the topline figures only tell part of the story. This ChinaPower feature untangles the details behind China’s government budget, offering insights into Chinese spending priorities and revealing how China’s fiscal situation is worsening with each new year.

China’s 2026 General Public Budget

At the heart of China’s government budget is the general public budget (一般公共预算).¹ It includes revenue and spending by the central government and local governments, as well as transfers from the central government to local governments.

The new 2026 general public budget projects revenue of RMB 24.1 trillion ($3.5 trillion) and expenditure of RMB 30 trillion ($4.3 trillion)—both up 4 percent from the previous year.² This leaves China with an official projected deficit of nearly RMB 5.9 trillion ($854 billion), also up 4 percent from the projected deficit in 2025.³

 

One of the most closely watched items in the budget is China’s defense spending. China’s 2026 defense budget was set at RMB 1.9 trillion ($276.7 billion), a nominal 7 percent increase from the 2025 budget. This continues a recent trend that has seen nominal yearly percentage increases in the upper single digits. Even with steady increases, China still spends less on defense than the United States. In fiscal year 2026, the U.S. Congress authorized $890.6 billion in total defense spending, as well as an additional $82.2 supplementary funding for fiscal year 2026 and 2027 from the One Big Beautiful Bill Act.⁴

Nevertheless, China boasts the world’s second largest military budget, and China’s official defense figures do not capture total spending on the military. Actual defense spending is estimated to be considerably higher. Leading unofficial estimates peg actual spending at around 30 to 40 percent above Beijing’s figure, and one recent study, which accounts for purchasing power parity, estimates that China’s total defense spending is about twice the official figure, at around $471 billion.

Besides the military, spending on foreign affairs and science and technology are slated to see even larger percentage increases in 2026. Social welfare spending on social security, education, and health is rising at a slightly slower pace, but still faster than the total national average increase of 4.1 percent.

 

Notably, this spending is taking place against the backdrop of a slowing economy. The annual government work report, delivered by Premier Li Qiang during the opening session of the National People’s Congress in March, targeted a GDP growth rate of 4.5 to 5 percent (in real terms). This is the country’s lowest GDP growth target since 1991, except for 2020 when China did not release a GDP growth target amid the economic fallout from the Covid-19 pandemic.

China’s 2025 Fiscal Situation

In addition to laying out forecasted budget figures for the new year, each budget report provides data on actual spending in the previous year—which is not always in line with projected budget figures. In 2025, China’s national general public budget revenue dropped to RMB 23.2 trillion ($3.3 trillion)⁵ and expenditure grew to RMB 28.8 trillion ($4 trillion), resulting in an official deficit of RMB 5.7 trillion ($794 billion).⁶

The fall in revenue is notable. Revenue declined by 5.5 percent in 2025—the sharpest drop in decades and an even steeper drop than in 2020, when the Covid-19 pandemic constrained China’s fiscal situation.⁷

 

A few factors contributed to the drop. An 11.3 percent fall in non-tax revenue weighed significantly on overall revenue. The official budget report states this decline was mainly due to a high 2024 base created by a one-time arrangement requiring some central departments to hand over special proceeds in 2024. In other words, part of the 2025 decline is simply due to unique base effects.

However, the budget report also offers three macroeconomic reasons for weaker revenue growth in 2025. It mentions “drastic changes in the international economic and trade environment,” an indirect nod to the trade standoff with the United States. It also blames “low price levels” from deflationary pressure, which suppresses the nominal tax base.

Finally, the report mentions “ongoing adjustments in the real estate market,” an admission that China’s years-long property slump continues to create fiscal challenges, especially at the local level, where the property market’s decline has constrained the ability to gain from investment-led growth. China is increasingly looking at new revenue sources to lessen its fiscal challenges, including a new value-add tax in 2026 and greater long-term commitment to tax reform in the 15th Five Year Plan, which guides economic planning from 2026 to 2030.

Faced with downward pressure on revenue, China’s expenditure also slowed in 2025, especially at the local level, where cash-strapped governments have had to tighten their belts. From 2024 to 2025, growth in central level spending reached 5.7 percent, and growth in central government budget transfers to local government were at 1.6 percent while local government spending growth was nearly flat at just 0.2 percent.

Looking at notable 2025 expenditure categories, spending on foreign affairs reached RMB 65 billion ($9.1 billion), a notable increase of 8.7 percent, nearly doubling the year-over-year growth seen in 2024.⁸ Public security spending recovered from slower growth in the previous year, while agriculture, forestry, and water experienced the sharpest decline due to the significantly elevated spending in that category in 2024.

In line with trends from the previous year, the Chinese government spent the most on education and social security and employment, and it has continued investments in science and technology, albeit at a slower pace of 4.8 percent growth in 2025 compared to 5.7 percent growth in 2024. Debt payments in 2025, amounting to RMB 1.4 trillion ($189.2 billion), grew by 4.8 percent and marked a slower growth compared to the 8.8 percent growth in 2024.

Long-Term Trends under Xi Jinping

The release of each new budget also provides a more complete picture of how China’s spending priorities have evolved since Xi Jinping came to power in November 2012. Buoyed by China’s rapid economic growth, the general public budget has ballooned significantly under Xi. From 2013 to 2025, total expenditure grew 102 percent and revenue expanded 77 percent.

As spending has outpaced revenue, China has been left with a widening government deficit. In 2025, the official general public budget deficit reached RMB 5.66 trillion ($793.9 billion)—more than doubling since 2019.¹³ This trend is set to continue with a projected 2026 deficit of RMB 5.89 trillion ($853.6 billion), marking the highest deficit level recorded in China’s general public budget.

 

Not all parts of the budget have grown at the same pace. Between 2013 and 2025, spending on debt interest payments skyrocketed 341 percent, faster than any other major budget category. This reflects the growing strain China is facing under rising debt, with 19 percent of its 2026 central expenditure budgeted toward paying debt interests. This level of debt payment puts China roughly on par with other major economies. In fiscal year 2026, 14 percent of U.S. federal government outlays were towards interest payments on debt, and 25.6 percent of Japan’s fiscal year 2026 budget is expected to be spent on debt servicing.

China’s spending on social issues has also risen substantially. Expenditure on social security and employment—one of China’s largest spending categories—rose 206.5 percent between 2013 and 2025. China nevertheless continues to lack the robust levels of social welfare support seen in many advanced economies even as it faces increasing pressure to expand social welfare protections in a slowing economy. For instance, China has published plans to boost domestic consumption through a range of social subsidies, including for childcare, elderly care, and consumer product trade-ins. At the same time, the Chinese government has implemented some policy measures, such as raising the age of retirement, to ease pressure on government social payments.

 

Other categories, such as science and technology and defense, have also experienced high rates of growth over the last decade. Both have been major priorities for China’s leaders. China’s high spending on science and technology has helped to fuel major national projects under the “Innovation 2030” initiative,” including AI, quantum technology, space technology, deep-sea research, neural technology, and biotechnology. Major breakthroughs in quantum computing, space technology, and nuclear fusion have come out of these efforts. Spending on defense has also risen at a fast clip amid a major push to modernize the People’s Liberation Army.

Some categories have lagged in comparison. Spending on foreign affairs increased just 82.6 percent over the 2013-2025 period—about half as fast as increases in defense spending. Amid belt-tightening during the Covid-19 pandemic, spending on foreign affairs dropped nearly 17 percent in 2020 before dropping further in 2021 and 2022. Foreign affairs spending began to recover in 2023 and only recently surpassed the pre-pandemic high set in 2019.

At first glance, the budget figures also seem to suggest sluggish growth in spending on transportation. However, it is important to note that much of China’s spending on infrastructure is in various parts of local government budgets, and, most of the time, the provincial government holds the authority to allocate funds for infrastructure projects. A significant part of the total budget on infrastructure is likely obfuscated in the central transfer payments to local governments. The central government has also issued special sovereign bonds to help local governments fund infrastructure and other projects. Unlike regular government spending, these bonds are earmarked for specific projects and are not reflected in the general public budget.

China’s Other Budgets Reveal Deeper Fiscal Challenges

The general public budget is important, but it only tells part of the story. China has three additional national budgets: the government funds budget, the state capital operations budget, and the social insurance fund budget. In 2014, China’s Budget Law was revised to include a stipulation that revenues and expenditures from all four budgets should be included to create a “full-caliber” budget (全口径预算). Each of these budgets contains different components of China’s fiscal portfolio, as outlined below:

• Government Funds Budget (政府性基金预算): This budget largely falls under the purview of local governments. Revenue is primarily financed through land sales, with additional revenue from central and local governments’ purchases of special bonds. Expenditure flows are focused on capital expenditures such as infrastructure projects. In 2026, this budget’s revenue is projected to be RMB 5.8 trillion ($841.7 billion) and expenditure will be RMB 11.9 trillion ($1.7 trillion), resulting in a deficit of RMB 6.1 trillion ($878.1 billion)—up from a RMB 5.5 trillion ($773.9 billion) deficit in 2025. In an effort to promote economic growth, the central government will continue issuing ultra long-term special government bonds (超长期特别国债), which will contribute RMB 1.3 trillion ($188.4 billion) toward large-scale infrastructure projects and consumption-boosting initiatives. The entirety of these bonds will be issued to the government funds budget.

• State Capital Operations Budget (国有资本经营预算): The state capital operations budget is managed by the State-owned Assets Supervision and Administration Commission and centers on the revenue and expenditure associated with China’s sprawling network of state-owned enterprises. In 2026, the state capital operations budget is projected to bring in revenue of RMB 796.6 billion ($115.5 billion) and its expenditure will stand at RMB 292.1 billion ($42.3 billion). With an additional RMB 26 billion ($3.8 billion) carried over from the previous year, there will be a resulting surplus of RMB 530.5 billion ($76.9 billion), all of which will be transferred to the general public budget.

• Social Insurance Fund Budget (社会保险基金预算): The social insurance fund is managed by the National Council for Social Security Fund and is dedicated to meeting China’s social security needs. Income is generated from a subset of funds and the bulk of this is spent on costs related to pensions and medical insurance. In 2026, this budget’s revenue is projected to reach RMB 13.1 trillion ($1.9 trillion) and the expenditure will be RMB 11.8 trillion ($1.7 trillion), resulting in a surplus of RMB 1.3 trillion ($185.5 billion), which will be added to the fund’s overall capital, which is projected to stand at RMB 17.3 trillion ($2.5 trillion).

With the exception of the social insurance budget (which operates somewhat separately), the Chinese government has utilized transfers across these budgets to offset deficits in other areas. China states that its official general public budget deficit in 2026 will be RMB 5.9 trillion ($853.6 billion), but without transfers from other areas, the actual general budget deficit would total RMB 13.4 trillion (nearly $2 trillion).

When transfers between budgets are removed and China’s various budgets are consolidated into one total budget (excluding the social insurance fund budget), China’s fiscal situation appears significantly less healthy. China’s official 2026 deficit of RMB 5.9 trillion amounts to approximately 4 percent of China’s GDP. When the other budgets are accounted for, China’s total deficit climbs to a record-breaking 9.1 percent of GDP.

 

Tracking this trend over time paints a picture of a rapidly worsening fiscal situation for China. In the past, surpluses in the government funds budget and state capital operations budget typically helped to offset deficits in the general public budget, but this changed significantly in 2020 as China spent heavily to offset the economic fallout from the Covid-19 pandemic.

One key part of this has been the issuance of trillions of RMB worth of special-purpose bonds (专项债券). These fall under the government fund budget and were primarily created as a new vehicle for local governments to raise money for infrastructure projects and other special needs. More recently, however, these bonds have been used to alleviate local governments’ debt burdens and purge non-performing loans from their balance sheets. China authorized RMB 4.4 trillion of these kinds of bonds in 2025, up from 3.9 trillion in 2024.

Since 2022, China’s fiscal woes have been compounded by a major slowdown in the country’s sprawling real estate sector. Land sales are a crucial source of revenue for many local governments. Data from China’s National Bureau of Statistics shows that after a steep drop in 2022, land sales stabilized somewhat in 2023 but have since dropped further. This lost revenue was a major contributor to the 12.2 percent drop in the revenue of the government funds budget in 2024 and a subsequent 7 percent drop in 2025.

China is not alone in facing a tough fiscal environment. Governments around the world have been challenged by the pandemic and the ensuing economic fallout. Yet China’s situation is worsening at a rapid pace. If its deficits continue to grow, Chinese leaders will be forced to grapple with increasingly tough decisions about how to increase revenue or cut spending—or both.