Abstract
The long-lasting “guns versus butter” argument reflects the fact that China has been experiencing a difficult choice in terms of improving the defense and social welfare sectors, and thus achieving fiscal sustainability. The result, however, is controversial. The present paper therefore re-examines the relationship between defense and social welfare by employing continuous wavelet analysis during a long period of 1950–2014 in China. We focus in particular on their dynamic correlation and the lead-lag relationship across different frequency bands. Our results clearly show the inexistence of the crowding-out effect between defense expenditure and social welfare; moreover, the increase in defense (social welfare) expenditure could stimulate the expansion of social welfare (defense) spending. In addition, we find a positive relationship between defense and social welfare with defense leading during 1961–1968 in the short term, when China suffered from the economic breakdown and the social turbulence caused by the Great Famine, Sino-Soviet border conflict, etc. Notably, social welfare also led the progress in defense during 1984–1988 and 1995–1998 in the medium and long terms by the further deepening of the opening-up policy and enforcing the economic system reform.
Highlights
There has been a long lasting debate about whether the expansion of defense expenditure crowds out social welfare spending and hinders the development of social welfare, viz. the “guns versus butter” argument
Since defense and social welfare expenditures are major components of government fiscal expenditure, examining the potential existence of the crowding-out effect between defense expenditure and social welfare is important for China to achieve fiscal sustainability and promote defense and social welfare progress
Following the above arguments, we derive this primary research to revisit the potential presence of crowding-out effect between defense expenditure and social welfare in China in the time-frequency domain by employing the continuous wavelet analysis
Summary
There has been a long lasting debate about whether the expansion of defense expenditure crowds out social welfare spending and hinders the development of social welfare, viz. the “guns versus butter” argument. It is worth noting that defense expenditure as a ratio to GDP decreased dramatically after 1978 (the implementation of reform and opening-up policy) and reached a plateau at a relatively low level in the most recent decade. The social welfare expenditure as a ratio to GDP presented a continuously rising tendency, which first exceeded defense.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
