Abstract: The key to building a new development pattern with the domestic circulation as the main-body and the mutual promotion of domestic and international dual circulation lies in expanding consumption, with the focus of this expansion on rural areas. The main goal of the rural revitalization strategy is to boost rural consumer demand, and its implementation relies on the support of fiscal expenditure. By incorporating the urban-rural dual structure into a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model, this study explores the impact of China’s fiscal expenditure structure on consumption insufficiency and its transmission mechanism in this context. The results suggest that the root cause of consumption insufficiency may lie in the income distribution imbalance between urban and rural areas under the dual economic structure. Fiscal expenditure has exacerbated this imbalance, as China’s fiscal spending has long been biased toward urban investment, which in turn increases the returns to urban factors of production. Although the labor from the rural sector can flow into cities and share some of the benefits of urban development, the rural sector is unable to invest in the capital markets. The capital returns are mainly captured by urban residents, this situation has led to a widening income gap between urban and rural residents, further contributing to the overall consumption insufficiency in the country. While adjusting the fiscal expenditure structure to favor rural areas can alleviate this imbalance to some extent, it is unlikely to reverse the crowding-out effect of fiscal expenditure on consumption. Therefore, in order to expand and upgrade consumption, the government should adopt a comprehensive approach to gradually eliminate the urban-rural dual structure and achieve integrated urban-rural development.

Key words: fiscal expenditure structure, urban-rural dual structure, household consumption, dynamic stochastic general equilibrium