As the debt crisis in the United States and Europe continues to unfold, the borrowing practices of the ROC government have come under media scrutiny. But as Finance Minister Lee Sush-der explains, “though increasingly hard pressed, Taiwan’s public finances are still stable and healthy.”
In an interview with Taiwan Today Aug. 9, the country’s top financial official explained how the current administration’s efforts have improved public finances, the taxation system and management of state-owned assets.
“Over the past three years, the MOF has amended 41 tax laws and 344 administrative orders and rules,” Lee said. These include reducing inheritance tax, revoking tax exemptions for teachers and military personnel, lowering rice wine tax and streamlining tax reporting procedures. “These reforms have greatly increased agency efficiency and contributed to the well-being of the public.”
Lee said interministerial cooperation has also seen more effective development and management of public properties throughout the nation. “These changes can help revitalize state-owned assets.” Another major achievement has been to reclaim the management of state-owned financial institutions, so that their operations can be aligned more closely with the government’s policy goals.
While the country’s public finances are triggering concern, the minister played down the issue, saying the Public Debt Act prescribes a statutory limit on the amount of total government borrowing.
“Official statistics show that Taiwan’s total outstanding government debt amounts to 40 percent of the country’s average gross national product of the three preceding years, still within the statutory limit of 48 percent,” Lee said. In addition, the act also stipulates that no more than 15 percent of the central government’s budget can be financed with debt in any given year. “These checks and balances have kept public debt to a manageable level and will continue to do so in the future.”
Some have criticized that the debt figures do not fully reflect reality, because the numbers exclude entitlements such as the national health program and retirement plans for civil servants and laborers. “Such obligations are the responsibilities of different ministries, which have to perform actuarial calculations and make timely adjustments in premium rates to finance the operations,” Lee responded.
If and when public debt approaches the statutory limit, the MOF will have to take extraordinary measures, including cutting expenditures and putting development projects on hold. “As the finance minister, I will spare no efforts to ensure that such a scenario does not happen.”
The fundamental issue is not the debt level but what debt is used for, Lee said. Just as businesses borrow money to expand their operations, “debt is a good thing if it is used to build infrastructure and boost investment, because such projects will create jobs, expand the tax base and enrich the national coffers.”
As the country’s highest ranking financial official, Lee said his responsibility is to efficiently allocate all available resources, not just the nation’s tax revenues. And since the private sector accounts for 80 percent of Taiwan’s economy, “it makes perfect sense to leverage private resources to finance major infrastructure projects.”
To support the private sector, the government has to change its mindset and initiate regulatory easing to create business opportunities as incentives, Lee said. Some projects can be carried out under the build-operate-transfer model, while others can be designed so that they can be self-sustaining. “These approaches can greatly reduce the financial burden on the public sector, while increasing the efficiency of those projects.”
Official statistics show that when President Ma Ying-jeou took office in 2008, Taiwan’s BOT projects amounted to only a little more than NT$10 billion (US$344.55 million). The figure went up to over NT$220 billion in 2010, including the NT$400 billion Taiwan High Speed Rail, the NT$60 billion skyscraper Taipei 101 and the NT$30 billion Taipei Arena.
The MOF has also come under fire for enacting a series of tax cuts at a time when Taiwan’s public finances are under pressure. But Lee said tax burden—Taiwan’s currently stands at 11.9 percent, one of the lowest in Asia—is not the key issue in determining the health of an economy’s public finances.
According to the minister, tax cuts can increase taxpayers’ disposable income, boost domestic consumption and create a virtuous cycle that stimulates the economy. In the past, he noted, Taiwan used to offer high-tech companies a special tax incentive. A new regulation implemented last year, by contrast, reduces the business income tax on all firms from 25 percent to 17 percent. This will benefit all companies equally, increase their profitability and enable them to raise payrolls, he said.
“In addition to such structural changes, the MOF has also adopted several expedient measures to cope with unusual circumstances,” Lee pointed out. These include lowering the commodity tax for gasoline and import duties for commodities when prices were soaring in the second half of 2009, and waiving the commodity tax on purchases of electric vehicles.
All in all, these tax reductions amounted to NT$70 billion over the past three years, Lee said. “We have to look at the broader picture, because such timely measures were necessary to help achieve specific policy goals.”
As the domestic economy recovers, these measures have seen total tax revenues for the first seven months of the year increase nearly 10 percent to NT$1.06 trillion year on year, with business income taxes and business taxes posting record highs for the period.
As to the claim that the MOF-initiated “luxury tax” fails to check soaring real estate prices, the minister said the government’s goal is to bring the derailed housing market back on track, rather than prohibiting price increases at any cost. The special tax includes a 10-percent and 15-percent extra sales tax on real estate that changes hands within two and one years, respectively.
“Taxation is only one of the means to achieving this end, as the mission requires concerted efforts among relevant agencies,” Lee explained. Other tools include selected credit control and the provision of affordable public housing, among others, he added.
These efforts are proving effective, as MOI statistics show that the number of housing transactions in the second quarter decreased 8.76 percent from the same period a year ago, with Taipei and New Taipei City both dropping 20 percent. Bank tallies also reveal that mortgage lending decreased in June from a month earlier.
As the ROC gets ready to celebrate its centennial, the government’s vision is to boost the economy, promote social well-being and seek sustainable development, Lee said. “The MOF will strive to achieve these goals with ongoing effective allocation of financial resources and taxation reforms.” (HZW)
Write to Meg Chang at meg.chang@mail.gio.gov.tw