Thanks to plentiful tax revenues brought on by vigorous economic development and a conservative fiscal policy, the ROC government enjoyed solid national finances up to the late 1980s. A decade ago, the national coffers were filled with plenty of cash and the government often recorded budget surpluses.
Times have changed. Consider policymakers’ rapidly growing dependence on bonds to raise quick cash—and the resulting snowball effect of this in building a fast-growing deficit. In fiscal year 1992 (July 1991 to June 1992), the government began issuing bonds on a large scale to cover its massive outlays, mainly for several huge transportation and industrial development projects encompassed in the Six- Year National Development Plan. From 1991 through 1993, the central government issued US$22.6 billion in bonds, almost five times the US$4.7 billion in bonds outstanding in 1990. [All figures are based on an exchange rate of 27 New Taiwan dollars to 1 U.S. dollar.] From FY 1992 onward, more than 25 percent of its expenditures have been financed by bonds, up from less than 14 percent in FY 1991.
This spring, when the Executive Yuan proposed its original budget of US$38.9 billion for FY 1995, it planned to issue another US$6.3 billion worth of bonds, boosting the value of outstanding bonds to 108 percent of the annual budget—far exceeding the 95 percent legal ceiling. After adding in the bonds issued to fund the additional “special” budget, which covers major infrastructure projects and military procurement, the proposed bond issuance tally tops US$12.8 billion for FY 1995.
The Executive Yuan requested that the Legislature raise the legal ceiling for outstanding bonds and other financial borrowing to 120 percent of the budget. This brought stiff opposition from many legislators who contended that unbridled government spending could lead to financial disaster. New Party Legislator Wang Chien-shien (王建煊), former minister of finance, argued that if the government raised the ceiling this year, it would request another raise next year. He warned that an excessive deficit would lead to the collapse of Taiwan’s public financial structure.
The Executive Yuan countered that it had already taken the deficit into full consideration, pointing out that it had reduced the FY 1995 budget 1.2 percent from the previous year, breaking the previous trend of 10 to 15 percent annual growth. Cutting the budget further, Cabinet members argued, would disrupt government operations. When the budget was finalized in May, the ceiling was set at 113 percent and the Legislative Yuan reduced the original FY 1995 budget by US$837 million.
The central government’s current deficit of less than 14 percent of the GNP is still a far cry from that of many debt-laden nations. In the United States, the federal deficit reached 54 percent of the GNP in 1991; in Japan, it was nearly 45 percent in 1992. But local economists are still nervous. Outstanding debts at all levels of government now top US$70.4 billion, or almost 32 percent of the GNP, up from just over 15 percent in 1990. This is equal to more than US$3,700 per citizen. And this figure is likely to rise. The Directorate General of Budget, Accounting and Statistics (DGBAS) of the Executive Yuan estimates that outstanding government debts will soar to 36 percent of the GNP by 1999, assuming zero growth in government spending. Factoring in a more realistic 3 percent growth in spending, the figure hits 40 percent of the GNP.
Why is the government sinking further and further into debt? The main reason is the rapid expansion of public expenditures in recent years, especially to fund the massive construction projects in the Six-Year National Development Plan, launched in 1991. Taipei’s mass rapid transit system, for example, is running 92 percent over budget at an estimated total cost of US$18 billion, making it the world’s most expensive subway system. Altogether, the plan outlines more than six hundred projects at central, provincial, and local government levels.
Meanwhile, on the money supply side of the equation, the government is suffering from sluggish revenues caused mainly by large-scale tax evasion and an increasing number of tax breaks instituted by the Legislature. In the past four years, all levels of government experienced annual growth of only 7 percent in income, about half the average annual rise in public expenditures. Taxes, the largest revenue source, covered 79 percent of public expenses during the 1970s, but only cover 56 percent today.
Squeezed between rising costs and inadequate income, the government has increasingly turned to bonds. Although bonds issued to finance construction projects can bolster economic growth, especially during a recession, many economists believe the government has gone too far too fast. Wang Kun (汪錕), director-general of the DGBAS, for example, has publicly warned that the government’s deficit has reached a level that could shake Taiwan’s financial foundation. Others warn that over-reliance on financial borrowing and bonds will drain the capital available in the market, jacking up interest rates and slowing private investment.
The debt is already sapping the government’s financial strength. During FY 1995,9 cents of every dollar in the central government’s budget will go toward paying the principal and interest on bonds issued. The amount is expected to rise to 20 cents after 1998, the year when many of the five- and seven-year bonds already issued will mature. And interest payments will increase in the future, because the government has announced that it will be issuing mainly longer term seven- to ten-year bonds in the future, plus fifteen-year bonds to finance the special budget—the longest maturity period used since 1949. After deducting regular outlays for personnel, administrative affairs, national defense, and education, very little money will be left for infrastructure projects and economic development.
This may prompt the government to resort to even larger bond campaigns, creating a quickly worsening, cyclic problem. “This would boost interest rates and dampen the climate for private investment, thereby affecting the nation’s long-term economic development,” said Tsai Chi-yuan (蔡吉源), a research fellow at the Sun Yat-sen Institute for Social Sciences and Philosophy, Academia Sinica, in a recent interview with the Economic Daily News. Other analysts worry that the government may eventually be tempted to adopt a loose monetary policy, resulting in rampant inflation.
Policymakers are taking steps toward reducing the deficit. In 1993, under the direction of Premier Lien Chan (連戰), the Executive Yuan cut the Six-Year National Development Plan budget to US$220 billion, down from the original proposal of US$303 billion. Lien has also instructed the Executive Yuan to cut the total amount of positions in its agencies by 5 percent by 1997. He also called for the entire government to put a ceiling on the annual growth rate of its regular expenses at less than 3 percent, and on its capital outlays for infrastructure projects at less than 10 percent. Following similar practices in Japan and Singapore, the government also plans to use the huge postal savings account system, from which the government can borrow funds, to finance public infrastructure projects in order to reduce the reliance on bonds. The Council for Economic Planning and Development has proposed capping the total outstanding debt at all levels of government at 40 percent of the GNP. On the financial supply side, the Ministry of Finance is working to increase tax revenues by cracking down on tax evasion and stepping up collection of fees charged for government services such as trash collection.
Experts say even stiffer measures will be required to rein in the deficit. But implementing stronger steps will not be easy. During FY 1995, for instance, the Executive Yuan plans to cut 11,052 positions from government agencies. But actual employment at those agencies is slated to increase by 5,403 positions in order to cope with expansions such as the planned central health insurance bureau. Annual personnel expenditures will increase to US$12.54 billion, or more than 32 percent of the total budget, up from less than 30 percent the previous year.
In addition, payments will soon come due on several major social welfare projects. In FY 1995, the government plans to spend US$2.6 billion for the national health insurance program, scheduled to be launched by the end of this year. The new expenditure will boost the outlay for social welfare to US$5.3 billion, a 46 percent increase over FY 1994. The new program also requires that the central and local governments pay US$4 billion annually in health insurance premiums, more than double the US$1.8 billion paid yearly for existing insurance programs. And the premier’s move to give social welfare a priority status in his administration will likely bring more dramatic spending increases.
Other expenses include regular payments on the US$11.8 billion purchase of U.S.-made F-16 and French-made Mirage jet fighters. A nine-year payment schedule began in FY1993. Meanwhile, the ongoing projects under the six-year plan will continue to call for enormous funds.
Another consideration is that public expenditures must be reduced gradually to avoid disrupting the economy. Government spending now accounts for one-fourth of the island’s economic growth and its investments make up half of all domestic investments.
Still testing—The US$18 billion mass rapid transit system for Taipei is the world’s most expensive. Already 92 percent over budget, it is years behind schedule.
Politicians have proposed numerous plans for coping with the deficit. Legislator Wang Chien-shien has suggested accelerating privatization of public enterprises and opening up major infrastructure projects to private investment. Democratic Progressive Party Legislator Peng Pai-hsien (彭百顯) has urged policymakers to start by eliminating the financial waste that plagues large infrastructure projects and procurement programs. Others focus on reducing personnel expenses, which eat up nearly one-third of the annual budget. Largely due to high personnel expenses, government spending, excluding investments in infrastructure development, amounts to more than 17 percent of the GNP, much higher than the 9 percent set aside in Japan and Hong Kong, 10 percent in Singapore, or 11 percent in South Korea.
The solution, some analysts believe, will be to increase taxes. During the February-to-May legislative session, Minister of Finance Lin Chen-kuo (林振國) reported that he did not rule out the possibility of raising taxes. But tax hikes are not popular with legislators or the public. To gain necessary support for such a move, analysts say, the government must first change the popular perception that it is wasting money. The massive cost overruns on Taipei’s mass rapid transit system and a recent murder case exposing corruption in warship procurement have fueled negative viewpoints.
Wu Hui-lin (吳惠林), a research fellow at the Chung-Hua Institution for Economic Research, has pointed out that until policymakers reduce financial waste, increasing taxes will be like throwing money into a “bottomless pit.” Other economists point out that until the government cracks down on tax evasion and improves the taxation structure, increased taxes will fall largely on the shoulders of less affluent salary earners, thereby aggravating an unfair system.
Economists estimate that, because of prevalent tax evasion among the rich, more than 70 percent of the government’s income tax revenue comes from salary earners. In 1991, the Ministry of Finance’s Taxation Reform Committee (now defunct) estimated that fully half of the income produced by Taiwan citizens is not taxed. Experts also note that unless the loopholes are closed, the government cannot expect to reap the revenues that should come with a growing economy. It seems that getting rid of the deficit will be much more difficult than creating it.- Philip Liu (劉柏登) is editor-in-chief of Business Taiwan, a weekly newspaper published by the United Daily News Group.