Several analysts advocate boosting public spending

With the commodity price index continuing to fall over the past few months and Taiwan's Central Bank of China's low-interest rate policy doing little to stimulate the interest of private investors or consumers, several academics believe that boosting public spending might be the only way to ward off deflation.

The Directorate General of Budget, Accounting and Statistics (DGBAS) under the Cabinet reported Sunday that the commodity price index in July stood at 98.8 with 1996 as the base year, indicating a drop of 0.42 percent from that of June. In the first seven months of this year, the commodity price index dropped by 0.28 percent as compared with the same period of the preceding year.

Forecasting negative growth in the consumer price index for this year, the DGBAS said that Taiwan is still facing the threat of deflation. In May the International Monetary Fund (IMF) warned that Taiwan, Germany and Hong Kong were at risk of deflation.

When faced with deflationary pressures, many countries seek to apply a loose monetary policy as a stimulus to private consumption and investment willingness, Professor Chu Hao-ming (朱浩民) of National Chengchi University said, adding that since the Central Bank of China over the past few months has lowered the basic interest rates several times, the low-interest rate monetary policy is losing its effectiveness as a solution.

The professor suggested that boosting public spending might be more effective right now. However, with mounting public debt, the government must spend the money on projects that can contribute significantly to the nation, and not on quick-fix social welfare schemes.

He added that in the long run, the government needs to improve the domestic investment environment by ensuring good infrastructure, including water and electricity supplies, and making further relaxations on regulations governing cross-Taiwan Strait trade.

Chen Tien-chih (陳添枝), president of the Chung Hua Institute for Economic Research (中經院), agreed that boosting public spending might be the only resort for the government to avert deflation.

Chen said that the worst situation would be that consumers might speculate upon further price declines as the commodity price index continues to go down. This would make it even more difficult for the economy to rebound, he added.

The scholar suggested that the government consider raising salary levels of public servants. When the private sector follows suit, commodity prices might gradually go up, as purchasing power would rise.