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More public debt not the way to go

The government has recently proposed using special budgets as a way to circumvent the Public Debt Law (公債法) and increase the room for the central government to float debt. The opposition parties have shown different views.

Those who support the proposal cite the examples of the US, Japan, Germany, Singapore and others, all of which have public debts over 60 percent. Since our country's public debt is around 30 percent, there is still room to float debt. People probably have different views on the credibility of this argument, but we can take another analytic approach from a global perspective to observe this proposal.

According to the Government Finance Statistics Yearbook and World Economic Outlook reports published by the IMF, the government finances of advanced countries were in very good condition in 2000 when the total surpluses were 0.1 percent of GNP. Devel-oping countries, however, could not reach an equilibrium in their finances, as they had negative balances equivalent to 3.2 percent of their GNP during the same year.

Because of the global economic recession in the last two years, many countries have maintained minimum economic growth by expanding public-sector demand. The extent of their financial deficits has increased. The financial deficits of advanced countries reached 2.5 percent of GNP last year and those of developing countries maintained at around 3 percent of GNP.

After 1995 Taiwan's budget quickly went from bad to worse, showing a deficit equivalent to 3 percent of GNP. From 2000 to last year the government's budget deficit was the GNP's 4.5 percent, 6.5 percent and 4.4 percent respectively, much higher than the average of those of other countries.

The worst US government budget deficits took place in the early 1990s, when 20 percent of the budget was taken care of by floating debt. The situation improved with the sound development of "new economy." From 1998 to 2001, there were budget surpluses for four consecutive years. At present, the govern-ment's cumulative debt amounts to 60 percent of GNP, but half of the debt belongs to local governments. The federal government's debt situation is expected to show continuous improvement after economic recovery.

After unification Germany's budget deficit quickly increased in scope because of East Germany's disastrous financial situation, but since the 1990s the nation's deficit each year has rarely exceeded 3 percent of its GNP.

Japan really has a problem. Since 1998 the government's deficit has exceeded 5 percent of GNP, but the economy has not shown any sign of recovery. It is therefore clear that increasing government expenditures does not necessarily increase economic production. The true meaning of the so-called "Keynesian principle" needs to be understood further.

Singapore's financial situation has been stable since the 1990s, with its budget maintaining a considerable surplus. The debt mainly comes from the government issuing bonds to absorb public-reserve funds. This way, the government can protect the growth of public funds as well as make use of the funds more efficiently.

Given the unique cases of these four countries, it is therefore misleading to quote them when we show support for the government increasing its public debt.

Our country's annual budget deficit in recent years has exceeded the bearable load. It would be embarrassing for us to maintain a debt ceiling of 15 percent of the total budget. According to IMF reports for 2001, there are quite a few countries that are worse off than Taiwan, including Indonesia, India, Nepal, Pakistan, Sri Lanka, the Philippines, Turkey, Bolivia and El Salvador. Among the advanced countries, Japan has the highest percentage but the annual budget deficit is only about 7 percent of total budget amount.

It is clear that our public debt may not be the highest in the world but the government has limited room to maneuver. The situation has become so much worse that we have become as bad as the worst Third World countries. The all too common practice of developing countries lowering taxes but not increasing them makes things difficult for government finances and seriously affects the economy.

It would be a harsh to say the government should not increase public debt. But to prevent Taiwan from being relegated to developing-country status, the opposition parties have the responsibility to spend every dollar where it counts.

Tu Jenn-hwa is an associate professor at National Taiwan University's Graduate Institute of National Development.

Translated by Grace Shaw
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