Mon, Dec 08, 2008 - Page 8 News List

Responsible policy needs financial discipline

By Juang Jenn-huei 莊振輝

Growing public debt has a far reaching impact on state finances, and that is why the government and the opposition reached a consensus in 1996 resulting in the passage of the Public Debt Act (公共債務法). The act places strict regulations on how public debt must be restricted by overall debt stock and debt flow.

In 2000, the then-Chinese Nationalist Party (KMT) government passed the Establishment and Management of the National Stabilization Fund Act (國家金融安定基金設置及管理條例). It marked the first time the Public Debt Act was bypassed and it destroyed fiscal discipline. It was followed by the 921 Temporary Act for Post-Earthquake Reconstruction (九 二 一震災重建暫行條例).

After it gained power, the Democratic Progressive Party never considered planning for legitimate sources of public revenue but instead continued to see debt issuance as a panacea to cure all ills. It passed the seven special acts or provisions, including the Special Act Governing the Management of Keelung River Basin (基隆河流域整治特別條例), the Temporary Provisions for Severe Acute Respiratory Syndrome Prevention and Relief (嚴重急性呼吸道症候群防治及紓困暫行條例) and the Special Act for Flood Management (水患治理特別條例). All of these bypassed the Public Debt Act, which drew strong criticism from the opposition.

Now that the KMT is back in power it is proposing two draft bills that would once again bypass the Public Debt Act — a special act to revive the economy by issuing consumer vouchers and a special act to revive the economy by increasing investment in public construction.

It is regrettable to see how both parties criticize the policies of their opponent as long as they themselves are in opposition, only to turn around and act in a way that negates their past actions as soon as they return to power. The debt issue is merely one example.

No one doubts that these acts and provisions and their special budgets are matters of national importance, but that does not mean the government can rashly bypass the Public Debt Act and ignore fiscal discipline. If it did, why would we need a Public Debt Act in the first place? Voters elect a party to rule the country, and that party must have the capability to resolve fiscal and debt issues. If it doesn’t, one wonders what is the need for a transition of government.

There is nothing wrong with public construction and issuing debt. Many countries are facing their greatest challenge since the 1929 crash and its subsequent depression. As a result, Keynesian financial theory is making a comeback — expansionary economic policies allowing for the issue of debt to finance public construction and promote economic growth.

Debt, however, is not a panacea: Taiwan’s book debt and off-balance-sheet debt has already reached NT$13 trillion (US$387.7 billion), far exceeding the Public Debt Act restrictions. If there is no restraint, Taiwan may find itself fulfilling the prophecy of the 18th century Scottish economist David Hume, who said in his essay On Public Credit that “either the nation must destroy public credit or public credit will destroy the nation.”

Given the government’s fiscal difficulties and heavy debt, issuing more debt is the worst of bad solutions, and a solution for incapable political parties that will only increase the burden for coming generations.

A party that makes promises it is incapable of delivering on will be tempted to fall back on old habits and issue debt to solve its fiscal troubles. But voters will abandon it in the end. The government should heed the warning.

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