Sun, Aug 09, 2009 - Page 8 News List

EDITORIAL: Falling deeper into a fiscal trap

With the nation’s financial situation a source of immediate concern, the government has little choice: It must act fast to cut spending and broaden its sources of income, which is what Premier Liu Chao-shiuan (劉兆玄) said in a recent interview with Dow Jones Newswires.

Liu said in the interview on Thursday that the government would present a plan within a month to deal with its deteriorating finances and soaring budget deficit.

Taiwan’s export-oriented economy has been hurt by the global downturn, with companies cutting jobs and tax revenues falling. Other governments are looking for exit strategies from their aggressive fiscal policies amid signs of economic recovery and the same should hold true for Taiwan.

A government budget proposal passed by the Cabinet on July 30 said the government expects NT$1.55 trillion (US$47.3 billion) in revenues and NT$1.74 trillion in spending next year, resulting in a budget gap of NT$189.1 billion — 40.5 percent higher than this year’s deficit of NT$134.6 billion and the highest level in the last four years.

To handle the NT$189.1 billion deficit and a debt repayment of NT$66 billion for next year, the government has decided to use debt financing, claiming that the combined NT$255.1 billion in debt financing would represent only 14.7 percent of next year’s budgeted spending (NT$1.74 trillion), therefore keeping it below the 15 percent debt ceiling stipulated in the Public Debt Act (公共債務法).

But the actual size of the debt financing will be much more than NT$255.1 billion, because the government is planning to borrow money for an economic stimulus budget of NT$192.2 billion — part of the four-year NT$500 billion economic stimulus package — and has cited special regulations to help it circumvent the 15 percent debt ceiling.

What this means is, the government will need to borrow money or issue bonds to finance a total of NT$447.4 billion next year.

Following tax cuts since President Ma Ying-jeou (馬英九) took office last year, however, tax revenues have declined substantially, even as the administration’s stimulus measures boost government debt.

Under the Cabinet’s budget proposal, tax revenues are projected to sink to NT$1.12 trillion next year, down 11.8 percent from this year. Taiwan is likely to see government debt rise to as much as NT$4.55 trillion by the end of next year, a level that is NT$240 billion higher than this year and represents an increase of NT$770 billion since the beginning of Ma’s term.

Increasing public debt and declining tax revenues have already raised concerns at both Fitch Ratings and Standard & Poor’s Ratings Services, prompting the two agencies to revise downward their outlook for Taiwan earlier this year from stable to negative.

While the government looks for other ways to boost revenues — such as accelerating auctions of state-owned land and cutting spending elsewhere — what it should do is implement conservative and prudent policies to maintain fiscal discipline.

Unfortunately, the Cabinet’s budget proposal indicates that it will still stand by its aggressive fiscal stance, spending another NT$526.8 billion on infrastructure alone next year, up 4.9 percent from this year.

More government spending doesn’t guarantee a better economy: The key is effective use of government funding. With the Cabinet’s reputation in this regard under fire from the Ministry of Audit, the Ma administration is unlikely to put fiscal policy back on track.

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