While most investors last week focused on the ongoing debt crisis in the eurozone and the standoff over the increase of the debt ceiling in the US, they should also be aware that Taiwan has its own fiscal problems.
The announcement by the Council for Economic Planning and Development on Monday that it approved a NT$216.6 billion (US$7.5 billion) budget for major public construction projects next year is an issue that deserves far more attention than it has so far received.
That number represents the lowest level in 10 years — and therefore a lower public spending contribution to the nation’s economy. In addition, the government’s budget office is reportedly only able to allot about NT$125.2 billion for top-priority projects, meaning that there will be a funding gap of NT$91.4 billion for public works next year, affecting about 96 percent of ongoing projects.
This funding gap for public construction projects did not occur overnight; it has happened almost every year for the past decade, but in the past the government always solved the problem by reallocating funds from its special budget to ensure the continuation of major infrastructure projects.
The importance of investing in infrastructure is self-evident: It creates jobs and drives up domestic investment in the short term, while developing opportunities for economic growth in the long term. Of the NT$216.6 billion budget for next year, transportation infrastructure projects account for about 53 percent, followed by agricultural projects at 9.3 percent and flood control and drainage plans at 6.7 percent, according to the council’s figures.
The funding gap for next year is raising concern because the government has already spent the four-year NT$500 billion special budget the Cabinet approved in 2009 to boost the slowing economy.
Like many other economies in the world, Taiwan adopted an aggressive fiscal policy to help stimulate economic growth during the post-global financial crisis era. By using funds from the special budget for a four-year NT$500 billion economic stimulus package, the government was able to allocate NT$369.3 billion for major infrastructure projects in 2009, NT$356 billion last year and NT$302.8 billion this year. Unfortunately, there is simply no money left for next year, according to the Directorate-General of Budget, Accounting and Statistics.
While it is reasonable to expect the government to pull back from its aggressive fiscal policy with the economy likely to grow 5.06 percent this year, the extent to which it has slashed the public works budget is reason for concern.
The immediate downside risk to the nation is a lower contribution to GDP and attracting less foreign investment.
If the budget cut were to reflect an effort to implement conservative and prudent policies while maintaining fiscal discipline, then that would constitute a step in right direction, but the government needs to proceed cautiously.
However, if the true reason for such a big cut in the public works budget is that the government needs to fund its pay hike for civil servants amid rising public debt and declining tax revenues, the obvious answer would be to cancel the pay raise for civil servants and increase taxes on the wealthy. However, few lawmakers and government officials are likely to have the stomach for that ahead of presidential and legislative elections in January.
The government could take different approaches to fill the funding gap, such as accelerating the auction of state-owned land, cutting spending in other areas or seeking private money to finance public projects, but a fundamental solution to the problem ultimately depends on the much needed reforms of the nation’s distorted tax and fiscal system — which needs real action now, not cosmetic change designed to cover up political imperatives.
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