Democratic Progressive Party (DPP) Chairman Su Tseng-chang (蘇貞昌) and former DPP chairperson Tsai Ing-wen (蔡英文) recently suggested that President Ma Ying-jeou (馬英九) convene a national affairs conference in the hope that the ruling and opposition parties could meet with representatives of various sectors of society to discuss reforming the nation’s public pension systems. Ma rejected the proposal.
Ma’s incompetence is common knowledge, but even people within the pan-blue camp think it unwise to refuse to convene a national affairs conference. This is because if the nation’s pension funds are not reformed they will go bankrupt.
Additionally, the way the current system unreasonably favors certain social groups has not only placed a serious financial burden on the country, it has bred class antagonism.
These issues require collective wisdom to be solved and cannot be solved by one political party or by one person, no matter how gifted they are.
Rejecting Tsai’s suggestion not only means missing an opportunity for reform to be carried out jointly by the ruling and opposition parties, it also means that it will be very difficult to revamp the pension system.
Taiwan’s finances and economy are riddled with problems and are almost beyond help. The challenges and tests that lie ahead are no less daunting than those facing any other country, including the PIGS economies — Portugal, Italy, Greece and Spain.
One of the manifestations of these problems is that the national fiscal deficit is a structural problem, meaning that new debt must be issued annually simply to repay current debt.
For example, next year, NT$205.681 billion (US$7 billion) will be required to repay loan principals and interest on government debt. That is 10.53 percent of the normal budget and the special budget. This means that more than 10 percent of central government expenditure will be used to repay debt.
In addition, the repayment of loan principals will be financed by issuing more debt, causing a vicious cycle of issuing debt to repay debt, which of course means the total amount of debt just keeps increasing.
However, the days when the government can keep engaging in this cycle are numbered. At the end of this year, the government’s unpaid long-term debt will, for the first time ever, exceed NT$5 trillion. By the end of next year, it will increase to NT$5.27 trillion, amounting to 37.1 percent of the three-year average GNP.
This is extremely close to the legally allowed upper limit of 40 percent, and only leaves room for the government to issue another NT$400 billion to NT$500 billion of debt.
If hidden debt and money borrowed from non-profit funds are added, overall debt is nearing NT$22 trillion, almost 150 percent of GDP and close to Greece’s debt, which stands at 165 percent of GDP.
Taiwan, could very well become the Asian version of Greece. However, Greece has the active support of the eurozone member states, the European Central Bank and the IMF.
Who could Taiwan turn to for assistance if it suffered a sovereign debt crisis?
Apart from the problem of the fiscal deficit, the government’s budget allocation is becoming increasingly rigid, with the vast majority being allocated to low-productivity statutory budgets such as personnel costs, benefits and retirement funds, instead of being used to spur economic development.
Take the central government’s general budget proposal for next year as an example.
The annual budget is NT$1.9446 trillion, yet legally mandated major expenditures have reached more than NT$1.3513 trillion, accounting for 69.49 percent of the yearly budget and leaving only slightly more than NT$593.2 billion that can be used freely.
One can gain a sense of how serious the situation is by looking at personnel expenses alone.
The government’s structure and bureaucracy is bloated. Apart from having one of the highest numbers of ministries in the world, civil servants account for 3.5 percent of the overall population. This is a much higher figure than South Korea’s 2.12 percent, Singapore’s 2.9 percent and Japan’s 3.18 percent — it is too high a proportion.
In next year’s government budget, personnel expenses are projected to be NT$425.8 billion. This represents 21.90 percent of total yearly expenditure and is approximately 15 percent more than in other advanced nations, such as those in the EU.
As a result, the budget for infrastructure projects has been crowded out and dropped from NT$299.6 billion in 2010, to NT$262.9 billion last year and decreasing still further to NT$185.1 billion this year. Next year, it is projected to be NT$175 billion.
With the budget for infrastructure projects shrinking each year, less and less funding will be available to spur economic growth. Government bodies exist to improve the public’s well-being and to encourage economic growth, but the worsening imbalance between fiscal revenue and expenditure has had the opposite effect: It has turned the government intoan entity solely capable of maintaining its own operation instead of serving the public.
Another indication of economic disintegration is a major loss in national competitiveness.
The economy took off thanks to the development of traditional manufacturing industries and contract manufacturing for electronic goods. However, the majority of these industries are weak in innovation, research and development, and branding, as well as being mostly focused on contract manufacturing and assembly.
If this does not change, Taiwan will forever be caught in a price war with emerging economies. This “race to the bottom” makes local businesses increasingly preoccupied with lowering costs, moving production bases to areas with ever-cheaper labor.
This in turn creates a situation in which businesses who have moved away from Taiwan become increasingly disconnected from the local economy and the revenue they make having little impact on the creation of employment opportunities, nor improving the wellbeing of domestic workers.
For example, Hon Hai Precision Industry Co is the world’s largest contract manufacturer for electronic goods, but its production base is in China, where it has created 1 million jobs. The Taiwanese side of its operations accounts for less than 1 percent of overall operations and so regardless of how great its financial reports may be, little of that money benefits Taiwan.
Deteriorating government finances, the risk of retirement funds going bankrupt, a loss of competitiveness among businesses and incompetent leaders means the nation faces problems somewhat similar to the “fiscal cliff” in the US, and the European debt crisis. These factors have also weakened the industrial structure and led to a lack of leadership.
Even if the economy does not suddenly collapse, the day when it will start to steeply decline is not far away.
However, Ma is only concerned with the Chinese Nationalist Party (KMT) chairmanship elections and his own power.
He is unwilling to confront the crisis facing the nation and the risk that the economy could collapse. He seems to think that as long as he can get through his last term in office, he will be able to shirk responsibility for any future problems.
Because the Constitution designates the president the nation’s leader, until Ma is willing to take on the responsibility of carrying out necessary reforms, Taiwan’s future seems very bleak.
Translated by Drew Cameron