Taiwan could face own ‘fiscal cliff’

By Lee Wo-chiang 李沃牆  / 

Thu, Jan 24, 2013 - Page 8

Taiwan has been swept by a wave of anxiety about the possibility that its national pension fund could go bankrupt. Although the plot in this case is not as dire as the ongoing European debt crisis drama and has not dragged on so long, it has been playing for a while now and shows no signs of stopping just yet.

If an adequate policy response is not found soon, the pension-fund factor could turn out to be the last straw that breaks Taiwan’s financial back.

A few days ago, Examination Yuan President Kuan Chung (關中) identified a number of directions that could be taken in reforming pensions for public functionaries and public teachers.

These included defined benefit and contribution plans, lowering the income replacement rate (the ratio of pension payments to pre-retirement income), raising the age at which pensions begin to be paid and raising the rate of return on pension fund investments.

These ideas seem to offer a glimmer of hope for pension reform, but there are still too many variables for anybody to be sure whether these measures can be carried through.

How bad has Taiwan’s financial situation really become?

According to the most recent national debt clock figures released by the Ministry of Finance, as of the end of last month the central government’s total outstanding debt with maturity of one year and above, including government bonds and long-term borrowing, came to NT$4.9495 trillion (US$171 billion) and its outstanding short-term debts (treasury bills and short-term borrowing) stood at NT$275 billion.

This represents a debt of NT$224,000 for each person in Taiwan.

However, what is really worrying is not the growth in the average debt borne by each person, but the fact that outstanding government debt as a proportion of GDP keeps increasing year after year.

The debt-to-GDP ratio rose from 16.1 percent in 1996 to 29.59 percent in 2006 and is forecast to reach 36.52 percent this year. If government borrowing is not brought under control, this number will soon reach and exceed the legally prescribed government debt ceiling of 40 percent.

Another aspect is that the national debt figures quoted above are compiled according to the definitions set out in the Public Debt Act (公債法).

They include non-self-redeeming debt with maturity of one year and above, but they do not include self-redeeming debt or debts associated with various non-profit funds.

If the nation’s national debt figures were compiled according to the definitions used by the IMF, then national debt in the broad sense would include hidden debts such as all forms of debt incurred by government departments, state-run enterprises and government funds; including government bonds, government loans, social insurance benefit payments, pension payments and so on.

The Control Yuan made an appraisal of the central government’s hidden debt in a report issued in 2010 proposing corrective measures for the Cabinet and the Ministry of Finance.

The report pointed out that pensions for retired military personnel, public functionaries and public teachers came to more than NT$8.6 trillion.

There was a shortfall in social-insurance deposits of more than NT$4.8 trillion; arrears in insurance-premium subsidies for social-insurance programs stood at NT$120 billion and compensation for land expropriated to build roads came to NT$2 trillion.

These and other items added up to a total of NT$15.7 trillion.

The Control Yuan’s report noted that this debt represented 115 percent of GDP and that if the aforementioned non-self-redeeming central government debt with maturity of one year and above were added to this sum, it would add up to a grand total of NT$20 trillion, which is 150 percent of the nation’s GDP.

In addition, total debts borne by city, county and township governments totaled more than NT$800 billion as of last year.

The only thing worth celebrating is that the nation has no external debt impacting upon its economy.

A few days ago the Ministry of Finance published tax revenue figures for last year, revealing that the net total of actually collected taxes came to a record high NT$1.7793 trillion.

However, the shortfall in tax revenue for the year was in excess of NT$24.4 billion, principally because of a NT$55 billion shortfall in securities transactions tax collection.

This is the first time since the global financial crisis of 2009 that there has been a shortfall in tax revenues.

If the factor of price increases and that the consumer price index last year rose by 1.93 percent is taken into consideration, Taiwan’s real tax revenue last year fell by NT$1.7646 trillion compared with the year before.

In 2011 the US’ Democratic and Republican parties approved an automatic deficit-reduction mechanism that has helped restrain the US’ worsening fiscal deficit.

Recently the government has proposed amendments to the Public Debt Act, but it should reinforce two aspects of the regulations: advance-warning mechanisms and fiscal discipline.

To be specific, it will be imperative to establish advance warnings regarding the flow of borrowing by central and local government and to keep them under control.

If the flow of borrowing exceeds the alarm threshold for two years in a row, further amounts should only be borrowed if a two-thirds majority of legislators or councilors agree to it.

Taiwan may not become a second Greece, but the fact remains that our fiscal situation keeps getting worse. If we fail to tighten up the system, we are likely to face a Taiwanese version of a “fiscal cliff.”

Lee Wo-chiang is a professor in the Department of Banking and Finance at Tamkang University.

Translated by Julian Clegg