Time to face Taiwan’s ‘fiscal cliff’

By Huang Juei-min 黃瑞明  / 

Sun, Jan 27, 2013 - Page 8

Not long ago, US President Barack Obama and the Republican Party reached an agreement to avoid the country’s so-called “fiscal cliff” by increasing taxes on high-income earners.

Inspired by the developments in the US, domestic public opinion has made repeated calls for Taiwan’s government to avoid our own “fiscal cliff.”

The difference between Taiwan and the US is that while the US managed to reach a last-minute agreement to prevent the crisis at least temporarily, Taiwan could well fall off the cliff with eyes wide open.

Taiwan’s fiscal cliff is a result of the government’s unrestricted expenditures, which have resulted in massive government debt.

Everyone is now aware of that the largest single expense is the huge pensions given to military personnel, civil servants and public school teachers.

The dispute over their year-end bonus was finally resolved, but anyone with a clear understanding of the situation knows that the fiscal cliff will be unavoidable unless the NT$240 billion (US$8.19 billion) pension budget item — which will increase further in the future — is cut.

This is not a case of alarmist talk, and Examination Yuan President John Kuan’s (關中) recent remarks clearly show the seriousness of the matter.

Until about a month ago, Kuan often gave arrogant answers when people criticized the pension system, saying that such criticism was an insult to government employees, who are different from ordinary people.

However, he has changed his attitude and is now saying that widespread early retirement for government employees would put too much budget pressure on the government, and he has even apologized for this state of affairs. It took him four years as Examination Yuan president and more than NT$1 trillion in pension expenditure before he got to that point.

President Ma Ying-jeou (馬英九) and his administration are surely aware of the urgency of the matter, but to judge from the Examination Yuan’s reform plan, it seems the authorities are procrastinating. They are mainly focusing on current government employees, including delaying their retirement age and reducing the income replacement ratio. Such measures are certainly necessary.

As for retired government employees, the group that is adding to the government’s debt burden, it seems as if the government is merely planning to lower their preferential interest rate from 18 to 12 percent.

In terms of the most difficult part, the income replacement ratio that allows retirees to enjoy a high pension, the government is still hesitant to take action. On the surface, the issue seems to involve whether the reduction of pensions should be retroactive, but reform is not about forcing people to return money they have received in the past, it is about restricting future payments.

This issue is beyond legal dispute. The real problem is political, because politicians are unwilling to abandon their die-hard supporters and risk losing their votes without good reason. Nevertheless, if reform is incomplete, a financial crisis will be unavoidable and current government employees will not receive reasonable retirement pensions in the future.

The Ma administration can of course continue to procrastinate in the hope that matters will change.

However, we must not forget the monstrosities that are the international credit rating organizations. Such organizations claim to be neutral, and they regularly evaluate the credibility of large enterprises, financial instruments and countries. Although they were partially responsible for the 2008 financial crisis, they remain as influential as ever.

These institutions also deserve credit for the fluctuation of the euro in recent years. Whenever they lower the ratings of Portugal, Ireland, Italy, Greece or Spain — the PIIGS countries — the stock and exchange markets in other countries suffer, while hedge funds and other such vultures see this as an opportunity to speculate in these markets, worsening the crisis further.

Taiwan is also a prey to these credit rating institutions.

Take Fitch Ratings, for example. It started to warn Taiwan that its national debt was too high in 2006 and its 2011 financial report clearly stated that Taiwan’s credit rating could be affected if the nation’s financial situation continues to deteriorate.

If and when that day comes, Taiwan’s international isolation would mean that we would have to rely on Chinese assistance.

Recently, the British weekly magazine The Economist advised Obama as he entered his second term that if he wants to leave a positive legacy, he should drastically reduce the US’ national debt. Ma would do well to heed the same advice.

Huang Juei-min is a law professor at Providence University.

Translated by Eddy Chang