Last week, the Cabinet approved a preliminary plan for next year’s central government budget, with annual spending projected at NT$1.9407 trillion (US$64.7 billion), up 1.7 percent from this year’s NT$1.9076 trillion, and annual income forecast at NT$1.7308 trillion, down 0.1 percent from NT$1.7333 trillion and the first decline since 2010.
The budget plan shows an annual deficit of NT$209.9 billion. Together with NT$64 billion in debt repayment, the government will face a total budget shortfall of NT$273.9 billion next year — 27.75 percent higher than this year’s deficit of NT$214.4 billion and the first increase in fiscal shortfall over the past five years. The Cabinet has decided to cover the shortfall by issuing government bonds and borrowing, claiming that its debt financing would represent only 14.11 percent of next year’s annual expenditure and be below the 15 percent debt ceiling stipulated in the Public Debt Act (公共債務法).
However, the actual size of the deficit could be bigger than the estimated NT$273.9 billion if economic growth is not strong enough to support increasing social welfare costs. The government’s fiscal plight might be more serious than expected and, without violating the requirements set by the Public Debt Act and the Budget Act (預算法), it needs to broaden its income sources, including with assets sales.
The Cabinet has been quiet on plans to sell government-owned stocks in state-run banks and bluechip companies next year. However, as the central government’s debt level rose rapidly to 35.7 percent of the average GDP for the previous three years last year, from 30 percent in 2008, and is likely to reach 38.6 percent next year and approach the debt ceiling of 40.6 percent in 2015 at the earliest based on the speed of debt growth, the government has no choice but to sell its shares to deal with its deteriorating finances.
The Cabinet will finalize its annual budget plan on Aug. 22 and will submit the plan to the Legislative Yuan for final approval next month. If the share sale proposal, along with auctioning licenses for fourth-generation (4G) telecommunications services and selling state-owned land, are to become part of the government’s efforts to boost the national coffers, they could help reduce the deficit in the short term, but the fundamental fiscal problems facing Taiwan — such as lackluster GDP growth, a low tax burden and an increasingly aging population — remain unsolved.
Economists project that Taiwan needs to maintain 3 percent GDP growth each year to keep debt where it is, but the recent slowdown in growth, affected by weakening exports and increasing spending on infrastructure, have continued to lift government debt.
The nation’s fiscal problems are caused by insufficient revenues, with the tax burden, or the tax-to-GDP ratio, declining from about 20 percent in the 1990s to 12.4 percent this year. The ratio is likely to continue falling because of various tax breaks implemented to encourage investment and attract capital to flow back to the nation. This is good for large companies, but bad for the nation’s fiscal account.
However, the aging population poses the most serious challenge to Taiwan’s fiscal plight. The latest government data suggest that the percentage of people aged 65 or above is expected to rise to 14.6 percent of the population in 2018, from 11.5 percent this year, while the percentage of the working-age population is set to fall to 72.7 percent from 74 percent over the same period. This would indicate a decline in tax revenue in coming years, but an increase in social security and pension-related spending.
With rising budget deficits and central government debt, the government must consider selling assets to increase income. While this approach might bring short-term fiscal relief, it only postpones the fiscal problem a few years and will not help the government maintain fiscal discipline in the long term.