Investment needed in development for recovery

By Hsu Jen-hui 徐仁輝  / 

Sun, Oct 09, 2016 - Page 6

As Taiwan’s economy continues to suffer from sluggish market conditions and a low growth rate, central bank Governor Perng Fai-nan (彭淮南) on Sept. 29 proposed seven stimulus measures, including plans to boost exports by enhancing regional economic integration and six measures aimed at raising domestic demand. Of these, expanding public investment is one expansionary fiscal policy that the government could adopt without any further delay. President Tsai Ing-wen’s (蔡英文) administration should seriously consider increasing public investment as a way to lead the nation toward economic recovery.

However, judging from the government’s budget for next year, which is currently under review at the Legislative Yuan, Premier Lin Chuan (林全) and his Cabinet seem to have no plan or ambition to do so. A look at the central government’s budget plan shows that it is only to be expanded by 1.1 percent, even less than the expected GDP growth rate of 1.9 percent.

The government’s annual expenditure-to-GDP ratio is only 11.55 percent, which, after further cuts by the legislature and budget execution, is expected to be the lowest since the 1974 oil crisis. The average expenditure-to-GDP ratio was 15.09 percent under former president Lee Teng-hui’s (李登輝) administration, 13.37 percent under former president Chen Shui-bian (陳水扁) and 12.07 percent under former president Ma Ying-jeou (馬英九), yet the first annual budget of Lin’s financially savvy Cabinet is even lower than that of the conservative Ma administration.

How will the government convince the public that it will be able to save the economy? Having been elected with a huge majority, should the Tsai administration not be more ambitious?

Perhaps the Directorate-General of Budget, Accounting and Statistics (DGBAS) has no choice but to propose this budget, as tax revenue makes up only about 12 percent of GDP, and as it is unable to issue debt due to restrictions in the Public Debt Act (公共債務法). This ratio was higher during Lee’s presidency, allowing the government greater expenditure while still being able to live within its means.

While this view seems to make sense, it is a specious argument. When interest rates are lower, it is difficult to use monetary policy to stimulate the economy, thus necessitating expansive fiscal policies. The efficacy of such policies are easy to see if we take a look at the 2008 global financial crisis, when country after country issued debt to expand public expenditure.

Taiwan’s economy is sluggish right now, the central bank has announced that it would be difficult to lower interest rates further and the international economic situation is unclear. Public investment is the only way to start up the economy.

In the wake of the latest typhoon, the number of households without electricity reached a new high, while many bridges, roads and other infrastructure were destroyed. This puts the spotlight on deteriorating basic infrastructure, and the government must decide whether to improve it or rebuild it. The government has allocated only NT$186.9 billion (US$5.94 billion) of next year’s budget to infrastructure construction, 9.3 percent of the total annual budget expenditure, which clearly falls short of what is needed.

The budget is being reviewed by the legislature, and according to the Constitution, legislators can make budget cuts, but are not allowed to make additions. The Lin Cabinet could therefore consider using a special budget to increase infrastructure spending. In addition to stimulating the economy, it would also provide the general public with a more secure living situation.

Hsu Jen-hui is a professor at Shih Hsin University’s Department of Public Policy and Management.

Translated by Tu Yu-an and Perry Svensson