Fri, May 31, 2002 page12

• Government must employ financial discipline

  • By Yophy Huang 黃耀輝
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  An economic downturn followed Taiwan's first transfer of political power. After two years in power, the Chen Shui-bian (陳水扁) government has very little to show for itself in terms of economic performance. The economy posted unprecedented negative growth last year, while unemployment exceeded 5 percent and national income fell to levels not seen since 1995.

  In order to salvage the economy and expand domestic demand, the government rolled out a host of projects designed to increase consumer spending and reduce taxes by a wide margin, only to see the nation's finances deteriorate at an increased rate.

  We can understand how this happened by examining flaws in the central government's budgets for the last two years. As far as income is concerned, for a number of years income tax revenues were overestimated, as was revenue from the sale of stock in state-owned enterprises. Last year's budget, for example, was made according to an excessively optimistic growth rate estimate of over 6 percent. This was shown to be wildly inaccurate when that year's actual growth rate came in at minus 2 percent.

  This year's budget, based on an optimistic estimated growth rate of 4.2 percent, is also unrealistic. Government tax revenue and percentage of real income have consistently fallen and this is cause for concern.

  Government spending has not been curtailed. There has been no decline in the relatively high percentage of expenditure on personnel, and, while the government studies approaches to organizational streamlining, it has set up several additional agencies. We need to keep an eye on the government to see of it really is going to downsize, or, in fact, continue to expand.

  The administration once talked big about redressing Taiwan's financial burden. Chen, for example, spoke of setting up a central agency for awarding construction contracts that he said would save the government NT$100 billion annually. A few ministers have also said that as long as Taiwan weeds out corruption, sweeps out "black gold" politics and practices frugality, it could save NT$300 to NT$500 billion. So where is the center?

  The government is already running a current-account deficit and is unable to fulfill the capital account needs for economic development spending. This further highlights the unhealthy state of the nation's finances. As the deficit continues to rise due to the grave over-projection of revenues, the government uses operational funds to hide debt or evade the debt ceiling. The government's financial decline is even more serious than the statistics suggest.

  The decline has to do with the government's frenzied calls for tax cuts and its neglect of the deleterious effect upon income re-distribution this brings. Examples include the lowering of business taxes borne by financial institutions and the expansion of tax incentives for certain industries. Prospects for tax reform have also been restricted by Chen's promise not to raise taxes during this term.

  The decline also has to do with the government's "big government" mentality as well as a predilection for control and intervention. The government started intervening in the stock market when it fell below 8,000 points, incurring massive losses and humiliating itself in the process.

  Meanwhile, the slogans change from "8,100" -- former premier Chang Chun-hsiung's (張俊雄) NT$810 billion public construction project -- to the "six-year national development project." They are sleek but not solid -- a regression to the big and the uncanny.

  The government even wants to throw financial discipline out of the window and raise the debt ceiling. This will lead to a drastic rise in the budget deficit and government debt. The central government alone owes more than NT$3.5 trillion (including debts hidden in the "operational funds"), equivalent to 35 percent of GNP. There is no balanced government book in sight for the next five years.

  Let the statistics speak for themselves. The Chen administration's mid-term financial report card is as unsightly as red ink. If we are to avoid following in Japan's footsteps by sacrificing our finances and bringing down the economy, work must begin now to stop our financial decline.

  Government finances will never be balanced by means of the current 13 percent tax burden to meet government expenditures equivalent to 25 percent of GNP. If the government were to adopt the approach of increasing income to match expenditures, the tax bur-den would have to be increased by at least NT$1 trillion.

  But Chen has promised not to raise taxes. To get around this, he would have to admit to having made a mistake. But even the most naive of people know that that is not politically possible.

  If, however, the government were to adopt the alternative approach of cutting expenditures to match its income, it would have to lower expenditures by 10 percent of GNP. It would therefore have to do everything it could to tighten the belt around its pot belly.

  Experience tells us, however, that achieving small government is easier said than done. The government wouldn't dare raise taxes, but it has shown no determination to cut expenditures either.

  To improve its finances, I would suggest that the Chen government adopt a "New Middle Way" ap-proach, which means humbly abiding by financial discipline.

  First of all, it absolutely must not raise the debt ceiling before a fiscal balance is achieved.

  Second, the election laws will have to be amended to include provisions forbidding political parties and candidates from proposing increased expenditures or reduced revenues unless they also identify the financial resources to pay for their promises.

  Third, beginning from next year's budget, the government must provide a timetable and a concrete method for balancing its finances. This should at the very least demonstrate its sincerity, determination and pluck in improving its finances. Only then will it be able to justify two years of magnanimity and tolerance on the part of the people.

  Yophy Huang is an associate research fellow at the Chung-Hua Institution for Economic Research.

  Translated by Scudder Smith and Francis Huang
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