For quite some time, financial markets around the world have been mired in a crisis over sovereign debt. In Europe, debt crunches have broken out in Greece, Italy, Spain, Portugal and Ireland. No sooner has one country’s crisis been resolved than another one pops up elsewhere, and there seems to be no end in sight.
Most recently, the US has been embroiled in a debate over raising its debt ceiling. This kept financial markets worldwide on tenterhooks as the Republicans and Democrats stuck to their guns and refused to back down, and it was only just before the deadline last Tuesday that they finally reached a deal. Even though a compromise was reached, the US economy and its reputation were both badly dented.
On the face of it, Taiwan is a bystander that has not been directly affected by this global debt crisis, but when one takes a closer look at the true state of our national debt, it is hard to be confident that the economy can weather the storm and remain unscathed.
The sovereign debt crunches that have broken out over recent years may seem like a string of random events, but it increasingly looks like they are becoming a permanent state of affairs. According to figures published in the -Chinese-language Business Weekly, the total debt of governments around the world has soared 138 percent from US$18 trillion 10 years ago, to US$43 trillion today, while the global GDP has grown just 96 percent during the same period, from US$32 trillion to US$63 trillion. Clearly, government’s debt is growing faster than economies.
During the past decade, Taipei has not lagged behind in this global rush to borrow. Government debt in Taiwan, which stood at NT$2.8493 -trillion (US$98.3 billion) in 2002, is forecast to reach NT$4.9215 trillion by the end of this year, an increase of 72 percent.
The fastest growth in debt has taken place during the three years in which President Ma Ying-jeou (馬英九) has been in office, as his government has taken out loans of more than NT$400 billion a year for three years in a row. The central government’s outstanding debt has seen a net increase of NT$1.26 trillion since Ma took office, about the same amount of debt accumulated during the preceding eight years of the Democratic Progressive Party administration.
Ma and his ministers often say the country’s debt problem is not serious when compared with what is going on in Europe and the US. Their reasoning is that, for one, borrowing by the government has not reached or exceeded the legal limit and, for another, Taiwan has hardly any external debt. The legally defined ceiling for central government borrowing is 40 percent of GNP over the preceding three years.
Current central government outstanding debt extending more than one year stands at NT$4.9 trillion, which is 37 percent of the average GNP over the past three years — only NT$300 billion to NT$400 billion below the legal limit. If the Ma government goes on doing as it has done so far, borrowing at a rate of about NT$400 billion a year, then within a year it will find itself in the same sticky situation as the US government, with no option but to raise the debt ceiling.
How can anyone say that Taiwan doesn’t have a debt problem?
As if that were not bad enough, the debts listed above are only for the central government. If the more than NT$700 billion in non-profit fund borrowing and more than NT$600 billion in local government debt are figured into the equation, along with NT$15 trillion in hidden debt, then total government debt is already in excess of NT$21 trillion. (Although it should be noted that the Directorate--General of Budget, Accounting and Statistics does not include levy compensation for existing roads and unassigned payments for farmers’ health insurance deficits in its figures, so its declared figure for hidden debt is a bit less at NT$13 trillion). These figures mean that every Taiwanese is loaded down with NT$910,000 in government debt.
Having many debts is not always a bad thing. If the money a government borrows is invested in public construction or used to reward and assist industrial development, it can drive economic growth, which will generate more tax revenues and put the government in a better position to repay its debts. Thus, when money borrowed is used effectively, there is no need to worry even if there is a lot of debt. However, this is not the case in Taiwan and seen from this angle, the nation’s finances are already in a frighteningly precarious state.
Any government depends on tax revenues to pay interest and repay the principle on debts, but while Taipei’s borrowing has been soaring, its finances keep getting worse. According to data provided by the Ministry of Finance, the nation suffered a tax revenue shortfall for two years in a row — 2009 and last year. In 2009, the gap was more than NT$250 billion — the worst in history.
While the Ma -administration does not want to see its debts go through the roof, it has tried to ingratiate itself with business-owners and the rich by slashing estate and gift taxes from 50 percent down to 10 percent and profit-seeking enterprise income tax from 25 percent to 17 percent. However, the individual income tax that ordinary people pay has been trimmed by just 1 percent. As a result, revenues to the Treasury has fallen sharply.
In a situation where revenues are not enough to cover expenditure, how can the government possibly hope to repay its debts?
To make things worse, while the government claims high figures for economic growth, more than half of it is in the form of triangular trading. Since the goods sold by Taiwanese companies under triangular trade arrangements are made in other places, this kind of business does not generate jobs or boost tax revenues in Taiwan.
The figures tell us that, while government debt has gone up by NT$1.26 trillion under Ma’s administration, tax revenues have not yet recovered to the level they were at before the 2007 global financial crisis. With mounting debts set against lower tax revenues, the government’s finances are in a very risky situation.
You cannot judge whether a country’s debt situation will continue to worsen just by reading the raw data. You have to look at its economic growth, employment rate, tax revenues and so on.
Taiwan’s debts may be lower than those of a lot of other countries, but under the Ma administration’s China-friendly policies, and given its lack of long-term vision for economic development, government indebtedness will eventually be more than the public can bear and the nation’s finances will be crushed.
Translated by Julian Clegg
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