Sun, Nov 06, 2011 page8

• Government must cut spending

  • By Lin Chia-cheng 林嘉誠
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  The ruling and opposition parties have been locked in heated debate about raising the monthly subsidy for elderly farmers.

  The Chinese Nationalist Party’s (KMT) proposal is to automatically adjust the allowance every four years based on consumer price index (CPI) growth. Eight kinds of welfare allowance — including one for senior citizens with low or medium incomes — are to be adjusted in the same way.

  With a weak economy, a widening gap between rich and poor and a growing number of people falling into the low and middle-income brackets, no party is likely to oppose these new subsidy rules.

  The question is, where will the money come from? The Ministry of Finance has said it expects tax revenues for this year to exceed its target by NT$50 billion (US$1.67 billion), but who can guarantee that this will happen again next year or the year after?

  Premier Wu Den-yih (吳敦義) says that the legislature will still have the discretion, as in the past, to authorize the Cabinet to adjust payments, but this is certain to create a crowding-out effect.

  Government revenues in many countries, including Taiwan, are not enough to cover their expenditure. Governments run budget deficits year after year, and accumulated debt often exceeds their legally defined limits.

  The governments of Europe’s weakest economies — known as the “PIGS” (Portugal, Italy, Ireland, Greece and Spain) — have had their sovereign credit ratings cut after accumulating vast amounts of debt.

  The Greek government is teetering on the brink of bankruptcy, and eurozone governments have so far failed to come up with effective policies to thoroughly remedy the situation. Iceland and Ireland have also suffered debt crises and required bailouts.

  In the US, the executive branch of government has clashed with the US Congress over the issue of raising the limit for government borrowing. This crisis led to a cut in the US sovereign credit rating, triggering panic around the world.

  In this age of globalization, any sign of trouble in one country is immediately felt around the world. The series of global stock market crashes that have occurred over the past few months are cases in point.

  A still more serious problem is that the global economy has not fully recovered from the 2008 financial crisis.

  Many governments have been relying on loose monetary policies to stimulate consumption and rescue the financial sector. While such policies have led to soaring stock markets and real-estate prices, they have done little or nothing to help the real economy.

  Income inequality means economic growth does not benefit the majority of people, and the unemployment rate remains stubbornly high. Taiwan is no exception. While some private companies have performed reasonably well, many firms in the electronics sector, which caters mainly to the European and North American markets, are struggling.

  As for China, it may be headed for a hard landing, so relying on the Chinese market is sheer wishful thinking and ignores the hard realities. Taiwanese export orders in September rose just 1.72 percent from a year ago, representing the lowest annual increase in 23 months, and that should serve as a warning.

  The government is talking about a “golden decade,” but it has not proposed any immediate measures to achieve this goal. Neither does this promise include any short, medium or long-term plan to resolve the government deficit and outstanding debt.

  Anyone who has the slightest understanding of the composition of the Taiwanese government budget must be very anxious about public revenue and expenditure and the debt burden that we are passing on to future generations.

  The nation’s total debt relative to GNP may not be high compared with many other countries, but there are many other figures that speak volumes about the state of the economy and the nation’s finances.

  For instance, Taiwan’s tax burden stands at 12 percent of GNP, which is much lower than most countries. Keen not to lose votes during elections, the government does not dare to reform the taxation system. If labor insurance arrears, local government deficits and the operating fund debt are taken into account, the nation’s fiscal outlook is rather bleak.

  No government can call itself responsible if it ignores and avoids problems. While it is hard to tap new sources of revenue, the government can start by cutting expenditure.

  Having served as head of the Research, Development and Evaluation Commission for a number of years, I know that government ministries and departments have plenty of room for cutting costs.

  If the government that results from next year’s elections cannot find any new sources of revenue, it should set about cutting expenditure without delay.

  Lin Chia-cheng teaches at Soochow University and is a former head of the Research, Development and Evaluation Commission.

  Translated by Julian Clegg

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