Imagine that the Republic of China is a private company. What would that company’s finances look like?
The most basic approach would be to look at the amount of government debt together with the differential between annual income and expenditure. For the past few years, the government has consistently spent more than it has earned. This year, total government revenue has been NT$1.73 trillion (US$57.4 billion), compared with an expenditure of NT$1.94 trillion, leaving a budget deficit for the year of NT$210 billion. The government was in the red the previous year, too, to the tune of NT$174.4 billion, and NT$214.1 billion the year before that.
If things continue like this, public debt will soon approach the debt ceiling imposed by the law.
Second, just how large, exactly, is government debt? At the end of last year, the central government calculated — as it is required to do by the Public Debt Act (公共債務法) — the level of outstanding government debt. It was NT$5.2 trillion. When you add to this other liabilities and debts accumulated by local governments, explicit liabilities amount to around NT$7 trillion. This figure, however, does not include the hidden debt at various levels of government.
Also, according to the Directorate-General of Budget, Accounting and Statistics, hidden debt had reached NT$17.1 trillion by the end of last year. Of this, the pension fund for retired public servants — military personnel, civil servants and state school teachers — and the labor insurance fund, accounting for NT$8.4 trillion and NT$8.1 trillion respectively, were the most significant.
At the end of last year, the government’s explicit and hidden debt together totaled NT$24.2 trillion. At the end of 2012 this figure was NT$23.4 trillion. Evidently, government debt is continuing to rise.
Is the government responsible for covering the cost of hidden debt? Employees, employers and the government are all expected to contribute, at designated intervals, to the relevant retirement system and these contributions go into the pool of funds accumulated from which retired personnel receive their pensions.
Ideally, any pension fund will be large enough to deal with any future expenditure and its income and expenditure should balance, so that there is no possibility of it going bankrupt. Insufficient contributions, however, have meant that there is not enough money to pay the pensions of public servants or for labor insurance. This means that there will be a shortfall and there is even a risk of the fund going bankrupt. In the event of this the government may well have to underwrite losses.
For example, it is expected that the public servant pension fund and the labor insurance fund will, for the first time, need to pay out more than they receive in the years 2018 and 2020. According to detailed calculations made last year, there is a real threat of the funds going bankrupt by 2027 or 2031. This danger will still be there even if the government contributes around NT$138 billion each year in pension payments for retired public servants.
The government’s budget is in the red and there is mounting pressure from liabilities. The time for serious action over the government’s finances is now.
Recently, the legislature passed what it has touted as the biggest tax review to date, in what was purported to be a health package for the nation’s finances. It is expected that this plan could increase tax revenue by NT$60 billion. Nevertheless, even if the overhaul is as fundamental as claimed, the extra revenue it produces will be a mere fraction of the annual shortfall of NT$200 billion in the government’s finances, which will not go very far in returning government finances back to health.
At the same time, the government has been forced to curb the expenditure responsible for increasing the national debt and this has affected funds allocated for public construction projects which were intended to stimulate economic growth.
The size of the budget allocation for public construction projects has continued to shrink, falling as a percentage of annual spending for the past three years in a row. The government’s latest figures list the public construction budget allocated for the year 2015 as a mere NT$163.6 billion, accounting for only 9 percent of the government’s total annual expenditure. The National Development Council says that the budget allocation for public construction projects would normally be around 15 percent of annual government expenditure. This reduction is not only directly suppressing investment in new public construction projects, it is bad for the nation’s economic growth as a whole.
The government’s financial health package needs to initiate a more positive approach, which includes boosting tax revenue and mobilizing state-owned resources. The nation’s tax structure is a mess. The vast majority of tax income comes from income tax, with an insignificant amount coming from capital income tax. On May 20, President Ma Ying-jeou (馬英九) spoke of the importance of helping the younger generation afford to live in Taiwan. In addition to increasing the supply of housing, importance also needs to be placed on taxing the actual price of property transactions.
Given the current situation, within the next 20 years hidden debt will be a huge burden for the government. If this is not dealt with in good time the government may well face a financial crisis which will force the young today to make huge pension contributions in the future. As a result, pension reform needs to planned extremely carefully, to reduce future financial problems and lessen the burden on the younger generation.
Last year, the government established a task force on tax reform, but we have yet to see any substantial proposals. If we are going to find a solution we need to address this problem as soon as possible, so that the people in retirement now get less, those yet to retire contribute more and a reasonable retirement age is set so that everyone does their fair share.
Yeh Yin-hua is a professor in the Institute of Finance at National Chiao Tung University.
Translated by Paul Cooper
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