The Miaoli County Government’s budget is not very large, so it is surprising that the county is NT$64.8 billion (US$2.1 billion) in debt and unable to pay its civil servants.
The long-term deterioration of the local fiscal situation is a result of systemic factors. One factor is the central government’s centralization of funds. Another factor is the lack of fiscal discipline, and the inability to increase revenue and reduce expenditure.
Before the Taiwan Province administration was frozen in 1998, the provincial Department of Finance conducted strict reviews of local government budget plans, and adopted an evaluation system after budget implementation. Unfortunately, the system was not completely transferred to the Ministry of Finance. Considering Miaoli’s financial difficulties, the ministry should improve monitoring and control of local government finances to prevent the situation from deteriorating further.
As for non-systemic factors, fiscal deterioration often occurs when a mayor or commissioner has a fondness for the grandiose. According to US economist William Niskanen, bureaucrats seek to increase their budgets by using their power for personal gain. Local government heads, top officials and county councilors are all politicians, and they seek to increase budgets and staff for their own units. Although they know the local government is in debt, they raise debt to maximize their financial clout. As human weakness is like a runaway horse, local government debt surges.
Before a bailout, the ministry should demand that the Miaoli County Government propose a feasible plan to increase revenue and reduce expenditure, and that local civil servants work together at this difficult time and are treated as accomplices in the bankruptcy. The Miaoli County commissioner, top county officials and county councilors should be prepared for salary cuts. Are they aware that New York City officials cut their salaries in the 1970s to resolve a fiscal crisis?
Even if officials only have their monthly salaries cut by NT$5,000, that would signal their determination to stop increasing their power by expanding the budget, thus warning related units not to make slack budgets. This could also fix financial loopholes and lower opposition if Miaoli wants to broaden the sources of revenue by increasing taxes and fees.
The central government has provided a legal basis for local governments to broaden their revenue sources, although local government heads seldom employ them in order to attract votes. This is proven by the fact that local government finances have not improved since the Act Governing Local Tax Regulations (地方稅法通則) was implemented in 2002. The Miaoli County Government should have used the act to boost revenue and clear debt. The easiest way is to levy surtaxes on the central government’s income tax or the county government’s land value and house taxes.
Miaoli can refer to my 2001 book, Let’s Go to Taoyuan, in relation to the county’s fiscal reform. Taoyuan’s financial shortage stood at NT$16.5 billion in 1999, and in the budgets for the second half of 1999 and all of 2000, during my term as Department of Finance director, we cleared part of the old debt without taking on new debt.
Fiscal reform is a long and painful task. It is long because communication of concepts is time-consuming, and it is painful because it inevitably offends vested interests of an unreasonable existing system, causing conflict. However, if the Miaoli County Government can show unselfish concern for its civil servants and for residents’ welfare, and move forward courageously, it will succeed.
Tsai Chi-yuan is a former director of Taoyuan’s Department of Finance.
Translated by Eddy Chang
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