The Nation's Finances Need Internal Checks
United Daily News editorial (Taipei, Taiwan, ROC)
April 16, 2010
After months of stalemate in the legislature, the "Industrial Innovation Act" has suddenly experienced a reversal of fortune. The KMT is using its legislative majority to decide how the bill should be modified for passage. The question however, is whether the ruling party's policy coordination can be reconciled with President Ma's policy making.
Regrettably the current policy about face reveals serious oversights in the Ma administration's financial policy analysis, involving President Ma, the Presidential Office, the Executive Yuan, and his advisors. We hope to explain the basics of financial decision making in a series of editorials. These editorials would amount to a commentary on the decision-making process and policy direction of the president and his financial advisers. The most controversial aspect of the Industrial Innovation Act concerns taxation. Therefore we will begin by addressing the issue of taxation, and gradually broaden our critique from there.
The version of the bill originally sent to the Legislative Yuan was the result of discussions between the Ministry of Economic Affairs and the Ministry of Finance. It was even approved by the Tax Reform Commission and the Executive Yuan. It was subjected to thorough discussion and study because the impact of financial policy decisions can be extremely complex and require professional analysis. They are often matters the man in the street cannot understand. Businessmen and the public alike naturally want lower taxes. Therefore when financial decisions come face to face with populist sentiment or elected officials, the result is invariably tax cuts all the way. Industrial and business tycoons are usually more adept than salaried workers at lobbying the executive and the legislature. Professionals are forced to step back, and no one is left to defend the larger interests of the nation. Populist fiscal policy or legislation may not always pander to Big Business, but it is often unconducive to the overall health of the economy.
Our emphasis on the importance of the nation's finances is nothing new. It applies to the large scale revenues and expenditures of all economic entities. Let us take a law everyone is familiar with to illustrate the importance of fiscal and financial policy. Article 14 of the Securities and Exchange Act states that listed companies must establish an independent board of directors, or "Audit Committee." Its most important task is to elect the company's Chief Financial Officer and and Chief Auditor. If we compare the government to a corporation, the Chief Financial Officer and Chief Auditor are the equivalent of the Minister of Finance, the Comptroller, and the Auditor General. According to Article 14 of the Securities and Exchange Act, a listed company's financial and auditing directors must be independent. They must not be appointed by the General Manager. They must not even be subject to the control of the Chairman of the Board. Most listed companies insist on this level of independence and professionalism for their financial managers. Can a nation's government demand less? Therefore a nation's financial and accounting heads must be professional and resolute. They must not even be subject to the control of the premier (General Manager) and president (Chairman of the Board). The premier and the president should respect the authority of financial and accounting heads.
The law does not set professional standards for most corporate financial officers, only for large listed companies, mainly because the bigger the company, the more serious the consequences of any financial irregularities. A company need not worry about financial problems as long as everything is proceeding smoothly. But when a company is expanding its operations or is facing troubled times, financial management and control becomes particularly important. Our current financial heads are clearly more concerned about being obedient than they are about being professional. As a result they are silent about the Industrial Innovation Act, and expose the lack of financial checks and balances in our government.
The government faces two challenges. One. The Ma administration has pledged to promote its "Twelve Love for Taiwan Construction Projects." These require a budget of four-trillion over eight years. The amount is staggering. Two. Global climate change is exerting pressure on the government. Every summer and fall Taiwan is subject to natural disasters. These often require the expenditure of hundreds of billions of dollars. It is easy to imagine the government's financial burden under these twin pressures. Those in authority must be vigilant. How can they overlook such problems? Two years ago, in July, when the Tax Reform Commission was established, the Ma administration had an excellent opportunity to complete a sound, long term, macro level financial plan in tune with his national infrastructure plans. Unfortunately, the Tax Reform Commission defaulted, and instead promoted hasty, piecemeal, emergency policies and bills. It left the government's financial structure confused, and experts and scholars devastated.
All through 2009, the Ma administration promoted haphazard tax cuts. Even now, the Ma administration seems unaware of the seriousness of the fiscal deficit. Its response to the Industrial Innovation Act is to "Stabilize the situation by shouting 17%." Its tendency to pander to populist sentiment is deeply worrying. The government's financial status has gone from bad to worse. It has been repeatedly downgraded by international credit rating agencies, and blasted by both the Blue and Green media. The root of the problem is national leaders seriously deficient in their understanding of financial and fiscal affairs. The Ma administration desperately needs to mend the holes in its financial policy making process.
2010.04.16 02:13 am