Fiscal Sustainability Policy Debate Must Continue
United Daily News editorial (Taipei, Taiwan, ROC)
August 9, 2011
Summary: Executive Yuan political appointee Chu Ching-yi has clashed with
Minister of Finance Li Yi-teh. Chu pointed out that the low tax burden
would "make it impossible for the government to survive." This shows
that the tax system, which has given priority to economic development,
is out of balance, and is now leading to our government's fiscal
Full Text below:
Executive Yuan political appointee Chu Ching-yi has clashed with Minister of Finance Li Yi-teh. Chu pointed out that the low tax burden would "make it impossible for the government to survive." This shows that the tax system, which has given priority to economic development, is out of balance, and is now leading to our government's fiscal collapse.
The government has long relied on tax cuts to spur economic growth. But this approach has led to the loss of tax revenue. It has made the government oblivious to this structural problem in its fiscal affairs. Family members may publicly air the family's dirty laundry. But infighting within the cabinet must not stop debate. The government must respond to questions about the fiscal sustainability of the economy. It must find a solution acceptable to the public.
Under normal circumstances, a low national tax burden need not mean fiscal unsustainability. But the tax burden remains low, government spending remains high, and the debt is steadily increasing. Together, these add up to a chain reaction fatal to fiscal sustainability. As a cabinet member, Chu Ching-yi has touched a raw nerve. He has slaughtered a sacred cow. Onlookers in the government and opposition must not regard this as nothing more than a war of words or battle of wills between two political appointees.
What precisely is fiscal sustainability? In December 2009, following the financial tsunami, the Asia-Pacific Economic Cooperation (APEC) convened a seminar in Malaysia on strategies for fiscal stability and economic recovery. At the time, the definition of fiscal sustainability rested on two principles. First, the public debt to gross domestic product (GDP) ratio must not be too high, Second, debt must be limited, allowing room for for the next fiscal crisis. Now let us apply these two principles to Taiwan. The Public Debt Law stipulates that government debt at all levels must not exceed 48% of the GNP for the previous three years. For the central government, that figure is 40%. By the end of this year, the central government estimates that debts exceeding one year will approach 37%. Existing debt is almost 90% of the debt limit. Based on the government's own debt limit redline, the national debt is already too high.
How dangerous are high levels of debt? That depends on government solvency. Tax revenues are the government's most dependable source of income, Naturally it is an important way to limit debt. But in recent years the government has adopted an expansionary fiscal policy in response to the financial tsunami. It has aggressively cut taxes. It has accumulated a great deal of debt. As a result, over the past three years, it has collected 75 billion NT less in taxes than before. The tax burden in 2008 was 13.9%, By 2010 it fell to 11.9%. Total tax revenues as a percentage of the government's annual expenditures fell from 73% to 61%, Government solvency declined markedly.
Government income remained low. Government expenditures remained high. This forced the government to borrow to get by. Over the past three years the government accumulated nearly one trillion NT in new debt. Its single year budget deficit, jumped from less than 1% of GDP to over 3%. Clearly the data shows the fiscal situation on Taiwan moving toward extremes. Incomes are lower. Expenditures are higher. Debts are higher. The Ministry of Finance touted its tax cuts and ultralow tax burden as political accomplishments. Chu Ching-yi accused it of misleading the public. The fear is that the government and the public will become accustomed to the status quo. This will plant the seeds of irreversible fiscal ruin.
The government's debt structure differs from the United States, which is also mired in debt. Ours is not foreign debt. Our debt is domestic. Seventy percent of that debt is held by government banks. The national debt may be approaching the limit. But there is no risk of imminent default. Chu Ching-yi warned that "Obviously such a fiscal policy is unsustainable." He was not being alarmist. The government continues to ignore the warning signs. It clings to the "tax cuts are political accomplishments" mentality, The high debt burden means high interest on the debt, It means structural rigidities in government expenditures. It means a vicious cycle of debt owed on debt. The government cannot jump start the economy. It cannot meet the aforementioned second principle of financial sustainability. The high debt burden may even hijack monetary policy. Increasing interest rates increase the government's debt interest expense.
Can the government ensure its fiscal sustainability? This cannot be determined merely by looking at the amount of debt or the tax burden. Two government officials engaged in a battle of wills. Their respective definitions and interpretations of fiscal sustainability represent two extremes. They have laid their cards on the table. How can they not intersect? The government must establish a long-range fiscal strategy. It must determine how much money the nation requires. It must determine the magnitude of the nation's fiscal structure. It must determine how much tax revenue is adequate. It must determine the impact of these factors on the deficit, Only then can it objectively evaluate the nation's fiscal affairs. Only then can it alter its fiscal policy accordingly.