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State Budget reform will be a testing process

Update: December, 05/2017 - 09:00
Viet Nam News

There has been considerable discussion in the media recently about the urgent need to cut the nation’s bulging public workforce because it has become a heavy burden on the State Budget and the economy as a whole.

In the long run, the bulky public workforce, combined with pervasive, inefficient investment is the main cause for Việt Nam’s budget deficit in the long run.

For man years, the deficit has crossed the prudential limit of 3 per cent of gross domestic product (GDP). The Government has targeted a budget deficit of about 3.5 per cent of GDP for 2017 and 3.7 per cent for 2018, a significant reduction compared to 5.6 per cent in 2016 and over 6 per cent in 2015.

However, this reduction happens not as a result of an increase in revenue or decline in spending, but mainly due to a change in calculation wherein, this year onwards, the State budget deficit will not include repayment of the principal.

If we tally all interest and principal repayments, which may reach VNĐ164.7 trillion (US$7.2 billion) this year, the budget deficit is likely be around 6 per cent of the GDP.

Budget deficit happens when spending exceeds revenue. Given that there is little room for increasing revenue, swollen expenditure has a negative impact on the overall budget balance as well as the State’s capacity to allocate productive investments.

Despite the Government’s efforts in reforming taxes and fees, revenue from import-export taxes has been on a declining trend as a result of the country’s deeper integration in the global economy.

In the mid-1990s, revenue from crude oil production contributed around one third of the State’s revenues but now it accounts for just 7-8 per cent. Furthermore, with Việt Nam having to cut tariffs following Free Trade Agreements (FTAs) signed with ASEAN countries and many others, such tax revenues could drop significantly from 2018.

In the domestic market, the Government has trimmed corporate income tax to spur growth of the private sector, but deeper cuts are needed. Meanwhile, the State’s assets that could be converted to cash are also sinking, due to accelerated equitisation of State-owned enterprises.

To bolster revenues, the Ministry of Finance has proposed comprehensive tax reforms, projecting hikes in VAT, special consumption, corporate and personal income tax, as well as natural resources consumption tax. However, such proposals have garnered mixed public responses, because they have not been adequately explained.

So it is against this background of declining trends in revenue and State asset values that the steady increase in total State expenditure merits sharper focus on the bulky public workforce and other investments.

Despite the downsizing efforts in recent years, Việt Nam still has 30 ministries and ministry-level agencies, 42 general departments and 826 sub-departments and agencies under general departments, with total number of people receiving wages and allowances from the State budget reaching four million, excluding military and police personnel.

The ratio of civil servants per 1,000 residents in Việt Nam is 43 (excluding military and police personnel), much higher than 13 in the Philippines, 16 in India, 17 in Indonesia and 25 in Singapore.

The great number of public servants and officials not only makes for low operational efficiency, but also worsens regular budget spending. From 2011-2015, regular spending increased 2.2 times over the previous five years, accounting for 65 per cent of total budget expenditure.

As Phạm Minh Chính, Politburo member and head of the Central Organisation Commission, said, if we can downsize the public workforce by at least 10 per cent in 2021 compared to 2015, the regular budget spending will shrink by five per cent, equivalent to VNĐ45 trillion, making “it easy to build Long Thành Airport”.

Moreover, given major role of the Government in infrastructure investment, the public debt situation is alarming, with the debt-to-GDP ratio over 64 per cent in recent years, just below the 65 per cent ceiling determined by the National Assembly. Not taking efficiency of State investments into account, a high debt-to-GDP ratio and a high budget deficit can affect macro economic stability as well as the Government’s capacity to manipulate fiscal policy.

Rules of thumb

So problems in both revenue and expenditure lay the ground for urgent State Budget reforms. For this, some key rules have to be followed.

First, as a rule of thumb, the budget must generate savings, which means current expenditure should be lesser than revenues. This is especially important for the State to manipulate fiscal policy and allocate investments.

Second, residents pay taxes and that makes it the Government’s responsibility to present adequately what it is doing in accordance with its functions in a market-oriented economy.

Besides, tax collection should take into account two issues: efficiency and righteousness - providing incentives or subsidies cannot distort and erode the driving force of doing business.

Third, the Government must have appropriate recognition of efficiency of State investments. Budget should practice its key function of allocating capital for what is actually needed.

Other key tasks

One of the most important things is that the Government must build public confidence by specifying long-term target of reducing budget deficit and remaining committed to accomplishing it, while sticking to the goals of ensuring macroeconomic stability and maintaining low inflation.

To implement the rule of thumb, it is essential to reform both expenditure and revenue sides of the budget.

On the expenditure side, it is time to reassess the State’s role in a market-oriented economy, so that the reform is done in the most practical manner. In many sectors and areas, particularly public services, we need fundamental streamlining for efficient operations. Wage reform and income transfer must ensure the principle of productivity/efficiency.

However these reforms should be done step by step, as they will have deep impacts on people and society as a whole. To ensure its feasibility, expenditure reform also needs careful consideration of revenue reform.

Due to limited income and declining ODA, a thorough cost-benefit analysis should done for each investment project and the overall economic, social and environmental impacts taken into account, while avoiding negative effects on the private economy, like the “crowding out effect” which occurs when increased government involvement in a sector reduces the investment from the private sector.

On collections, reforms must be associated with the expenditure planning. A cumbersome, expensive tax system will affect economic momentum and efficiency.

Looking at the tax reform proposal by the Ministry of Finance, it is controversial because the ministry lacks a comprehensive, convincing explanation that focuses on its efficiency, on its impact on businesses and consumers, as also on inflation and macroeconomic stability.

A comprehensive analysis and explanation is more essential in the context of the business community calling for reduced taxes as incentive for doing business.

In addition, an administrative reform of revenue collection is imperative to reduce operational costs and ensure efficiency, given the prevalence of presumptive taxation scheme sand trade fraud, which have distorted tax collection and made it an inequitable process.

More importantly, to take appropriate action, the Government should comprehensively analyse the risks of the trade/tax loopholes and public debt situation in correlation with overall State’s debt, macroeconomic stability, capital flows to fund repayment and the foreign reserves situation.

Reforming the State budget is not just a story of reducing deficit, revenue and expenditure, but one of institutional reform in relation with public organisation and workforce restructuring. Việt Nam needs comprehensive reform which needs collaboration and work in tandem by all ministries and relevant State agencies.

This process will test the political will of the whole public system and impact public confidence and society’s trust in the Government’s capacity to regulate the macroeconomy in the long term.

* Võ Trí Thành is a senior economist at the Central Institute for Economic Management (CIEM) and a member of the National Financial and Monetary Policy Advisory Council. A doctorate holder in economics from the Australian National University, Thành mainly undertakes research and provides consultation on issues related to macroeconomic policies, trade liberalisation and international economic integration. Other areas of interest include institutional reforms and financial systems.

 

 

 

 

 

 

 

 

 

 

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