Growth goals at odds with deficit reality

PUBLISHED : Saturday, 25 July, 1998, 12:00am
UPDATED : Saturday, 25 July, 1998, 12:00am

The Taiwanese Government is talking of spending more on infrastructure in order to stimulate the economy.

The Council for Economic Planning and Development has proposed boosting infrastructure spending by 14 per cent, or NT$47.8 billion (about HK$10.75 billion), and calculates that the 0.6 per cent this would add to gross domestic product would keep the GDP growth rate at the target 6 per cent.

The place could certainly do with it. The members of the ruling Kuomintang party took the view when they moved over from the mainland in 1949 that they were all going back to their real home anyway within a few years, so why bother spending money on a temporary one.

This perception has gradually changed over the past 10 years, but it still has left Taiwan far behind on needed roadways, railways and other infrastructure improvements. Ambitious projects started earlier this decade have had their funding trimmed or have otherwise fallen behind for reasons of engineering problems or political interference.

Whether it makes immediate economic sense at the moment is another matter. The problem is that the government might have proved itself ready to spend the money but has not proved itself quite so ready to raise it.

As the first chart shows, the fiscal deficit has averaged the equivalent of 6 per cent of GDP since the beginning of 1990 and, although there has been a slight improvement over the past two years, the latest figures still have the annual deficit at roughly 6 per cent. Put another way, for every NT dollar the government spends it collects only 75 cents in revenue.

It is the worst fiscal performance in Asia, barring perhaps Japan's if anyone could dig the full truth out of the Japanese Government's accounts. If one leaves the likes of Cambodia or Laos out of the equation, until the end of 1997 every other country in Asia could boast a fiscal surplus, even Indonesia if one excludes debt repayment from expenditure as the IMF does.

It is very much at odds with the common perception of Taiwan as a rapidly industrialising society of frugal people. What is more, the continual deficit has resulted in an ever-rising government debt burden. As the second chart shows, Taiwan's banks now hold $2.2 trillion of various forms of government debt, or the equivalent of 26 per cent of GDP, and the figure excludes external debt.

This is particularly notable, because tight money policies have kept domestic credit growth down. Money supply on the M2 measure is running at only 8.5 per cent and overall bank-lending growth at little more.

It's a good question why the central bank should want to keep things so tight when the government of which it is part has adopted so loose an attitude towards money, but that's the way things are in Taipei and arguing the point with the bureaucrats won't get you far.

It means that there is an ever-smaller share left in the trough for the private sector after the government has had its turn.

But, if Taiwan expects growth from infrastructure spending, it had better learn to practise fiscal discipline first. The way things are going, there is trouble over the horizon.