20101115 Taiwan’s finances are in a dreamland

Taiwan’s finances are in a dreamland

By Chang Ruay-shiung 張瑞雄

Recently, the media has been preoccupied by news about the Taipei International Flora Exposition, the special municipality elections and the results of former president Chen Shui-bian’s (陳水扁) various trials. Not too many people have been paying attention to major international events, especially the recent strikes and reform to the pensions system in France.

Under the previous French law, the retirement age was 60 and anyone who made social security payments for 40-and-a-half years could claim full pension benefits from the age of 65. However, an aging population has meant that pension and healthcare costs have increased steadily. Combined with the falling number of taxpayers — a result of falling birth rates — this made reform of the pensions system very urgent.

The recently passed pension reform bill raises the retirement age from 60 to 62, increases the required years of social welfare payments to 41-and-a-half years and pushes the age for full pension benefits back to 67. The reform is likely to save the French government between 20 billion euros (US$27.4 billion) to 30 billion euros annually and reduce the budget deficit, while helping the country to maintain its AAA credit rating. That will in turn allow the government to repay debt at lower interest rates. The new law therefore kills several birds with one stone.

The measure has been strongly opposed by both the opposition and labor unions, which called several nationwide, cross-industry strikes in recent weeks. Millions of protesters participated in the rallies, causing financial losses of several hundreds of millions of euros everyday. This not only affected the daily lives of French people, it also shook the security of the country’s social fabric.

Reform in a democratic country is tough. The pressure from voters, opinion polls, strikes and demonstrations often force politicians to curry favor with and finally yield to the public. I can’t help but admire French President Nicolas Sarkozy. Despite his approval ratings plummeting to new lows, he still put his personal political career on the line by pledging to push the reform through.

While France and all Europe are pushing for such reform, Taiwan is still living in a dreamland. In Taiwan, the government spends NT$450 billion (US$14.9 billion) on personnel costs and NT$150 billion on retirement pensions annually, not to mention national debt reaching almost NT$14 trillion. Calculating a 2 percent annual interest rate, that places annual interest payments at about NT$280 billion. This adds up to about NT$880 billion, half of the government’s income of NT$1.5535 trillion in the last fiscal year. What will Taiwan’s future look like if this continues?

The five special municipality elections are crucial to politicians, the flora expo is a pleasant event and people can vent their anger by commenting on Chen’s trials. However, none of these things will help resolve Taiwan’s financial difficulties. Politicians always attack one another on TV or in the newspapers. Do they even care about the black hole in the government’s finances?

A healthy financial situation is based on healthy tax system. The government set up the Tax Reform Committee on June 30, 2008, but it merely proposed tax cuts, including lowering the Estate and Gift Tax to 10 percent, instead of raising taxes, because of various kinds of pressure before it was terminated on Dec. 29 last year. Things do not look too good. After the Nov. 27 elections, the legislative and presidential elections follow in two years. Elections imply that there will be no tax increases or reforms. This is really a tragedy for our democracy.

Chang Ruay-shiung is vice president of National Dong Hwa University.