20131118 Borrowing more money is not OK
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Borrowing more money is not OK

By Huang Shih-chang, Wu Hui-lin 黃勢璋,吳惠林

When the Minister of finance reported on the state of government debt a few days ago, saying that it was going off the scale, President Ma Ying-jeou’s (馬英九) reaction was: “Government debt in some countries stands at 200 percent of GDP, but they are doing just fine. That is why a lot of people wonder what we are afraid of, saying ‘Go on, borrow some more.’ Why can’t we issue more debt?”

This response is deeply regrettable and a cause for great concern given the uncertain future of today’s young and future generations.

On the face of it, Taiwan’s national debt stands at 38.6 percent, a lot less than in other high-debt countries. This seems to imply that Taiwan’s debt situation is both sound and safe. However, in reality this hides a risk for potential national bankruptcy, because the government’s definition of national debt differs from the international standard.

This also means that when the government makes debt comparisons with other countries, the results are often ridiculous because of the different calculation standards.

According to articles 4 and 5 of the Public Debt Act (公共債務法), the government issues non-self-liquidating debt with a maturity of one year or more, excluding short-term debt with a maturity of less than one year.

Furthermore, in 2010, the Control Yuan issued a correction to the Cabinet because it thinks that although the formula for calculating national debt meets the legal requirements, it does not comply with the international definition and therefore it is not suitable for making comparisons with other countries.

In June, the legislature passed an amendment to the Public Debt Act that replaces GNP with GDP as the basis for debt calculation and amends the debt ceiling for the national and local governments so that debt may not exceed 40.6 percent and 9.4 percent respectively, of the average nominal GDP for the previous three fiscal years.

These changes are the main ways in which the government wants to restructure local governments, amend the debt restriction structure for the different government levels and meet international standards.

However, this is nothing but a flawed recipe for issuing more debt.

This flawed amendment, together with the repeatedly raised debt ceiling, will not be a positive recipe for handling the deteriorating debt situation. It is more like a sugar-coated poison pill that will do nothing to control the situation, but instead will increase debt by NT$72 billion (US$2.43 billion).

It has been 20 years since the government was told that it must understand the taxes paid by the public are the precondition for the government services that they need and enjoy, and that continuously borrowing money will not promote public happiness and satisfy more needs.

The transformation and upgrading of the country’s industrial structure is not going very well, unscrupulous businesses create scandal after scandal, overall economic performance over the past few years has started out promising much and ended in desperation, and the government is only capable of promoting tax incentives, as if tax cuts were a cure-all.

The result has been that Taiwan’s tax burden is among the world’s lowest.

This in turn has affected the constantly deteriorating fiscal situation, which in future will force the government to issue debt simply to be able to finance its policies and budgets. This has led to a situation in which the government needs to raise debt to service debt, just as so-called “credit card slaves” must rely on their cards to make ends meet, placing the government in a vicious circle that it is unable extract itself from.

This is why, as Taiwan is facing its current fiscal difficulties and national debt is bringing the nation to the edge of the cliff, we again call on the president to rein in his horses and stop raising the debt so that long-term sustainable development for coming generations can be promoted.

This is a situation that cannot be faced with the mindset that it is okay to borrow more money.

Wu Hui-lin is a researcher at the Chung-Hua Institution for Economic Research. Huang Shih-chang is an assistant researcher at the institution.

Translated by Perry Svensson

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