Public Finance

As introduced by the Yearbook of the Republic of China:

Over recent years, the Ministry of Finance (MOF) has implemented a series of fiscal policy measures to weather a succession of storms, and to help Taiwan evolve into a developed economy. In order to meet the challenges of liberalization and globalization following Taiwan's accession to the WTO in January 2002, current fiscal policies place emphasis on stimulating the economy, supporting national major construction projects, promoting fiscal and financial reform, enhancing exchanges with other countries, and expanding international affairs, with the aim of enhancing Taiwan's international competitiveness and promoting sustainable economic development.

For 2002, the central government slightly reduced expenditure compared with the previous year. A decline in tax revenue and income from selling shares of public enterprises and dividends from public enterprises, however, caused central government revenues to drop and led to a widened deficit of NT$246 billion.

Government Expenditures

In order to promote economic development and encourage private investment, several major public construction projects were implemented from 1991 onwards, thus exacerbating the trend of deficit increase. In FY2002, although central government expenditures declined 0.48 percent from the FY2001 level of NT$1,559.7 billion to NT$1,552.2 billion, revenues also decreased 8 percent, resulting in a deficit of NT$246 billion. Among the component elements, current expenditure contracted by 4.29 percent to NT$1,183.6 billion, mainly owing to the shrinkage of government subsidies, the loss of the farmers' insurance program, and the civil servants' pension plans. Capital expenditure grew substantially by 14.12 percent to NT$368.6 billion, reflecting the government's continuous efforts to implement the National Development Plan in the New Century and other policies aimed at promoting public investment to boost the economy. Of general government expenditures, those on national defense used to constitute the largest share but as a percentage have been declining for the past ten years, while expenditures on social security and debt have increased. Spending on social security commanded the largest share of total central government expenditure in 2002. This change indicates that, in addition to national security, the government now puts more emphasis on economic construction, social welfare, and education and cultural development.

The government's spending on social welfare has gradually increased and over the last two years accounted for the largest share of overall government expenditure in the previous two years. In 2002, however, the spending fell by 10.54 percent compared with the previous year, due to government efforts to enhance the auditing procedures of farmers' insurance program, thus reducing the need for government subsidy. The scale of public expenditure of the central government, as measured by the ratio of central government expenditure to GDP, declined to 15.95 percent in 2002 from the previous year's 16.41 percent due to the decrease in social welfare expenditure. Over the same period, the ratio of fiscal deficit to GDP leaped from 9.14 percent in 2001 to 15.91 percent as a result of the shrinkage of government revenues.

The following figure compares the expenditure structure of Taiwan's central government in 1993 and that in 2002:

Government Revenues

Central government revenues come mainly from taxes (including monopoly profits) which have been stable and are still sufficient to finance various government activities. With decreases in revenues from taxes, monopolies, public enterprises, utilities, properties, fees, fines, and indemnities, the total revenue for central governments decreased 7.90 percent in 2002 to NT$1,305.3 billion. Overall, the share of current revenues declined 6 percent in FY2002. Broken down by revenue category, tax revenue and surpluses of public enterprises and public utilities still constituted the two major revenue pools for the central government, which respectively accounted for 62.82 percent and 19.32 percent of total revenue in 2002.

Beginning in 2002, monopoly profits on tobacco and alcohol, a major part of government revenue in the past, were phased out following Taiwan's entry into the WTO, being replaced by a tobacco and alcohol tax. Nevertheless, tax revenue still regressed slightly by 2.55 percent in 2002 due to a 29.05 percent drop in business income tax in line with the gloomy business climate a year earlier. The surpluses of public enterprises and public utilities significantly slackened by 24.9 percent as the sales of government-owned stocks passed its peak, and dividends from public enterprises decreased after privatization. Revenue from fees, fines, and indemnities increased as much as 70.07 percent due to the huge licensing fees of NT$49 billion for operating 3G telecommunications services.

The following figure compares the revenue structure of Taiwan's central government in 1993 and that in 2002:

Debt Financing and Obligations

In 2002, principal repayment of central government debt dropped significantly from the previous year because NT$195.9 billion of it was transferred to the government debt management fund under the MOF. The central government's demand for debt financing climbed to NT$302.3 billion in 2002 from the preceding year's NT$264.7 billion due, however, to the widening annual fiscal deficit. Of this amount, NT$244.4 billion was raised through issuing government bonds and the remaining NT$57.9 billion was appropriated from surpluses of the previous years.

In FY2002, expenditures outran revenues; the fiscal balance of the government continued to run a deficit. Over the past decade, all construction funds from the issue of central government bonds have been used to finance important national construction projects. Central government bond issues totaled NT$244.4 billion in 2002, increasing the outstanding debt of the central government to NT$2,898.4 billion at the end of 2002, up 3 percent from NT$2,807.7 billion at the end of 2001. The ratio of central government outstanding debt to the average of annual Gross National Product (GNP) in the preceding three years stood at 30.11 percent, which was still below the ceiling of 40 percent allowed by the Public Debt Act.

In FY 2003, the ratio of outstanding central government domestic debt to GDP is expected to jump to 30 percent as the central government took on responsibility for paying provincial government debts amounting to NT$825.6 billion. Total outstanding public bonds and foreign debt of central government reached NT$1,971 billion in FY2002, an increase of 14.65 percent from FY2001. Nevertheless, external public debt was slightly reduced from US$7.4 million at the end of 2001 to US$7 million at the end of 2002. The external public debt servicing ratio, which is equal to external public debt divided by the foreign exchange income from goods and services, stayed at 0.005 percent at the end of 2002.

Debt dependency, as measured by the ratio of debt proceeds to total central government expenditure, continued its decrease, to 15.75 percent in 2002 from 17.68 percent in 2001. This decrease was mainly attributable to establishment of the government debt management fund in late 1999 that shared the responsibility of principal repayment. Coupled with appropriating surpluses in previous years, the debt dependency ratio continued to decline.

Budget Allocation

All governments from the central to the county/city levels are required to submit their budget bills for review by the legislative body at their respective levels three months before the beginning of each fiscal year. Cities under county jurisdiction and urban and rural townships are required to submit their proposed budgets to their respective representative offices two months in advance.

Funding for these budgets comes mainly from national and local taxes, which are allocated proportionally to each government level in accordance with the Act Governing the Allocation of Government Revenues and Expenditures. The Executive Yuan reviews the financial conditions of each government level each year, and may revise the law to adjust the percentage of tax revenues to be appropriated to the different levels of government. The tax revenues shall, however, account for an appropriate proportion of the fiscal expenditures at each government level, which is also required to maintain a certain proportion of local financial resources. The figures for these two proportions, which are proposed by the Executive Yuan, require the approval of the Legislature.

On July 19, 2000, the Executive Yuan announced the new tax revenue ratio allocated to each level of local government. According to the new ratio, 39 percent of the tax revenue was distributed to county/city government in fiscal year 2001, a 4 percent increase over the previous year. The rural and urban townships obtained 12 percent of the tax revenue since the Taiwan Provincial Government no longer has any major responsibilities to local governments. The percentage for the special municipalities of Taipei and Kaohsiung was reduced from 47 to 43. The central government was holding 6 percent of the revenue as an emergency reserve, while reducing the allocations for Taipei and Kaohsiung.

The local county/city governments not only requested a fair distribution formula based on population, area, financial needs, and efforts made in boosting revenues, but also demanded an allocation of the entire business tax revenue. The Executive Yuan also encouraged local governments to develop their own sources of income, such as lotteries and taxes on alcohol and cigarettes. Under the Self-governance Act for Provinces and Counties, and the Municipal Self-governance Act, local governments from the provincial level down may increase their revenues by levying taxes or charging fees for specific purposes in the areas under their jurisdiction. The fees may be charged in accordance with pertinent regulations or with the approval of the legislative body or representative conference at that level of government.

As the supervisory organization of provincial and municipal self-governance, the Executive Yuan may provide subsidies or financial aid to the said governments with the approval of the Legislative Yuan. Such subsidies or financial aid may be cut if the government concerned does not levy taxes or fees which are permitted under the law. This is also true for governments of counties, provincial municipalities, county municipalities, and urban and rural townships. Such subsidies and aid are provided with the approval of the respective county/city council or representative conference. The provincial government may demand funding for such purposes from counties/cities that are in better financial conditions.