(Source: State Bank of Vietnam)Hanoi (VNS/VNA) - There has been considerable discussion in themedia recently about the urgent need to cut the nation’s bulging publicworkforce because it has become a heavy burden on the State Budget and the economyas a whole.
According to Vo Tri Thanh, a senior economist at the Central Institute forEconomic Management (CIEM), the bulky public workforce, combined withpervasive, inefficient investment is the main cause for Vietnam’s budgetdeficit in the long run.
For many years, the deficit has crossed the prudential limit of 3 percent of grossdomestic product (GDP). The Government has targeted a budget deficit of about3.5 percent of GDP for 2017 and 3.7 percent for 2018, a significant reductioncompared to 5.6 percent in 2016 and over 6 percent in 2015.
However, this reduction happens not as a result of an increase in revenue ordecline in spending, but mainly due to a change in calculation wherein, thisyear onwards, the State budget deficit will not include repayment of theprincipal.
“If we tally all interest and principal repayments, which may reach 164.7trillion VND (7.2 billion USD) this year, the budget deficit is likely bearound 6 percent of the GDP,” he said.
He stated that budget deficit happens when spending exceeds revenue. Given thatthere is little room for increasing revenue, swollen expenditure has a negativeimpact on the overall budget balance as well as the State’s capacity toallocate productive investments.
Despite the Government’s efforts in reforming taxes and fees, revenue fromimport-export taxes has been on a declining trend as a result of the country’sdeeper integration in the global economy.
In the mid-1990s, revenue from crude oil production contributed around onethird of the State’s revenues but now it accounts for just 7-8 percent.Furthermore, with Vietnam having to cut tariffs following Free Trade Agreements(FTAs) signed with ASEAN countries and many others, such tax revenues coulddrop significantly from 2018.
Thanh, who is also a member of the National Financial and Monetary PolicyAdvisory Council, went on to say that in the domestic market, the Governmenthas trimmed corporate income tax to spur growth of the private sector, but deepercuts are needed. Meanwhile, the State’s assets that could be converted to cashare also sinking, due to accelerated equitisation of State-owned enterprises.
To bolster revenues, the Ministry of Finance has proposed comprehensive taxreforms, projecting hikes in VAT, special consumption, corporate and personalincome tax, as well as natural resources consumption tax. However, suchproposals have garnered mixed public responses, because they have not beenadequately explained.
So it is against this background of declining trends in revenue and State assetvalues that the steady increase in total State expenditure merits sharper focuson the bulky public workforce and other investments, he noted.
Despite the downsizing efforts in recent years, Vietnam still has 30 ministriesand ministry-level agencies, 42 general departments and 826 sub-departments andagencies under general departments, with total number of people receiving wagesand allowances from the State budget reaching four million, excluding militaryand police personnel.
The ratio of civil servants per 1,000 residents in Vietnam is 43 (excludingmilitary and police personnel), much higher than 13 in the Philippines, 16 inIndia, 17 in Indonesia and 25 in Singapore.
The great number of public servants and officials not only makes for lowoperational efficiency, but also worsens regular budget spending. From2011-2015, regular spending increased 2.2 times over the previous five years,accounting for 65 per cent of total budget expenditure.
Thanh quoted Pham Minh Chinh, Politburo member and head of the Central PartyCommittee’s Organisation Commission, said “if we can downsize the publicworkforce by at least 10 percent in 2021 compared to 2015, the regular budgetspending will shrink by five percent, equivalent to 45 trillion VND, making “iteasy to build Long Thanh Airport”.
Moreover, given major role of the Government in infrastructure investment, thepublic debt situation is alarming, with the debt-to-GDP ratio over 64 percentin recent years, just below the 65 percent ceiling determined by the NationalAssembly. Not taking efficiency of State investments into account, a highdebt-to-GDP ratio and a high budget deficit can affect macroeconomic stabilityas well as the Government’s capacity to manipulate fiscal policy.
According to the economist, one of the most important things is that theGovernment must build public confidence by specifying long-term target ofreducing budget deficit and remaining committed to accomplishing it, whilesticking to the goals of ensuring macroeconomic stability and maintaining lowinflation.
To implement the rule of thumb, it is essential to reform both expenditure andrevenue sides of the budget.
On the expenditure side, it is time to reassess the State’s role in amarket-oriented economy, so that the reform is done in the most practicalmanner. In many sectors and areas, particularly public services, we need fundamentalstreamlining for efficient operations, he said.
Wage reform and income transfer must ensure the principle ofproductivity/efficiency, he added.
However, Thanh noted that these reforms should be done step by step, as theywill have deep impacts on people and society as a whole. To ensure itsfeasibility, expenditure reform also needs careful consideration of revenuereform.
Due to limited income and declining ODA, a thorough cost-benefit analysisshould done for each investment project and the overall economic, social andenvironmental impacts taken into account, while avoiding negative effects onthe private economy, like the “crowding out effect” which occurs when increasedgovernment involvement in a sector reduces the investment from the privatesector.
On collections, reforms must be associated with the expenditure planning. Acumbersome, expensive tax system will affect economic momentum and efficiency.
Looking at the tax reform proposal by the Ministry of Finance, it iscontroversial because the ministry lacks a comprehensive, convincingexplanation that focuses on its efficiency, on its impact on businesses andconsumers, as also on inflation and macroeconomic stability.
A comprehensive analysis and explanation is more essential in the context ofthe business community calling for reduced taxes as incentive for doingbusiness.
In addition, an administrative reform of revenue collection is imperative toreduce operational costs and ensure efficiency, given the prevalence ofpresumptive taxation scheme sand trade fraud, which have distorted taxcollection and made it an inequitable process.
More importantly, Thanh said to take appropriate action, the Government shouldcomprehensively analyse the risks of the trade/tax loopholes and public debtsituation 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 andexpenditure, but one of institutional reform in relation with publicorganisation and workforce restructuring. Vietnam needs comprehensive reformwhich needs collaboration and work in tandem by all ministries and relevantState agencies.
This process will test the political will of the whole public system and impactpublic confidence and society’s trust in the Government’s capacity to regulatethe macro-economy in the long term, he concluded.-VNA
According to Vo Tri Thanh, a senior economist at the Central Institute forEconomic Management (CIEM), the bulky public workforce, combined withpervasive, inefficient investment is the main cause for Vietnam’s budgetdeficit in the long run.
For many years, the deficit has crossed the prudential limit of 3 percent of grossdomestic product (GDP). The Government has targeted a budget deficit of about3.5 percent of GDP for 2017 and 3.7 percent for 2018, a significant reductioncompared to 5.6 percent in 2016 and over 6 percent in 2015.
However, this reduction happens not as a result of an increase in revenue ordecline in spending, but mainly due to a change in calculation wherein, thisyear onwards, the State budget deficit will not include repayment of theprincipal.
“If we tally all interest and principal repayments, which may reach 164.7trillion VND (7.2 billion USD) this year, the budget deficit is likely bearound 6 percent of the GDP,” he said.
He stated that budget deficit happens when spending exceeds revenue. Given thatthere is little room for increasing revenue, swollen expenditure has a negativeimpact on the overall budget balance as well as the State’s capacity toallocate productive investments.
Despite the Government’s efforts in reforming taxes and fees, revenue fromimport-export taxes has been on a declining trend as a result of the country’sdeeper integration in the global economy.
In the mid-1990s, revenue from crude oil production contributed around onethird of the State’s revenues but now it accounts for just 7-8 percent.Furthermore, with Vietnam having to cut tariffs following Free Trade Agreements(FTAs) signed with ASEAN countries and many others, such tax revenues coulddrop significantly from 2018.
Thanh, who is also a member of the National Financial and Monetary PolicyAdvisory Council, went on to say that in the domestic market, the Governmenthas trimmed corporate income tax to spur growth of the private sector, but deepercuts are needed. Meanwhile, the State’s assets that could be converted to cashare also sinking, due to accelerated equitisation of State-owned enterprises.
To bolster revenues, the Ministry of Finance has proposed comprehensive taxreforms, projecting hikes in VAT, special consumption, corporate and personalincome tax, as well as natural resources consumption tax. However, suchproposals have garnered mixed public responses, because they have not beenadequately explained.
So it is against this background of declining trends in revenue and State assetvalues that the steady increase in total State expenditure merits sharper focuson the bulky public workforce and other investments, he noted.
Despite the downsizing efforts in recent years, Vietnam still has 30 ministriesand ministry-level agencies, 42 general departments and 826 sub-departments andagencies under general departments, with total number of people receiving wagesand allowances from the State budget reaching four million, excluding militaryand police personnel.
The ratio of civil servants per 1,000 residents in Vietnam is 43 (excludingmilitary and police personnel), much higher than 13 in the Philippines, 16 inIndia, 17 in Indonesia and 25 in Singapore.
The great number of public servants and officials not only makes for lowoperational efficiency, but also worsens regular budget spending. From2011-2015, regular spending increased 2.2 times over the previous five years,accounting for 65 per cent of total budget expenditure.
Thanh quoted Pham Minh Chinh, Politburo member and head of the Central PartyCommittee’s Organisation Commission, said “if we can downsize the publicworkforce by at least 10 percent in 2021 compared to 2015, the regular budgetspending will shrink by five percent, equivalent to 45 trillion VND, making “iteasy to build Long Thanh Airport”.
Moreover, given major role of the Government in infrastructure investment, thepublic debt situation is alarming, with the debt-to-GDP ratio over 64 percentin recent years, just below the 65 percent ceiling determined by the NationalAssembly. Not taking efficiency of State investments into account, a highdebt-to-GDP ratio and a high budget deficit can affect macroeconomic stabilityas well as the Government’s capacity to manipulate fiscal policy.
According to the economist, one of the most important things is that theGovernment must build public confidence by specifying long-term target ofreducing budget deficit and remaining committed to accomplishing it, whilesticking to the goals of ensuring macroeconomic stability and maintaining lowinflation.
To implement the rule of thumb, it is essential to reform both expenditure andrevenue sides of the budget.
On the expenditure side, it is time to reassess the State’s role in amarket-oriented economy, so that the reform is done in the most practicalmanner. In many sectors and areas, particularly public services, we need fundamentalstreamlining for efficient operations, he said.
Wage reform and income transfer must ensure the principle ofproductivity/efficiency, he added.
However, Thanh noted that these reforms should be done step by step, as theywill have deep impacts on people and society as a whole. To ensure itsfeasibility, expenditure reform also needs careful consideration of revenuereform.
Due to limited income and declining ODA, a thorough cost-benefit analysisshould done for each investment project and the overall economic, social andenvironmental impacts taken into account, while avoiding negative effects onthe private economy, like the “crowding out effect” which occurs when increasedgovernment involvement in a sector reduces the investment from the privatesector.
On collections, reforms must be associated with the expenditure planning. Acumbersome, expensive tax system will affect economic momentum and efficiency.
Looking at the tax reform proposal by the Ministry of Finance, it iscontroversial because the ministry lacks a comprehensive, convincingexplanation that focuses on its efficiency, on its impact on businesses andconsumers, as also on inflation and macroeconomic stability.
A comprehensive analysis and explanation is more essential in the context ofthe business community calling for reduced taxes as incentive for doingbusiness.
In addition, an administrative reform of revenue collection is imperative toreduce operational costs and ensure efficiency, given the prevalence ofpresumptive taxation scheme sand trade fraud, which have distorted taxcollection and made it an inequitable process.
More importantly, Thanh said to take appropriate action, the Government shouldcomprehensively analyse the risks of the trade/tax loopholes and public debtsituation 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 andexpenditure, but one of institutional reform in relation with publicorganisation and workforce restructuring. Vietnam needs comprehensive reformwhich needs collaboration and work in tandem by all ministries and relevantState agencies.
This process will test the political will of the whole public system and impactpublic confidence and society’s trust in the Government’s capacity to regulatethe macro-economy in the long term, he concluded.-VNA
VNA
