Some say "Taiwan is up to its neck in money!" Nevertheless, mysteriously, Taiwan's debt has been quietly piling up.

Every time an election rolls around, reconstruction of "military dependents' communities" becomes a hot topic. Such work is one of the Twelve Major Projects currently being undertaken.

A surprising deterioration of finances

In the 1990 fiscal year, Taiwan had an accumulated budget surplus of more than NT$250 billion. Nevertheless, in a few short years, government finances have been run through at an astounding pace. By the 1995 fiscal year, not only had the surplus been exhausted, the government debt had reached more than NT$1.2 trillion. If the debts of the provincial, municipal, and local governments are added in, the country is now running at over NT$2 trillion in the red. This means that, on average, each of Taiwan's 21 million people is responsible for more than NT$100-000 of national debt!

These figures are very disquieting. It is true that some of the outlays have been postponed--especially expenses for transportation infrastructure, which is running behind schedule--so that the nominal central government debt of more than NT$1.2 trillion is in fact currently NT$820 billion. Nevertheless, regardless of how you crunch the numbers, the bottom line is that the government is in a fiscal crisis. Bond issues, once simply a part of money management, have become a necessary adjunct to government finances.

For businesses which play high-risk, high-profit games, there is nothing unusual about borrowing to tide over cash flow problems. But for the government, which will never realize high profits, the only source of funds to pay off the debt is the general populace. Minister of Finance Lin Chen-kuo warns: "We are almost at the point where we can't afford to draw up a budget at all!" If the current situation continues, in just a few years as much as 20% of government spending may go for interest payments. When that happens, not only will major new projects be out of the question, even day-to-day administration will be difficult to carry out.

Allocation of the FY1995 Central Government Budget.

Who is eating the pie?

The average citizen is unlikely to make much headway into the 2000-page annual budget report, and can't even really imagine astronomical amounts calculated in terms of tens of billions. But they cannot help but wonder: Who has consumed the once burgeoning budget? Will choking down the current huge pie help produce an even bigger pie later on?

According to a report from the Minister of Finance, expenditures have sharply risen in the past few years for several reasons, of which the most important is the "huge outlays for infrastructure."

Do you recall the trademark program of the administration of Premier Hau Pei-tsun--the "Six Year National Development Plan"? Even after being trimmed several times, the Six Year Plan's total cost is still NT$6 trillion.

The many infrastructure projects familiar to the man in the street are part of these many items. For example, the highway projects in the transportation plan will cost more than NT$500 billion. Complete construction of the "Community Road System" carries a pricetag in excess of NT$200 billion. The Second North-South Freeway--which, it is hoped, will open to traffic at the end of this year, thus being the first key project the public can finally enjoy--will run up an NT$170 billion bill.

In terms of railroads, though the controversial budget for the high-speed train did not pass the Legislative Yuan last year, the "Regulations for Encouraging Participation" in railroad privatization did. There is a proposal to create a special high-speed railroad budget of over NT$120 billion to be spent over the next four to five fiscal years (though original costs are expected to be moderated somewhat by the participation of private capital in the program). The cost of the Taipei Mass Rapid Transit System, now being rushed to its completion, will total more than NT$400 billion; Kaohsiung's mass transportation system, now in the detailed planning stage, will cost roughly NT$230 billion.

The construction bill is nowhere near its end. and includes more than ten other "NT$100 billion-class" projects, all of which have been hurried into construction in these few years. It is true these projects will take five or six years (or even longer) to complete, so that expenditures will be somewhat spread out, and local governments and state-run enterprises are expected to bear a small part of the burden. Nevertheless, the upshot is this: Conservatively estimated, the major projects listed by the Council for Economic Planning and Development will still require more than NT$300 billion per year, accounting for nearly 30% of central government expenditures.

Under budgetary constraints, the long-established military Peking opera troupes and school are facing closure.

The big squeezes out the little

As soon as you mention infrastructure projects, the first thing that pops into the heads of most people is conspiracy among government officials and private businesses to make enormous profits. In fact, leaving aside the factor of human flaws, infrastructure is essential for economic development. Lin Chuan, the director of the Graduate institute of Finance and Taxation at National Chengchih University, recalls the background at the time these major projects were being drafted. "For a full decade prior to these projects the government had undertaken no major infrastructure tasks, and the government lagged far behind the private sector, so it was essential to develop some major plans to boost morale and inspire the public."

Lin says further that government investment and private investment are complementary. Both should go forward steadily and stably. Regrettably, however,in Taiwan infrastructure programs have come in periodic and uneven waves. As a result, when the waves peak, there is tremendous financial strain on government departments, and other programs get pushed aside. There is also a displacement or crowding-out effect on private investment because the big ticket projects take capital, resources, and labor away from the private sector.

Peng Pai-hsien, a Democratic Progressive Party legislator well-known for his financial expertise, states that "the big projects push aside the medium-sized ones, and the medium-sized ones cut out the small ones." The consumption of a huge portion of the budget by large projects can create many anomalies. For example, looking at the FY1994 budget for the Environmental Protection Administration, more than half of the allocated NT$10 billion-plus will pay for incinerators under an item entitled: "Upgrading environmental engineering and construction." Meanwhile a paltry share of the budget-less than 4%--is going for waste management, protection of air and water quality, and noise control, which are the items people care most about.

In fact, government officials are clearer than anyone about the importance of steady, small scale environmental work at the local level, but there is little they can do: "The project is already under construction. It's like getting water on your head--you have to go ahead and wash your hair whether you want to or not." One EPA staff member bemoans the fact that "big projects are easy to begin but difficult to bring to fruition." But he also feels that if a project is necessary it should be undertaken, regardless of size. Although many are concerned about the crowding out of smaller programs, the only thing is to take the current opportunity to finish larger projects such as the incinerators, since it is not the incinerators per se that people find objectionable.

Nevertheless, given the vast size of the infrastructure budget, "it's true that there is a lot of money that just disappears," says Wang Kun, the director-general of the Directorate-General of Budget, Accounting, and Statistics. With money so tight, the DGBAS is "holding the line" on the big projects: "Whenever we find any place where we can save money, we immediately 'seek and destroy' that item."

Wang Kun offers a case in point. A huge part of the money budgeted for infrastructure is meant to go for land acquisition. But some of the land belongs to the state in the first place, so naturally it is not necessary to appropriate funds for it. Also, after the law is passed to eliminate the value-added tax on the sale of farm land, the compensation price for land purchased by the state can be appropriately lowered. Also, after much public concern about the problem of bidding for key projects, open bidding has produced several cases in which "the winning bid was even lower than the minimum amount" in the original budget. "We hope that, added together, we can save NT$30-50 billion out of the budget for the next fiscal year," Wang says with confidence.

Major infrastructure projects cost a lot of money and are not easy to bring on line, but when all is said and done these ravenous monsters will steadily leave the stage, or will become of only secondary importance, and leave most of the budgetary pie to others. What really seems "an unending drain that can never be controlled" is that part of the budget which elicits the most extreme emotions both for and against, social welfare.

The military has spent a great deal on procurement in recent years. The newly purchased AH-1 Cobra assault helicopter opened a lot of eyes during the Han Kuang maneuvers this year. （photo by Chen Mei-ling）

Whose welfare? Whose responsibility?

No one will deny that social welfare is the newest and most ambitious consumer of the budget pie. This year the Ministry of the Interior sharply raised the amount budgeted for social welfare, doubling last year's appropriation and exceeding the NT$50 billion mark. The main item has been a large sum to compensate for deficits in the farmers' health insurance program. Appropriations for social welfare account for more than half the spending of the Ministry of the Interior, while other tasks such as civil administration, housing registration, and land management have to play second fiddle.

Moreover, the large increase in social welfare spending does not include the much-debated universal health insurance program. It is worrying that even on the eve of the implementation of the program government and private experts are still arguing over how much the plan will really cost. "If in the future it turns out that the burden is too great, inevitably everyone will be pointing fingers and no one will accept responsibility," warns Sun Ko-nan, a researcher at the Chung Hua Institution for Economic Research.

"This is the very beginning for universal health insurance, so nobody is really sure just how much should be appropriated," says one staff member in the First Bureau of the DGBAS. It is particularly tough because the amendments to the existing programs of labor, farmers' and civil servants' insurance have not yet completed the legal process, and many variables are hanging on the Legislative Yuan. With the situation so unclear, the only thing to do for the moment is to "take things one step at a time."

The Office of Accounting of the new Central Health Insurance Bureau (CHIB) points out that it was originally expected that universal health insurance would begin at the end of last year, so the last fiscal year (originally July 1994 to June 1995) was shortened to seven months, and only NT$130 billion plus was allocated. But this budget was set on the assumption that "the income from insurance premiums would reach the same level, and expenditures and revenues would balance out." In theory, the CHIB is supposed to balance its own budget. The government will put up the NT$8 billion needed by the agency to get operations started (working capital) and the annual NT$6-plus billion in administrative costs; will continue to pay existing subsidies for insurance for military personnel, civil servants, the handicapped, and low income households; and will pay a small part of insurance premiums (most of which are covered by the individual and employers). Overall, with all existing and new costs added together, the government should not be laying out more than NT$80 billion per year, or less than one tenth of the central government budget. But can the program stay in balance? Who will make up the difference if it cannot? The answers to these questions are far from clear.

Taxes are the most stable source of government revenue. But today taxes account for only 55% of government income. Some of the top goals of finance bureaucracies are to close tax loopholes, stop tax evasion, and broaden the tax base. The photo shows a tax bureau at work.

Money but no people

Expensive as universal health insurance may be, it is not the only expensive social welfare (or social insurance) program. The national pension for the elderly, currently in the planning stage, is expected to reach the NT$100 billion level. Although actual implementation of the program was originally postponed to 1998, "with the Legislative Yuan elections coming up at the end of this year, it might not be possible to put it off that long," suggests Lin Wan-yi, a professor of sociology at National Taiwan University.

The same problem that exists in infrastructure also exists in social spending. The big ticket items certainly seem appealing, but behind the scenes smaller items are being sacrificed. For example, many schools have budgets for new buildings, but can't get the funds for maintenance of old classrooms. Big social welfare programs, which seem to be aimed at insuring fairness and equity, will have the same effect.

For instance, though the social welfare budget is now 100 times what it was a decade ago, the number of personnel assigned to social welfare administration at the local level has not increased. At best, local governments have to use short-term contract workers to meet their needs, but this is very inefficient, leaving the public dissastisfied. For example, recently subsidies for the elderly were greatly expanded, but there were not enough staff to handle all the applications. Many elderly people who were unable to collect their subsidies ended up accusing the staff of being obstructionist. Moreover, beginning next year the central government will no longer compensate local governments for hiring social workers. It is likely that after many social workers leave their positions, the work of visiting and protecting the handicapped, women, children, and other disadvantaged groups will grind to an even slower pace.

The Democratic Progressive Party has promised a pension for the elderly in the cities and counties where it holds executive power, while the Kuomintang, which controls the central level government, has responded with an offer of increased subsidies for low-income elderly. Is a pension for the elderly necessary? How should it be issued? These are not merely social welfare or finance issues, but political issues.

Look at the budget, debate policy

Expensive as infrastructure and social welfare may be, defense--which chewed up 30-40% of the budget in the 1980s--is still number one. Despite a steady fall in relative share in recent years, it still takes up about one-fourth of central government allocations. It is not a small burden on finances, particularly with the added special appropriation for the purchase of fighter planes over these few years.

In addition, there are expenditures for science and education. The Constitution of the ROC stipulates that at least 15% of the national budget must go to these areas, so that education and technology--seen by many as "underprivileged" sectors--actually take up a rather large share of the budget.

"The division of the budget reflects the priorities and considerations of the nation's policies," is a much loved statement quoted by scholars. With this in mind, Wang Kun says plainly that "the Twelve Major Projects, social welfare, and culture and education are the key points in the government budget for next year." Yet when ordinary folks hear that the total budget for many of the things they care about most--such as the judicial system, the legislative process, legal affairs, civil administration, foreign policy, or relations with mainland China--adds up to less than 10% of total outlays (the same level as interest payments), they are at a loss for words.

Looking to the future, because of financial constraints, consumption expenses by all government departments will see zero growth, while the amount left over will be put into constructive endeavors. Wang Kun adds that in the budget for FY1996, currently being deliberated, all spending items deemed to be "impractical, inefficient, or outdated" will be either cut or postponed.

Share and share alike

There are plans large and small to reduce spending, including streamlining personnel, reducing overseas trips, and strictly controlling overtime pay or meal subsidies. Also, funds for scholars and private groups to do general research will be slashed. All those in the civil service are feeling the need to "tighten their belts."

"In the past money was managed in a relaxed way, and people became accustomed to spending. Now everyone has to change their ways," says Wang Kun. He offers an example: Right now government publications are all beautifully printed on high quality paper, though this is by no means necessary for all of them. "When the Japanese government hit hard times in the 1990s, the order went down that all government publications would have to be in black and white!" Wang concludes that the main point is not in how much money is saved, but in inculcating the habit of frugality.

Of course, cuts in the budget will cause a short-term loss of morale at government agencies. Since it is already hard to meet current expenses, little can be done in the way of training and retaining talented people or doing policy research. Still, given the limited size of the fiscal pie and the priority accorded to the demands of various sectors of the public, it seems that the civil service--the actual providers of government services--will be squeezed.

In this democratic era, it is expected that campaign promises will be redeemed. Regardless of whether they be powerful groups or disadvantaged, whether they act openly or behind closed doors, interest groups are stopping at nothing to get a share of budgetary resources. Where will it all lead?

Lin Chuan offers the following interesting metaphor: It is like building a stage on level ground. In order to get a good view, everyone will stand on tiptoe. But after everyone stands on tiptoe, still no one can see the stage, so that all the effort has been wasted. Perhaps, forced by circumstances, no one will remain flatfooted. But what of those who haven't the strength to rise up? Who are too timid? Or who don't even understand that they should get up on their toes? It will take a special effort to enable them to enjoy their fair share of what is to be had.

[Picture Caption]

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Taipei's mass transit system has proved to be very expensive, but if it really helps resolve Taipei's traffic problems it will have been worth it.

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Every time an election rolls around, reconstruction of "military dependents' communities" becomes a hot topic. Such work is one of the Twelve Major Projects currently being undertaken.

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Allocation of the FY1995 Central Government Budget

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Under budgetary constraints, the long-established military Peking opera troupes and school are facing closure.

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The military has spent a great deal on procurement in recent years. The newly purchased AH-1 Cobra assault helicopter opened a lot of eyes during the Han Kuang maneuvers this year. (photo by Chen Mei-ling)

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Taxes are the most stable source of government revenue. But today taxes account for only 55% of government income. Some of the top goals of finance bureaucracies are to close tax loopholes, stop tax evasion, and broaden the tax base. The photo shows a tax bureau at work.

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The Democratic Progressive Party has promised a pension for the elderly in the cities and counties where it holds executive power, while the Kuomintang, which controls the central level government, has responded with an offer of increased subsidies for low-income elderly. Is a pension for the elderly necessary? How should it be issued? These are not merely social welfare or finance issues, but political issues.