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Introduction
iscal system has a powerful influence on the performance of the economy. However, a weak fiscal system may lead to severe results, such as continuously increasing debt burden, hyper inflation, or economic downturn. Analyzing the weaknesses of the fiscal system would be a necessary task in order to keep the system away from instabilities. There are some weaknesses which do not immediately lead to fiscal instabilities, such as long term loans which may have to pay back 10 years later, or government guarantees which may save a lot of government resource by shifting budget-financing expenditures to bank-financing loans. In developing countries, this kind of weaknesses is often ignored simply due to their delayed impacts. However, the weaknesses still exist and may cause serious problems if they are realized too late. A fiscal system which contains those “hidden” weaknesses is considered a vulnerable system. A vulnerable fiscal system is not necessary a weak system. However, it could become a weak system in the future if those weaknesses are not eliminated.
Assessing the vulnerability of a fiscal system is an issue which remains largely unexplored in the literature of public finance. The pioneering work in assessing fiscal vulnerability is attached to Hemming and Petrie (2000) with the first explicit definition and a comprehensive framework. In their working paper, a vulnerable fiscal system is a system which fails to achieve its aggregate macro fiscal objectives, in which the aggregate fiscal objectives were specified as avoiding excessive deficit and debt, managing aggregate demand, and maintaining reasonable and stable tax rates. This definition, though covering a wide range of fiscal vulnerabilities, may cause controversy in specifying the aggregate macro fiscal objectives. Due to limits in time and effort, in this study, a vulnerable fiscal system is understood in a narrower scope. Focusing mainly on the stability of a fiscal stance, a vulnerable fiscal system is a fiscal system containing weaknesses that may cause fiscal stance unstable in the future.
Vietnam is a transition economy. Since the economic reform began in early 1990s, fiscal system in Vietnam has been improved much, together with the success in economic performance. However, when analyzing the budget structure, some warnings have been raised on the danger of increasing budget deficit in the coming period (Government of Vietnam and Donors, 2000; Bùi Đường Nghiêu, 2000). Whether or not the current fiscal deficit would be kept stable and sustainable in Vietnam would be a question that needs critical examination. And the answer to this question could be found if we know whether the Vietnamese fiscal system is vulnerable or, says another way, whether the fiscal system contains vulnerabilities which may lead to fiscal instability in the future. This is also the research question of this study.
The objective of the study is looking for evidences that can support the hypothesis that Vietnamese fiscal system contains vulnerabilities which may cause the fiscal stance unstable in the future. Due to the inconsistency of data between the 1980s and 1990s, the study would focus on the time period from 1990 to 2000, which cover the most significant changes in the Vietnamese fiscal system. Based on the framework proposed by Hemming and Petrie (2000) with modifications to match the theme of this study as well as the specific situation of Vietnamese fiscal system, major fiscal vulnerabilities would be scanned highlighting the most vulnerable parts. The result is expected that fiscal vulnerabilities would be found in revenue structure, in some expenditure items, domestic debt status, and in the accounting and auditing system.
The study would be organized as followed: Chapter 1 reviews the literature in assessing fiscal vulnerabilities; Chapter 2 overviews the Vietnamese fiscal system; Chapter 3 proposes a framework for assessing fiscal vulnerability in Vietnam and examines fiscal vulnerability in Vietnam based on the framework proposed; and Chapter 4 highlights some policy implications. The Conclusion will sum up main findings as well as shortcomings of the study. Chapter 1. Fiscal Vulnerability - A Literature Review
1.1. Definition
The term “fiscal vulnerability” was initiated and defined by Hemming and Petrie (2000) as “a situation where a government is exposed to the possibility of failure to achieve its aggregate fiscal policy objectives” (Hemming and Petrie, 2000). In this definition, the fiscal policy objectives consist of three objectives: (1) avoiding excessive fiscal deficit and debt, (2) ensuring fiscal policy contribute to effective demand management, and (3) maintaining reasonable and stable tax rates. 1.2. Fiscal vulnerabilities in literature
Though the issue of fiscal vulnerability has just been introduced in the work done by Hemming and Petrie (2000), the idea of a vulnerable fiscal system in which the weaknesses hidden in budget expenditure, revenue or management can cause instability to the whole system has been initiated long ago, such as public debt sustainability, the fiscal dependence on oil, fiscal contingent liability, and some other vulnerabilities in many aspects of a fiscal system like in fiscal information, fiscal management or even in the political aspect of the fiscal system. 1.2.1. Public Debt and Fiscal Deficit
It is clear that public debt has close link to fiscal deficit. This is not a causality link, but rather, an interactive relation. When the government doesn’t want to use inflationary financing while still finds difficult in raising tax revenue, accumulating public debt would be the choice. However, a large public debt burden creates a significant amount of interest payment that, in return, pressures on fiscal deficit. The point is that when the public debt is large enough or some external shocks occur that raise the interest payment significantly that the economic growth can not help raising budget revenue enough to cover, it would then increase fiscal deficit. The government has to accumulate more debt to finance for its deficit and enlarge the interest payment for the next fiscal year, which then further raising fiscal deficit. This vicious spiral easily lead to debt crises unless a dramatic changes in fiscal policy is made to repress budget expenditure or raise revenue. The question that whether the current debt level is high enough that may ignite a vicious spiral of debt – deficit, is the core issue in the debate of fiscal sustainability, which emerged in the mid 1980s.
There are 2 approaches in literature to assess fiscal sustainability: Present Value Constraint (PVC) approach and accounting approach (Cuddington, 1996). Both approaches begin with the following static budget constraint:
in which, Bt is government debt stock at the beginning of the period and Dt+1 is the primary fiscal balance (excluding interest payment). The PVC approach tests the fiscal sustainability by iterating equation (1) forward N periods to get a constraint for present value of debt stock. With the assumption that the government debt must grow more slowly than the real interest rate, the condition for a sustainable fiscal deficit to hold in respect to the PVC is:
Empirical works using PVC approach are Hamilton and Flavin (1986) for United States, Afonso (2000) for EU countries, Olekalns and Cashin (2000) for India, Siriwardana (1998) for Sri Lanka, and some other works. Results of those empirical studies showed that the approach, with some modifications to meet specific country cases, could be effective in assessing the sustainability of public debt level.
In the accounting approach, fiscal sustainability would be maintained if the debt/GDP ratio is kept constant over time, given a specified GDP growth rate and constant real interest rate. In the simple case, ignoring the effects of foreign borrowing and seigniorage, the sustainable primary balance is determined by setting the growth rate of debt-to-GDP ratio equal to zero, thus:
Equation (9) shows the indicator that can help easily assess the sustainability of fiscal stance. The fiscal policy is sustainable when the actual level of fiscal primary balance is equal or higher than the sustainable one, or interpreting in terms of Dd, whenever Dd ≥ 0, the fiscal policy is considered sustainable (Cuddington, 1996).
Both PVC and accounting approaches have their own advantage and disadvantage. However, in the context of an assessing framework using series of indicator, accounting approach would be more preferable due to its simplicity and indicator-based assessment. 1.2.2. Dependence on oil and fiscal vulnerability in oil-exporting countries
Literature on the oil dependency in oil exporting countries focuses on the ways changes in oil price can affect on the economy and state budget, as well as the methods to protect government budget from oil price volatilities. The phenomenon when a country getting a windfall gain from natural resource either by increasing export price or discovering new mines, has to suffer slowing down economic development, is called in economic literature as “resource curse”. The term was first used by Auty (1993), who argued that resource abundance is generally associated with poor economic growth. The export boom due to export price shock or new discoveries would bring in a great flow of foreign exchange. This large amount of foreign exchange can cause pressure on exchange rate, leading to an appreciation, which in turn, reduce the relative price of tradable products in relation with non-tradable ones, and reduce the competitiveness of not only those non-tradable goods, but also tradable goods other than mining resources. From state budget standpoint, an export boom would increase budget revenue significantly either by export tax or profit from state owned exporters. This motivates government to spend more, and exacerbate economic cycle and threaten the long-run fiscal sustainability. Sachs and Warner (1995) have carried out a cross-country analysis and come to conclusion that support the resource curse hypothesis. However, empirical evidences on the so-called ‘Dutch disease” effect seem controversy in supporting the resource curse hypothesis. Mikesell (1997, in Sarraf and Jiwanji, 2001) posed an example of Peru where the Dutch disease proved its effect. But Everhart and Duval-Hernandez (2001) in their study about oil management in Mexico has shown that the Dutch may have no impact on both booming and non-booming industries. Sarraf and Jiwanji (2001) in examining the case of Botswana with mineral booming have also shown that the economic growth had not faced Dutch disease.
The literature also proposes methods to prevent oil price volatilities. In general, there are three groups of instrument to deal with price volatilities: i) instruments aim at making price less variable, ii) instruments aim at improving price predictability, and iii) instruments aim at keeping expenditure inline with income flows (Varangis and Larson, 1996). 1.2.3. Fiscal contingent liabilities: hidden risks for fiscal sustainability
The problem of fiscal contingent liability was first introduced by Polackova (1998) in her attempt to address a major part of fiscal risks and vulnerabilities. The government fiscal liabilities include either explicit and implicit liabilities, or direct and contingent liabilities. Government explicit liabilities are those recognized by laws or contracts which the government has to carry out anytime. Meanwhile, implicit liabilities are those which are not legal bindings, but the government still has to carry out due to moral obligations or public expectations and pressure. From another perspective, government direct liabilities are those explicit or implicit liabilities which are predictable, i.e. the government can foresee and plan for them. Contingent liabilities are those unpredictable. They, like insurance scheme for earthquake, may occur tomorrow, next week or never happen that the government cannot predict or plan. For that uncertainty, contingent liabilities are considered hidden risks to fiscal sustainability and a major fiscal vulnerability. The Polackova’s framework has been adopted in some country’s case studies to analyze the potential fiscal risks. In Bulgaria, Polackova et. la. (2000) has scrutinize all sources of fiscal risk based on the fiscal risk matrix and found that the fiscal had reserved limited room for accommodating fiscal risks, which could be problematic when some fiscal liabilities are called. In another case study done in Hungary, some major fiscal risks have been revealed (Polackova el. la., 1999a). The case of Czech Republic would be a symbolic case in abuse of government guarantee leading to a bulk of contingent liabilities (Polackova el. la., 1999b). 1.2.4. The Hemming and Petrie’s Framework for assessing fiscal vulnerability
Hemming and Petrie are the first and only ones who have explicit definition of fiscal vulnerability as well as a complete framework for assessing this problem. In their working paper (Hemming and Petrie, 2000), the term “fiscal vulnerability” is understood as the possibility of failure in achieving fiscal policy objectives, which are avoiding excessive fiscal deficit and debt, ensuring the contribution of fiscal policy to effective demand management, and maintaining reasonable and stable tax rates. The assessing framework adopts a series of analysis indicators focusing on four aspects: incorrect specification of the initial fiscal position; sensitivity of short term fiscal outcome to risk; threats to long term fiscal sustainability; and structural or institutional weaknesses.
The first aspect of vulnerability focuses on two questions: first, whether the fiscal position is vulnerable initially? And second, whether the initial fiscal position captures all fiscal activities of the government, or from another point of view, whether the initial fiscal stance is correctly specified. This should be the quick view over the fiscal system in order to get broad understanding about the vulnerability of the system.
The second aspect analyses short term fiscal risks to answer the question: whether the fiscal stance is sensible to internal and external factors, like changes in growth rate, inflation, or term-of-trade shocks. The method for this part is quality analysis, focusing on the impacts of variations in macroeconomic variables, as well as in economic and non-economic determinants of fiscal revenue and expenditure on the fiscal balance.
The third aspect of fiscal vulnerability related to the threats to long-term fiscal sustainability. Unfavorable debt dynamics would be the most significant threat that can be foreseeable. Government debt rating is also a signal of a weak and vulnerable government that can impact on long-term sustainability of the fiscal system. Other non-economic problems related to long term sustainability would also be assessed in order to highlight their impact on the fiscal system sustainability.
The forth aspect – structural and institutional weaknesses – includes weaknesses in four categories: weaknesses in expenditure, in revenue, in fiscal management and in government effectiveness. Weakness in expenditure structure is demonstrated by a large share of nondiscretionary spending in total spending or GDP, an excessive military spending, or significant gap between the share of a program and average share of such program in other countries. Weakness in revenue structure is illustrated by an inelastic and highly concentrated revenue system, extensive earmarking or a large share of non-tax revenue. Fiscal management is considered weak when the expenditure and tax arrears are large, medium term budget planning does not present, or auditing activities are weak. And the government is regarded as ineffective when it get a low score in public sector performance survey or has a bad reputation of corruption.
The framework, in overall, has touched every corner of a vulnerable fiscal system. However, since it is the first attempt in this issue, the framework still reveals some shortcomings. The misalignment between proposed fiscal policy objectives and the aspects which the framework follows has made the targets of the framework a bit confuse. Background literature and arguments for vulnerability indicators were rarely provided, making the application and judgment of the framework difficult to perform. Moreover, the framework was designed for a typical fiscal system with significant advance in fiscal administration, i.e. requires certain level of fiscal data consolidation and administration technique which may not be suitable to some developing countries. Chapter 2. Vietnamese fiscal system - An overview
The amount of budget revenue in GDP has increased significantly during the past 10 years, from 15% in 1990 to 21% in 2000. Two tax reforms have contributed significantly in consolidating tax system, both in administrative mechanism and tax structure. The first tax reform (1990-1995) introduced series of new tax laws, of which important ones were turnover tax, profit tax, export-import tax, and special consumption tax. The tax collection bodies also changed dramatically with the formation of General Taxation Department and the system of State Treasury. And the result was the continuous increase of tax revenue during the period 1991-1995. The second tax reform begun in 1996 focused on the improvement of the tax system with the introduction of two new taxes: Value Added Tax and Corporate Income Tax (in replacement of the Turnover Tax and Profit tax), and amendment of other two: Special Consumption Tax and Export-Import Tax. Though the result was not much improvement in tax revenue, it has helped the Vietnamese tax system become more equitable and compatible to international standard.
However, tax collection from SOEs still takes dominant share in total budget revenue (22%) in comparison with other economic sectors (5% for FDI and 6% for non-SOEs). It reflects the continuous heavy dependence of budget revenue on SOEs sector. Furthermore, oil production (including profit share and all taxes related to oil production and export) and import taxes took 40% of total budget revenue, signaling a fragile structure. Tax law violations, especially in VAT and import taxes, are still widespread and cause thousands billion VND lost.
The amount of total budget expenditure is well maintained at a stable rate of 22% - 23% GDP for the last several years. However, the structure of budget expenditure has been changed significantly. The share of capital expenditure has increased from 22.1% in 1995 to 33.8% in 2000. Accordingly, the share of current expenditure has been reduced from 72.6% in 1995 to 63.0% in 2000. Among public investments, the largest part is for transportation infrastructure (29.7%) and education (15.2%). The only 1.5% total capital expenditure of public investment for science, technology and environment would be matter when it is so low that can meet the demand. The disappearance of SOEs subsidies in capital expenditure would be a significant success of the fiscal reform. However, the hidden subsidies through various kinds should be considered carefully. Among current expenditure items, the largest are spending for education and social security, which take 17.9% and 16.6%, respectively. However, notice should be taken on the current expenditure for transportation, which accounts for 2.2% total current expenditure. This number meets only one third of the requirements to maintain normal operation and maintenance. Public wage is also troublesome. The current average wage level is unreasonably low to afford a normal life. But the large number of public worker (more than 4 millions) has made the share of public wage an enormous amount of 28% total public expenditure. The minimum requirement of at least double this current wage level is causing extremely difficulty for the government to afford.
In sum, the fiscal system has contributed significantly into the economic growth during the last decade. However, some issues in fiscal system have arisen as threatens to the long term sustainability of fiscal stance. Those issues need critical examination and proper solutions so that their effects on the fiscal system could be minimized. Chapter 3. Fiscal Vulnerability In Vietnam
A. PROPOSE A FRAMEWORK FOR ASSESSING FISCAL VULNERABILITY IN VIETNAM
To make the Hemming and Petrie’s framework relevant to Vietnamese situation, and also make it concentrate on the main theme of the study, it needs some modifications. The fiscal policy objectives, which are 3 in the original framework, should be focused only on fiscal balance objective to answer the research question: whether the low fiscal deficit in Vietnam is sustainable. Some indicators should be removed or modified. The order of indicators is also rearranged to make it more suitable to the study’s theme. With those modifications, the proposed framework would assess fiscal vulnerability in Vietnam in 5 aspects: (1) Initial fiscal position; (2) Sustainability of public debt; (3) Expenditure vulnerability; (4) Revenue vulnerability; and (5) Fiscal management vulnerability.
The initial fiscal position refers to the historic data of fiscal stance. A fiscal deficit occurs at the same time with significant high inflation (more than 10%) and increasing unemployment should be a vulnerable fiscal position.
For a given interest rate and certain growth of budget revenue and expenditure, the amount of public debt stock would be the decisive determinant for answering the question: whether the fiscal policy is sustainable or not. Among some methods, the accounting method would be the most suitable to the framework due to its simplicity and indicator-based approach. Analysis of structure of public debt and debt management also reveal potential vulnerabilities to fiscal sustainable.
3.1.
Contingent liabilities:
3.2. Nondiscretionary spending: Nondiscretionary spendings are those spendings which are indispensable or resilient to change due to legal, political or social reasons. They often are debt payment (interest and principal), public wage and salary (including public pensions), or incomplete continuous investments. A significant share of nondiscretionary expenditure may reduce flexibility of the fiscal management.
3.3. Spendings which are in urgent need to improve: there are some items for which expenditure is indispensable due to public and/or international pressures. They could be social security, education or environmental reservation expenditures, which are currently too low in comparison with other developing countries. The significant amount of need to improve those expenditures would be a signal of vulnerability.
4.1. Dependence on oil production: The larger the share of oil revenue in total budget revenue, the higher the vulnerability that fiscal system has to face. However, proper management over oil revenue would reduce the risks that it may cause to the fiscal system.
4.2. Dependence on import tariff: in the trend of international integration, tariff barriers are quickly removed or replaced by non-tariff barriers. In this context, dependence on tariff revenue would be dangerous as this source is shrinking.
4.3. Tax buoyancy: Tax buoyancy is defined as the increase in the tax revenue collected compared with the relative increase in GDP. In developing countries, the increase of budget expenditure is often higher than the economic growth rate. Hence, the slow growth of tax revenue would imply an increasing budget deficit and unsustainable fiscal stance.
5.1. Expenditure arrears: Expenditure arrears are the budget expenditures which have been made but not yet financed. Expenditure arrears are a kind of government debt to budget spending units, and the government has to pay for them in the next fiscal scheme. Large expenditure arrears demonstrate a weak fiscal management system, and increase budget debt burden.
5.2. Tax arrears: Large amount of tax arrear is a serious problem. It reveals that either tax regulations are not relevant to economic situation, or tax management is weak and ineffective.
5.3. Frequent tax law changes: A tax system which changes too quickly (every 2 years or shorter, with major change like introduction or abortion of new tax, exemption for a large tax base…) may cause delay in domestic investment and retard economic growth, which impact directly on budget revenue.
5.4. Existence of medium term expenditure framework (MTEF): MTEF is a new method of budgeting with some advanced features, which can help allocating public resource more efficiently, enhancing the quality and efficiency of budget expenditure. The application of MTEF, to some extent, may verify the quality of fiscal management, and help reduce the uncertainty in fiscal balance.
5.5. Fiscal audit: Weak fiscal audit can reduce the reliability of fiscal data, and even diminish the effectiveness of fiscal policies. Weakness in fiscal audit could reveal in the incapable fiscal audit entities and auditing procedures. The long delay in preparing and auditing final accounts is also a signal of weak audit.
5.6. Fiscal accounting: weaknesses in fiscal accounting can lead to unreliable fiscal data, and misleading recommended policies. A complicated accounting procedure, incompartibility between reporting regulations and capacity of accounting system, and the discrepancies between other sources of fiscal data are some evidences of a poor accounting system.
B. ASSESSING FISCAL VULNERABILITY IN VIETNAM
The Vietnamese government has achieved recognition in keeping stable and prudent deficit level. Since 1994, the deficit has been below 2% GDP. Inflation rate of the second half of 1990s was also in safe range under 10%. And unemployment was kept stable around 6-7% of total labor force. All signals would make the sense that Vietnamese fiscal system would have good initial fiscal position.
In total public debt in Vietnam, external debt takes about one third, and domestic debt takes another two. The share of external debt in total public debt has continuously reduced from 56% in 1995 to 32% in 2000. All external public debts in Vietnam are ODA from international organizations or governments with concessional interest rate. The calculation of fiscal external debt sustainability indicator for the period 1996-2000 shows a safe situation of the debt-deficit relation. For all the period, it was positive, except for the year 2000, implying that the public debt to GDP ratio has been well maintained during the period. It also means that the current public debt situation is sustainable.
However, the domestic debt level would need more critical looks. All domestic public debts are from selling government bonds. The absolute number of domestic debt has been increasing faster than the economic growth for the last several years, leading to the increasing percentage of the domestic public debt to GDP from 1.4% in 1996 to 3.5% in 2001. Almost all domestic public debt is short term government bonds matured in 1 or 2 years, causing immediate repayment burden on the next fiscal year. Most of the attempts to issue government bonds with longer term were fail. Estimated in the scenario when the GDP growth is 7.5%, inflation 4.5% and deficit is kept at 5% GDP shows that while debt repayment for domestic government bonds for 2001 was only 7.1% total public expenditure, that number in 2010 would be 12.8% (or 3.2% GDP), equal two third of total public spending for education. The number would be higher if deficit, due to some reasons, increases higher than 5% GDP while mobilizing external funds is limited.
For the regulations on external debt management, the Regulation on Borrowing and Settling External Debts and Regulation on Managing Official Development Assistance have been promulgated. Many other by-law documents have also been issued to regulate foreign borrowing activities since then, such as Circular 81/LB/TC-NH, Circular 11/TCT/BTC, Decision 72/1999/QD-BTC, Decision 02/2000/QD-BTC… In general, the legal framework for managing external debt in Vietnam has been set comprehensively. However, there is still lack of a unique government agency to control external debt. Currently, external debts arisen from SOEs are under the control of MoF, while those of SOCBs are under the control of SBV. The MPI carries out all activities related to negotiating and signing agreements on borrowing official government debts (ODA). The scattering in managing external debt causes many difficulties in controlling debt situation in national level. A national strategy on debt management is being built in the effort to enhance the quality of debt management in near future.
Controlling the domestic public debt is the sole Ministry of Finance. All activities related to government bonds is regulated by The Regulation on Issuing Government Bonds, which promulgated with Decree 01/2000/ND-CP dated 13/1/2001. Maybe due to difficulty in issuing long term bonds, there isn’t a strategy for domestic government bonds up to now. And no government agents, including MoF and MPI, raises the issue of increasing domestic public debts as a threaten to the fiscal sustainability.
In general, the situation of public debt in Vietnam is not much severe. However, more concerns should be put on the domestic public debt. Lack of a unified government agency specialize in external debt management and the long delay in constructing a comprehensive national external debt strategy would be a signal of weak debt management.
3.3.1. Contingent liabilities: In Vietnam, the state guarantee for enterprises is not new. However, the government does not encourage this kind of guarantee. Regulations and criteria for economic entities to gain a state guarantee are strict and quite difficult to access. The State Bank of Vietnam and Ministry of Finance are legal agencies to carry out state guarantee. However, both of them need the direction from Prime Minister for final decisions. Only state owned entities can access the guarantee Information about the detailed amount of state guarantee is not available. However, the strict regulation and discouragement would imply, to some extent, secure status of the guarantee.
Among state insurance schemes which may cause fiscal contingent liabilities, relieves for natural disasters and insurance for banking deposits are the most common. In Vietnam, flooding may be the most devastative natural disaster due to its high frequency. However, the loss from flooding is expected to be lower in future since the flood occurring repeatedly year after year has made government and people get experience in facing it. Moreover, the government annual budget’s provision for flood relief has helped reduce the risk of unpredictably increasing budget payment for flood relief. Deposit insurance is a newly introduced scheme in Vietnam in the form of The Deposit Insurance Fund. However, the real liability coverage is not as much as it appears due to strict condition and difficulties in repayment.
In sum, contingent liabilities in Vietnam fall mostly on the implicit rescue commitment to SOEs and SOCBs. It is difficult to foresee the failure of SOEs and SOCBs. However, with the strong commitment from government leaders and supports from international donors, the SOEs and SOCBs reform would achieve significant results that may minimize the amount of government rescue activities in future.
3.3.2. Nondiscretionary spendings: In Vietnam, the “incremental budgeting” - an implicit regulation requires that the spending on items next period is at least equal or higher than it was in the previous – is making a large part of budget expenditure resilient to change, and causes many difficulties for fiscal authorities in re-prioritizing budget expenditure and implementing fiscal policies. Among this entire “implicit nondiscretionary” fiscal system, some items are really impossible to deduct, such as public wages, or education expenditure.
3.3.3. Spendings which are in urgent need to improve: The Public Expenditure Review 2000 has listed at least four major sources of pressure on increasing expenditure. They are public wage reform, state owned enterprises and banking system reform, maintenance for new infrastructures, and some new policies which have been announced. Those items would claim for at least 10% additional budget expenditure for the next fiscal year, causing the fiscal stance more vulnerable if the budget revenue cannot raise enough resource to afford.
3.4.1. The dependence on oil production is a significant potential risk to the stability of the fiscal stance. The revenue from oil production contributed to Vietnamese budget is 25% of total budget revenue in 2000. However, the instability of the oil price has caused much worry to the government. Since 1990, the year that Vietnam began to joint international oil market, on average, the oil price change is 21.2% each year. Estimates show that for each percentage point increase in oil price, the revenue from oil exploration contributed to budget revenue would increase by 0.2 percent (of total budget revenue). The fact has revealed that in 2000, when the price of oil increased by 58%, the revenue from oil production (contributed to state budget) has increased by 52% (compared to plan figures), making the total budget revenue increased by 10.4% and counting for a half of total revenue increase in 2000. The problem of oil price volatility needs a solution for both budget dependency as well as inefficiency of resource use.
3.4.2. Dependence on import tariff: the share of import tariff in total tax revenue has been reduced significantly since 1997, when Vietnam began implementing its AFTA commitments. However, the reduction in import tariffs share would not necessary reflects the efforts of the government, but due to external factors. IMF estimated that weighted average import tariff rate stayed virtually unchanged in 1999 and 2000 (at around 15.5%), implying that it was not the result of tariff reduction. The major factors for tariff revenue reduction were Asian crisis, which reduce the amount of import, and weaknesses in custom administration. Nevertheless, the share of 14.9% total budget revenue in 2000 is still large in comparison with other neighboring Asian countries, like Indonesia (2.6%), Malaysia (7.4%), or Thailand (10.9%) in the same year.
3.4.3. Tax buoyancy: For the period 1996-2000, Vietnamese budget revenue is inelastic with the average tax buoyancy is 0.74, and budget revenue buoyancy is 0.92. It is not a good signal from the vulnerability point of view, especially when we know that the budget expenditure buoyancy for the same period is 1.29. Statistics from other Asian countries shows the tax buoyancy higher than unit in most countries, except Malaysia (Indonesia: 1.4; Thailand: 2.8; Philippines: 2.1 and Malaysia: 0.7)7. The main cause for this inelasticity is the reduction of foreign trade taxes in conformance with AFTA aggreement. Though the tax reform (second phase) has brought significant increase in VAT and corporate income tax revenue, it cannot fulfill the loss from export-import taxes, and let the budget revenue over GDP falls from 22.4% in 1996 to 20.7% in 2000. The inelasticity of Vietnamese tax buoyancy implies the rigidity, and to some extent, the inefficiency of tax system as it cannot catch up the pace of economic growth.
4.5.1. Expenditure arrear: According to MoF, there is no expenditure arrear, if it is understood as some kinds of expenditure which are in annual budget plan, but had not been paid till the end of fiscal year. However, there is another kind of expenditure arrear: those activities would have been financed by state budget, but have not due to temporary limited budget resource. Typical example is transportation upgrading and maintenance. According to report from Ministry of Transportation, the amount of such expenditure arrears accrued up to early 1999 of the Ministry was 1,642 billions dong (2% of total budget expenditure in 1999).
4.5.2. Large tax arrears: similar to expenditure arrear, there’s no official report on tax arrears. However, news and articles can give pieces of evidence. According to the news from Netnam (http://home.netnam.vn), to the end of 2001, the rent which enterprises in Hanoi have to pay but not paid has reached to more than 100 billions dong. More than 200 motorbike businesses operating in Hanoi pay VAT less than they would have paid by accounting the retail prices less than the actual prices with the estimated amount of unpaid tax reached to several tens billions dong. An interview to Mr. Nguyen Quang Don, vice director of Hanoi Taxation Department taken by Vietnam Investment Review showed that the tax arrear of non-state enterprises for the last three years has reached to 40 billions dong, which was impossible to collect, though the Department has tried by all means (VIR 14/5/2001). The number of import tax arrear in Ho Chi Minh city in 2001 was also reported up to 433 billions dong (SGGP 23/11/2001). Above news and articles, though reflect only a small piece of the reality, can give us the notion on tax arrear in Vietnam.
4.5.3. Frequent tax law change: Vietnam is on the way of tax reform, the instability in tax law system is inevitable. However, there are many tax adjustments which not serve for the tax reform, but for the daily administration of the government, or even for the interests of some economic groups. The VAT is typical examples. Within a short period from 9/1999 to 11/2000, at least 4 Decisions from Prime Minister have been promulgated to change VAT rates for specific industries. At the end of 2000 (2 years after the initiation), MoF promulgated a brand new set of VAT rates in replace of the old mess bundle of rates. All those changes, though have some positive encouragement to businesses, are implemented widely (and somehow, carelessly), and therefore, cause negative effects. Tax law changes also occurred in other taxes, such as corporate income tax, or Personal income tax, though with less frequency than VAT. The changes in tax law in Vietnam are rather frequent and may cause more negative effects on the business environment, unstable budget revenue and more vulnerable to fiscal stance.
4.5.4. Medium term expenditure framework (MTEF), the newly introduced budgeting method with some advanced features, is in the trial period in Vietnam. Though promising that it would bring efficiency and sustainability to fiscal management, the implementation of MTEF is still slow. Lack of MTEF in budgeting process should be considered a signal of fiscal vulnerability, especially when the current budgeting method in Vietnam contains many weaknesses in coordinating and managing public resource efficiently.
4.5.5. Incapable fiscal audit entities and incomplete fiscal audit procedure may be another signal for weak fiscal management. The State Audit of Vietnam - the main body in charge - has only 600 staffs, but has to carry out audit for all fiscal levels in all 61 provinces and cities, as well as all government agencies receiving resource from state budget. The obvious result is that almost all fiscal data in district and commune levels are not audited. The overlapping in function among other fiscal inspection agencies also make the work of the State Audit of Vietnam more difficult. The legal framework of fiscal audit is also facing problems. The system of auditing standards, which works as the rule for audit activities, has not been completed. And the independence of the State Audit of Vietnam is also questioned. All above signals would imply a weak fiscal audit system, which may influence on the reliability of fiscal data.
4.5.6. Fiscal accounting: In Vietnam, both the treasury system and the financial office system are in charge of recording fiscal transactions, in which treasuries record the real cash flows, while financial offices record all fiscal transactions. Ministry of Finance will get reports from both systems to make a broad view. However, the incapability in district financial offices may cause inaccurate fiscal data. Moreover, there were significant discrepancies between the accounting system adopted in treasury system and that in financial department system. The unnecessarily complicated fiscal accounting procedure also contributes to make the fiscal reports less reliable. In addition, administrative decentralization is sometimes also a matter in misleading the fiscal report. All those facts would imply an incomplete fiscal accounting system, which may make the fiscal data less reliable, especially when a strong nationwide fiscal audit system has not yet been completed as mentioned above.
C. SUMMARY ON FISCAL VULNERABILITY IN VIETNAM
The current fiscal position in Vietnam is relatively strong. However, there are some weaknesses which are highly likely leading to fiscal stance vulnerability in future. While the expenditure is pressured to increase in the near future, the inelasticity of tax system would be a matter. Main cause for the tax inelasticity is the continuous reduction of revenue from import tariff following the schedule to joint AFTA in 2006. The heavy dependence on oil production would also be a major source of fiscal vulnerability. The rigidity of expenditure structure plus highly promising increase of some expenditure items could cause more pressure on the fiscal balance, especially when the pressure from international counterparts on increasing budget expenditure in SOE and banking reform or on reducing tariff in accordant with free trade agreements. Contingent liabilities, one of the main sources of fiscal vulnerability, are not a severe problem in Vietnam with strict control over state guarantees. However, failure of SOEs and SOCBs reforms would increase significantly the amount of contingent liabilities.
There are some other aspects that may need more concerns, though their influence on the fiscal vulnerability situation is not much. The unnecessary changes in tax law may create potential risk to the tax revenue source as it make businesses tend to wait for tax preferences rather than struggling for their profit. The separated fiscal management between some government agencies would make the inconsistence in allocating resources and increasing the amount of expenditure arrears. Lack of an effective budgeting method, like Medium Term Expenditure Framework, would be a signal of weak fiscal management. And incapable fiscal audit and not fully reliable accounting data make the fame of good fiscal stance less attractive, making more doubt about the future of a prudent budget deficit.
The public debt situation in Vietnam is relatively healthy. The current debt stock and annual scheduled debt services are not so high that can trigger the spiral of deficit-debt unsustainability. However, more concern should be spent on domestic debt level. And the incomplete debt management system and under-compilation national external debt strategy may cause risks to the debt sustainability in the future. Chapter 4. Policy Recommendations
4.1. Fiscal information system
The fiscal information system, including fiscal accounting and auditing, should be the most urgently needed to be improved. Improvement of the fiscal accounting system should focus on the fiscal accounting capability in lowest spending units. And the fiscal accounting procedures and standards should be improved toward a more simple, transparent and easy to be computerized system. The accounting standards also have to comply with international standards in order to get international acceptance of fiscal data. And discrepancies between treasury accounting and fiscal accounting must be eliminated. The fiscal audit system is another weakness in fiscal information system which needs to be consolidated. High priority should be placed on the State Audit of Vietnam in order to strengthen the capacity of this agency. More fiscal auditors should be recruited and skill and knowledge of fiscal auditors also need to be improved. 4.2. Revenue system
Budget revenue is the most vulnerable issue in the Vietnamese fiscal system. Heavy dependence on oil exploration and import tariff would make the budget revenue easy to volatile. Among two effective methods in protecting oil revenue from volatilities of the price: stabilization fund and price hedging, a stabilization fund would be a good choice. However, experience from other oil exporting countries showed that without a strict discipline and regulation, the use of stabilization fund would be harmful to the fiscal stance. The fund management should be separated relatively to fiscal management in order to avoid the abuse of the fund for raising budget deficit purposes.
Tax reform, which has achieved significant success in the last two phases, need to continue with the emphasis on the direct taxes, like corporate income tax and personal income tax, in order to raise the share of direct tax revenue in total budget revenue. The tax laws need to be more simple and equitable with least exceptions. The improvement of revenue system also can help relax the high pressure on budget expenditure, which derived from some highly likely increasing items, such as infrastructure maintenance or wage reform.
4.3. Other recommendations
Applying more effective budgeting method like MTEF can help enhance the fiscal management, hence, reduce fiscal vulnerability. However, in order to success in implementing MTEF, there must be a strong commitment from political and government leaders, a good cooperation among line ministries and between MoF and MPI, and well trained staffs in planning and budgeting from central to local levels of government.
Public debt situation in Vietnam is currently in safe range. However, some changes should be made to avoid risks arisen from this risky issue. Debt management, which is currently joint-managed by MoF, MPI and SBV, should be concentrated in one government agency in order to reduce disagreements among agencies. A comprehensive long term national public debt strategy should be completed in short time in order to set a guideline for further debt transactions. And more concern should be made on the domestic public debt.
The MoF also need to report the situation of tax arrear as well as expenditure arrear to make the budget more transparent and avoid vulnerability from those issues. Conclusion
he situation of fiscal vulnerability in Vietnam is not much serious. This is partly due to the prudent fiscal policy which the government has carried out for the last several years. However, this maybe also originates from the fact that the fiscal system in Vietnam has not been fully developed. The main sources of fiscal vulnerability in Vietnam are from the dependence of budget revenue on oil production and tariff. Some expenditure items which are under pressure to increase in future are also threatening to the fiscal sustainability. However, control over those items is within government’s capacity, if the budget revenue problems are solved. The domestic public debt would be a source of fiscal vulnerability as it is increasing rapidly with little concern from MoF and government. And last but not least, the weak accounting and auditing system can ruin all efforts of reform, if a reconsolidation in these fields is not carried out effectively. To conclusion, we can return to the original question: Whether or not the current fiscal deficit would be kept stable and sustainable in Vietnam. For short time, the fiscal stance would still be kept stable. However, for longer time, the answer would be No unless those vulnerabilities are realized and corrected on time.
Though taking much time and efforts, this study could not cover all issues arisen from fiscal vulnerability problem. The biggest shortcoming is the relative isolating point of view when the author tries to analyze the vulnerability of fiscal stance. The lack of fiscal data and information also limit the depth of analysis. And the shortage of literature information and source would make the study not quite comprehensive.
The Vietnamese fiscal system is in the reform process. Many aspects are not similar to experience in other countries, which require trial and error process to find the way. With the attempt to build a theoretical framework for assessing fiscal vulnerability relevant to situation in Vietnam, the study would like to contribute a case study in Vietnam to the economic literature on fiscal vulnerability, and also contribute to Vietnamese fiscal literature with the hope of building a better fiscal system in Vietnam. | ||
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