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Cablegate: Taiwan 2007 Budget Proposal

VZCZCXYZ0907
RR RUEHWEB

DE RUEHIN #3199/01 2580842
ZNR UUUUU ZZH
R 150842Z SEP 06
FM AIT TAIPEI
TO SECSTATE WASHDC 2146

UNCLAS AIT TAIPEI 003199

SIPDIS

INFO USDOC WASHDC
AMEMBASSY BANGKOK
AMEMBASSY BEIJING
AMEMBASSY SEOUL
AMEMBASSY SINGAPORE
AMEMBASSY TOKYO
AMEMBASSY MANILA
AMEMBASSY JAKARTA


AMEMBASSY KUALA LUMPUR
AMEMBASSY HANOI
AMEMBASSY CANBERRA
AMEMBASSY WELLINGTON
AMCONSUL HONG KONG
AMCONSUL SHANGHAI
AMCONSUL GUANGZHOU
DEPT OF AGRICULTURE WASHDC
DEPT OF ENERGY WASHDC
DEPT OF TREASURY WASHDC

SIPDIS, SENSITIVE BUT UNCLASSIFIED

STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/TC, EAP/EP

USTR FOR ALTBACH

USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY FOR OASIA/LMOGHTADER
TREASURY PLEASE PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Taiwan 2007 Budget Proposal


SUMMARY
-------

1. Taiwan's executive branch has proposed a 2007 central government
budget with expenditure growth at an eight-year high, but with
increased tax revenues reducing the deficit. While education,
science and culture continue to occupy the largest share of the
proposed budget, defense spending will grow 30%, mainly on
procurements from the United States. End summary.

Regular Budget and Special Budget
---------------------------------

2. On August 31, 2006, the Executive Yuan (EY) submitted its 2007
central budget proposal to the Legislative Yuan (LY). The proposal
includes funding for off-budget programs and a special budget for
public construction projects. The LY will begin its next session on
September 19 and start reviewing the budget proposal in late
September. The central budget is also called the "regular" budget.
It lists revenues and funds for all administrative programs in a
fiscal year, now coinciding with the calendar year. A "special"
budget may cover a period of more than one year and is designed to
fund: (1) defense spending required by emergency or war, (2) major
national economic programs, (3) recovery from natural disasters, or
(4) irregular or multi-year policy initiatives.

Smaller Budget Deficit
----------------------

3. The proposal projects the 2007 budget deficit will decline 19%
from 2006 to NT$152 billion (US$4.7 billion at the exchange rate of
NT$32.5 per USD). The budget deficit plus new bonds issued to repay
old debt in 2007 will decline to NT$217 billion (US$6.7 billion),
down from NT$344 billion (US$10.6 billion) in 2003 and NT$253.5
billion (US$7.8 billion) in 2004. The EY plans to make up the
shortfall with NT$17 billion (US$523 million) of savings from
previous years and NT$200 billion (US$6.1 billion) of new bonds,
which together amount to 12% of total expenditures in the proposed
regular budget, below the maximum of 15% set by law.

Outstanding Debt within Statutory Limits
----------------------------------------

4. New bonds issued under the proposed regular and special budget
programs will drive up outstanding central government public debt
from NT$3,555.7 billion (US$109.4 billion) in 2005 to NT$4,040.7
billion (US$124.3 billion) in 2007. The outstanding debt as a share
of GNP in 2007 will increase from 33.1% in 2005 to an estimated
35.2%, still below the statutory limit of 40%. According to
Taiwan's Budget Bureau, the outstanding debt of both central and
local governments as of the end of 2005 was NT$416.9 billion
(US$128.3 billion) or 36.4% of GNP or 37.4% of GDP. Adding
short-term (less than one year) revolving debt (bonds) and
off-budget liabilities to outstanding debt increases the debt/GDP
ratio to 46.2%. This ratio is less than the 52.7% in the United
Kingdom, 64.1% in the United States, 66.9% in Germany, and 163.4% in
Japan.

Tax Revenue Projected for 2007 Still Understated
--------------------------------------------- ---

5. The alternative minimum tax (AMT) passed Taiwan's legislature in
2005 and became effective in January 2006. Tax authorities will
start to collect the 10-20% AMT in 2007, which is expected to
generate additional revenue of NT$11 billion (US$307 million) in its
first year. A tax reform bill to increase the 5% business
transaction tax and eliminate the tax-exempt status of military
personnel and school teachers is now under LY consideration. A
Budget Bureau official said tax revenue in 2007 will increase at
least 3% on top of the estimated 3.5% growth in 2006.

6. Tax revenue will contribute 74% of total central revenue in
2007, the highest in the past ten years. Anti-evasion efforts have
boosted tax revenue collected by central and local governments from
barely above 12% of GNP in 2003 and 2004 to 14.1% of GNP in 2005.
The Budget Bureau predicts the ratio will further increase to about
14.5% in 2007. This level is still far below the 27% collected in
Japan, the 30% in the United States, or the 35% (or higher) in some
European countries.

High Defense Spending Growth
----------------------------

7. The Ministry of National Defense (MND) will switch some
procurement to the regular budget for 2007 from the special budget
proposal which has been blocked by the LY more than 50 times. As a
result of the switch, defense expenditure in the regular budget will
grow 30%, the highest rate among major spending categories, to
NT$311.5 billion (US$9.58 billion). The MND share of total central
expenditure in 2007 will increase to an eight-year high of 18.7% up
from 15.2-15.4% in the early 2000s. Proposed military procurements
include NT$6.14 billion (US$191.9 million) for P-3C anti-submarine
aircraft, NT$14.9 billion (US$465.9 million) to upgrade existing
Patriot II missiles, and NT$4.54 billion (US$141.9 million) for the
first stage of diesel submarine procurement.

Impact of Defense Spending
--------------------------

8. The increased defense spending will squeeze all other spending
categories to growth of less than three percent in 2007. Funding
for community development and environmental protection will decline
3.4%. Education, science, and culture will still occupy the largest
share of the regular budget, but the 2007 share will decline to
19.3% from 20% in 2006. The share for social welfare programs will
slip from 19.4% to 18.6%.

Economic Development Funding
----------------------------

9. Economic development projects account for only 12% of the 2007
regular budget, less than the shares for defense,
education/science/culture, and social welfare. However, some
economic projects in 2007 will be financed by special budgets and
off-budget plans submitted by state-owned enterprises and
state-controlled funds. According to the Budget Bureau, total
funding for all economic development projects in 2007 will reach
NT$534.2 billion (US$16.4 billion), 2.7 times the NT$199.4 billion
(US$6.1 billion) listed in the 2007 regular budget proposal.

Comment
-------

10. Legislators have until December 31 to review the budget and in
the past have regularly cut EY proposals. In 2005, the LY cut 2.3%
from the EY's proposal for 2006 and "froze" another 16%. Many
administrative programs are still waiting for the LY to "unfreeze"
funds from the 2006 budget.

Young

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