What should be done when overspending and public debt are on the rise?

04:40' PM - Tuesday, 22/05/2018

The pressure for more debt/equity swaps has increased as 50 percent of Vietnam's domestic debt matures in the next three years.

In recent years, the Ministry of Finance’s (MOF) announcements on imposing new taxes or raising tax rates is no longer stirring long debates.

The 2012 Macroeconomy Report released by the National Assembly’s Economics Committee showed that in addition to an annual 2-digit ‘inflation tax’, Vietnamese have to bear the ratio of taxes and fees to GDP that is 1.4-3 times higher than other regional countries because of overlapping taxation and local business protection policies.

However, MOF still insisted on raising the environmental tax on petrol near the ceiling level in 2018.

Most recently, MOF has proposed taxing houses worth VND700 million or VND1 billion and more.

An analyst said that while GDP growth is beyond expectations, the state budget is not plentiful.

Formosa and Samsung were the two enterprises which made great contributions to the miracle GDP growth rate of 6.81 percent last year, but the tax collections from them increased insignificantly as they were both enjoying tax incentives.

The public debt in 2017 decreased to 61.3 percent of GDP, but the amount was still very high, over VND3,000 trillion. More seriously, Vietnam is among the countries with the highest debt-to-GDP ratios (up by 10 percent in 2012-2017), according to the World Bank.

For the last three years, Vietnam has been borrowing money to pay old debts. In 2016, Vietnam borrowed VND95 trillion in debt swaps. In 2017, Vietnam borrowed VND144 trillion to pay loan principal.

The report on Vietnam’s public spending prepared by the government of Vietnam and the World Bank, released in October 2017, showed that Vietnam is still under pressure that forces it to mobilize capital for rollover with 50 percent of domestic debts getting matured in three years.

As for foreign debts, MOF said that debt payment obligations will be due in 2022-2025 when many ODA loans become mature.

The analyst attributed the high spending and high debt to ineffective use of loans.

Vinashin, which was the leading shipbuilder, incurred a huge loss of VND86 trillion according to a Government Inspection’s report.

Meanwhile, 12 super projects of the Ministry of Industry and Trade incurred foreign debts of VND20 trillion.

Of the two solutions to ease the public debt burden – increasing tax collections by protecting sources of revenue, and reducing spending, Vietnam is inclining towards the second.

Vietnam plans to borrow VND195 trillion to offset overspending in 2018. The figures were VND254 trillion in 2016 and VND172 trillion in 2017. - VNN -

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