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 
 
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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