Revenge of the Budget Cutters

UNCLAS SECTION 01 OF 03 TAIPEI 000498

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SENSITIVE

E.O. 12958: N/A
TAGS: EINV EFIN ECON TW
SUBJECT: Revenge of the Budget Cutters

SUMMARY AND COMMENT
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1. (SBU) Taiwan's Legislative Yuan (LY) passed the
government's 2005 central budget during its final session.
The opposition Kuomintang (KMT) Party and People First Party
(PFP) used their legislative majority to slash funding for
some government agencies. The deepest cuts seemed
politically motivated. The cuts will slow Taiwan's
privatization of state-owned enterprises (SOEs) and efforts
to promote research and development. The final LY session
was more notable for what it did not do than for what it
accomplished since it failed to even consider most pending
legislation, including several bills of economic importance
such as the creation of a National Communications
Commission, re-funding the Financial Reconstruction Fund,
and a bill for reorganization of the executive branch. The
LY performance in its final session demonstrated again how
preoccupation with narrow political issues is blocking
progress on Taiwan's national priorities. END SUMMARY AND
COMMENT.

Day Late, Dollar Short
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2. (SBU) The LY passed the 2005 central government budget
just before midnight January 20, 2005 during a marathon
final session that lasted 28 hours. The approved budget
slashed the Chen Administration's 2005 funding request by
nearly 5% (NT$71.6 billion (US$2.2 billion)) to NT$1,402.7
billion and cut spending by a little under 2% (NT$27.2
billion to NT$1,625.6 billion). It was the biggest cut in
the central government budget in three years and will
increase Taiwan's 2005 budget deficit to NT$277.3 billion,
more than had been projected in the Administration's budget
proposal, but still less than the 2004 deficit. The 2005
fiscal deficit, which includes the budget deficit plus debt
repayment, will reach NT$336.1 billion.


3. (SBU) Taiwan's Budget Bureau section chief Lin Shuen-yu
told AIT/T the deficit would be financed by NT$255 billion
of bonds with the remaining NT$81.1 billion coming from past
government savings. Lin estimated that outstanding debt
would reach NT$3,668 billion or 35.7% of GNP by the end of
2005, a lower percentage than found in most developed
nations and much lower than Singapore's 112% or Japan's
whopping 169%, although higher than South Korea's 21%.

Retaliation Against Key Agencies
--------------


3. (SBU) Local media speculated that the funding cuts were
retaliation by the opposition parties against government
agencies that acted contrary to the opposition party
interests. Reports noted that the Government Information
Office (GIO) fought to take broadcast channels away from the
KMT-owned Broadcasting Corporation of China, and was
punished with the deepest budget cut, nearly 13% less than
the requested funding level. GIO Director General Lin Chia-
lung's representational fund was totally removed and funding
for legalization of underground broadcasting stations (which
would acquire frequencies taken back from the Broadcasting
Corporation of China) was cut in half. The LY also cut by
half funding for GIO public interest programs, which
broadcast numerous pro-administration reports during the
March 20, 2004 presidential election campaign. Proposed
funding of NT$12 million for the GIO's press release and
coordination program, which also distributed pro-
administration political material, was cut by 95% to only
NT$0.6 million.

Education and Justice Targeted
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4. (SBU) The opposition-controlled LY also slashed the
budget for operations controlled by the Education Minister
Du Chen-sheng and National Physical Fitness Council Chairman
Chen Chuan-shou. Opposition KMT/PFP parties were reportedly
upset with these officials' strong support of the ruling
party and their efforts to promote local Taiwan history and
geography in school textbooks. The judiciary was also
apparently targeted for partisan reasons. In December 2004
Taiwan's high court ruled that the committee formed by the
LY to investigate the election-eve shooting of President
Chen Shui-bian and Vice President Annette Lu was
unconstitutional. Local media saw it as retaliation that
the LY stopped all funding for allowances and overseas trips
for all of the high court's justices.

Economic Impact
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5. (SBU) The LY approved budget cut by 20% funding for
Ministry of Economic Affairs (MOEA) efforts to promote
private research and development activities. The cut will
prevent research and development spending from reaching the
announced target of 3% of GDP by 2008. Other cuts included
total elimination of revenues from sales of equity shares in
state-owned enterprises, removing the legal basis for the
privatization programs being conducted by the MOEA and MOF.
The LY also passed a resolution to block increases in
national health insurance premiums without express consent
of the LY, a move that will make it more difficult to
resolve the national health insurance system's financial
problems.

COMMENT
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6. (SBU) The 2005 budget, and the hundreds of bills not
even addressed by the LY, signal continued political
gridlock over national economic priorities. Longstanding
efforts to address pressing economic issues - financial
sector reform, privatization and R&D policy - have once
again been set aside as the major political parties jockey
for position. While the Administration has put in place a
new financial supervisory system, it has failed to secure
funding to deal with the several banks already taken over by
bank regulators and additional banks and credit coops that
are very weak. Taiwan's stuttering steps towards WTO-
mandated privatization of state-owned enterprises have again
been blocked. In addition, Taiwan's Department of Health
will find it more difficult to address the deficit spending
of the national health insurance program. These are further
another examples of politics impeding the implementation of
already established policy. The inability of the government
to pursue a coherent macro economic strategy will have
negative consequences for Taiwan's long-term economic
health. The increased budget deficit and the consequent
rise in interest rates will have a negative effect on the
competitiveness of Taiwan firms.

PAAL