Taiwan government prioritizes fiscal stability in the latest budget proposal for 2017

The Taiwanese government has prioritized the goal of maintaining fiscal stability over that of supporting economic growth in its latest budget proposal for 2017 disclosed on August 18. This is the first budget under President Tsai’s administration that took office in May this year. However, this is in line with the long-term economic plans outlined by President Tsai during the election campaigns.

Under the draft budget, central government expenditures will increase a modest 1.1 percent next year. This compares to a similar 1.3 percent rise assumed for government revenues. Fiscal deficit will narrow slightly to TWD 152.3 billion next year from TWD 153.6 billion this year.

"As a percentage of GDP, we reckon that the deficit ratio will remain roughly unchanged at 0.9 percent," DBS commented in its research report.

Further, the central government’s debt to GDP ratio is projected to fall to 33.9 percent, a tad lower than 34.1 percent this year. Overall, this budget is expected to have a neutral impact on next year’s GDP growth outlook. But the impact will vary across sectors, the report said.

On the positive note, the budget includes a notable 7.1 percent increase in government spending on education, science and culture, and a 3.6 percent increase in social welfare spending. More funds will be used to upgrade school facilities, promote industrial innovation and improve elderly care services, among others. The public funds allocated to infrastructures will also be lifted by 3.1 percent next year, which is expected to lend support to the construction sector.

Meanwhile, given that the government clings to a prudent fiscal policy, the central bank of Taiwan (CBC) would find it still necessary to shoulder the burden of supporting GDP growth in the near term. One more rate cut remains likely for the CBC meeting in September, which implies further room for the short-term yields to decline.