A solution to economic growth that the Government has doubled down on is to spur public investment, with major infrastructure projects given a focus. Such efforts have yet to pay off. What is the problem?
Fiscal expansion
In March 2023, the State Bank of Vietnam (SBV), the central bank, twice reduced key interest rates, effectively loosening its monetary policy to support economic growth. It looks like such moves take time to bear fruit. Monetary policy has not yielded good results due to multiple impediments, including control on credit growth, the low demand for funding in the economy, and stringent lending conditions imposed by banks as a hedge against risks.
Given such a situation, the expansionary fiscal policy has been embraced in the face of woefully low GDP growth in the first quarter. Most recently, the Government has approved a proposal to reduce the value-added tax from 10% to 8% in the rest of the year and has assigned the Finance Ministry to fast-track the preparation of a resolution to this effect for submission to the National Assembly.
While fuel prices might rise again following a crude production cut announced by the Organization of the Petroleum Exporting Countries plus (OPEC+), and as the inflationary pressure remains to be tamed, alongside weak consumption, the VAT reduction would help ease the inflationary pressure and enhance the efficiency of the Government’s stimulus program.
This will be the second VAT cut. The Government last year lowered the VAT, also to 8%, to help fuel the post-pandemic economic recovery. According to the Ministry of Finance, this policy is needed for this year to stimulate consumption and support production and business activities. With the imminent VAT cut, the Ministry of Finance estimates a contraction of VND5.8 trillion in the State budget revenue per month and VND35 trillion in the second half of the year.
The Ministry of Finance has also proposed a reduction of 35 types of fees and charges in the second half (amounting to VND700 billion) to support businesses and households.
In the middle of April, a decree on the extension of tax and land rent payments for 2023 was issued, which is the fifth time this measure has been taken by the Government at a time when enterprises are facing hardships as the market narrowed down with fewer orders. Accordingly, companies and household businesses can defer their payments of VAT, corporate income tax, personal income tax, and land rent.
As State budget revenue is growing in line with estimates that have ensured a surplus, the launch of such fiscal policy would not pile pressure on the State budget.
Specifically, in 2022, the total State budget revenue hit VND1,784.8 trillion, or 26.4% higher than the estimate and rising 13.8% against the previous year, according to the General Statistics Office. Budget spending, meanwhile, totaled only VND1,562.3 trillion, equal to 87.5% of the estimate but rising 8.1% against the previous year.
The momentum continued into the first quarter this year, as the total budget revenue is estimated at VND491.5 trillion, or 30.3% of the annual estimate, far higher than the budget expenditure of VND363.4 trillion, which is equal to only 17.5% of the annual estimate.
As such, the country attained a budget surplus of VND222.4 trillion in 2022 and VND128.1 trillion in the first quarter this year, the latter being equal to nearly 58% of the total budget surplus in 2022.
What should come next?
Apart from the monetary loosening or the fiscal expansion via exemption or reduction of taxes and fees, a solution that has stronger and quicker dispersion effect to growth that has been pursued by the Government lately is to boost public investment, with major infrastructure projects given a focus. However, it looks like such efforts have yet to pay off as many localities are still reluctant to step up disbursement.
In a correspondence dated April 19, the Prime Minister rebuked several ministries, agencies and localities that have been evasive in their public investment assignments for fear of responsibility, or have refused to make decisions on jobs within their jurisdiction, or have passed the buck to other bodies or higher authorities. Consequently, work has barely moved on, adversely affecting the efficiency in administration and “eroding the confidence of business and the public in State agencies.”
The Government leader demanded that officials and civil servants failing to perform their tasks or evading their assignments be replaced or transferred.
Earlier, during a conference in November with authorities of cities and provinces where major transport projects were being executed, the Prime Minister also stressed sanctions, demanding that officials be replaced upon failure to perform their assignments. The Prime Minister stressed that the Party as well as the National Assembly had underlined the importance of public investment, and called for higher awareness among officials of all levels. The leader urged relevant authorities to review investment procedures to expedite work, and all officials had to duly perform tasks as assigned. Ministries, agencies and localities were told to submit reports pinpointing specific impediments, instead of citing general difficulties.
However, it should also be noted that as harsh sanctions have been imposed on State officials for wrongdoing in recent years, many officials and employees in the State sector are now distancing themselves from their mandates to avoid risks of being implicated in potential irregularities. Therefore, despite the Government’s efforts to do away with that negative mindset, many individuals and agencies are standing still, for fear of such risks in the future.
Therefore, it is of paramount importance to relieve those officials of such worries, and to create mechanisms to protect those who boldly perform their assignments as mandated. A good policy or mechanism should be able to prevent wrongdoing and to serve as an efficient deterrent against any deliberate violations.
The mood of hesitancy among officials can be seen in the practice of handing over land to enterprises or transferring State stakes to the private sector. Years ago, such practices could be done in an easy-going manner without strong oversight, resulting in State assets being offloaded at low prices, although there were also deals being done in a healthy manner, generating good revenue for the State budget. These days, however, tough sanctions are being taken against violations, instilling worries in the private sector and causing discomfort or worries among State officials who feel uncertain whether they can be implicated or not.
