Statistical Yearbook for Asia and the Pacific 2011
 
Economy
Fiscal balance
Data source: Asian Development Bank, Key Indicators for Asia and the Pacific 2010 (Manila, 2010).

In 2009, fiscal deficits widened in many Asian and Pacific countries and revenue streams underperformed. The global financial crisis also resulted in many governments implementing expansionary fiscal policies in support of domestic economies.

In East and North-East Asia, all countries had recorded fiscal deficits in 2009, except in Hong Kong, China, which recorded a fiscal surplus of 1.1% of GDP. Cuts in public spending and strong growth in revenue in Hong Kong, China, have enabled six consecutive years of budget surpluses. China recorded a fiscal deficit in 2009 of 2.2% owing to fiscal expansion to stimulate the domestic economy (as evident by the high public expenditure at 22% of GDP – the highest level in recent decades). In China, most of the extra spending was allocated for infrastructural investment (railways, airports, environmental infrastructure, low-cost housing and the reconstruction of areas affected by the Sichuan earthquake of May 2008). Even with the global financial crisis, China sustained sufficient growth for the government revenue to continue its upward trend of the previous years. The Republic of Korea also posted a fiscal deficit at 1.7% of GDP in 2009 for the first time in the past decade, mainly because of increases in public expenditure and declines in revenue. Concerned about the sharply deteriorating economic outlook, the Republic of Korea announced after September 2008 that it would introduce a combination of tax cuts for individuals and tax breaks for companies; and an addition to the budget of 17.7 trillion won (US$12.9 billion) in 2009 to boost the economy.

In North and Central Asia, almost all countries recorded a decrease in fiscal balance in 2009. Tajikistan recorded high fiscal deficits in both 2008 and 2009, of 7.6% and 7.1% of GDP, respectively. The deficit in Tajikistan was due to a narrow tax base, high levels of social spending and a large share of revenue linked to the performance of the aluminium and cotton sectors. Armenia showed a fiscal deficit in 2009, at 4.7% of GDP due to weak revenue performance, part of a persistent trend of fiscal deficits over several years. In Georgia, the 2009 fiscal deficit was also high, at 7.2% of GDP, as the government had to contend with lower revenue as real GDP contracted; and demand on public expenditure increased arising from population displacement and wartime damage to infrastructure.

Figure III. 5 – Fiscal balance relative to GDP, Asia and the Pacific, 2008 and 2009

Figure III. 5  Fiscal balance relative to GDP, Asia and the Pacific, 2008 and 2009

South-East Asian countries showed significant deterioration of fiscal balances in 2009 thus reversing the trend of fiscal surpluses achieved since 2005. Falls in revenue collection were the principal cause, with public revenue at 17% of GDP, a substantial decline from 21% in 2008. Viet Nam and Malaysia recorded large fiscal deficits in 2009 at 7.7% and 7.0% of GDP, respectively. In Viet Nam, the large fiscal deficit partly reflected a rise in government expenditure as stimulus programmes and social welfare provisions increased in 2009. The widening deficit in Viet Nam was also a result of relatively slow revenue growth due to subdued economic activity; and a sharp drop in the price of crude oil as the petroleum sector accounts for a substantial proportion of government income. Despite efforts to broaden the tax base in Viet Nam (a reformed personal income tax came into effect in January 2009), the tax base remained low and tax evasion continued to be a problem. In Malaysia, public spending increased with the implementation of an additional fiscal stimulus package, while revenue collection was adversely affected by the decline in global oil prices – resulting in a decline in petroleum royalties and petroleum income tax account. Thailand and the Philippines recorded substantial fiscal deficits in 2009 at 4.1% of GDP and 3.9% of GDP, respectively, attributed to both increasing public expenditure and declining public revenues. Thailand used emergency measures to enable borrowing of a total of THB400 billion in excess of the limit set by budgetary law to combat a severe revenue shortfall in the fiscal year 2009. In the Philippines, government collected lower revenue owing to economic weakness and a range of tax cuts implemented at the start of 2009.

South and South-West Asian countries recorded large fiscal deficits, particularly India (at 6.6%), the Maldives (6.7%) and Sri Lanka (9.8%). Fiscal deficits, however, mainly stemmed from increases in public expenditure coupled with the underlying structural factor of relatively low revenue bases – the government revenue in all countries except Bhutan and the Maldives was less than 15% of GDP. India had a public expenditure at 16% of GDP, while revenue was at 9.7% of GDP. The fiscal position in India in 2009 was significantly affected by (a) supplementary fiscal measures to reduce the impact of the global financial crisis on the real economy; (b) slower growth in corporate tax revenue as overall economic growth moderated; (c) public-sector pay increases; and (d) lower revenue from import duties.

In the Pacific, aggregate fiscal surplus turned into deficit in 2009 at 2.3% of GDP – after sustaining fiscal surpluses over the previous six years. The change in fiscal position could be attributed partly to the effects of the global financial crisis on tourism earnings and remittances. Palau recorded a large deficit of nearly 12% of GDP due to a large public expenditure at 53% of GDP during 2009, while public revenue remained relatively low at 21% of GDP. In Palau, early policy efforts were implemented to deal with the fiscal deterioration by cutting spending and dropping social welfare spending. In the Solomon Islands, most Government-funded development spending in 2009 was deferred, Government hiring was suspended and funding for goods and services was cut by 35%; thus, the Solomon Islands recorded a fiscal surplus of 0.1% in 2009.

The amount of fiscal balance that is cyclical versus structural should be considered when assessing the fiscal situation in a country. While some countries may experience cyclical fiscal imbalance that would likely improve as global and domestic economies recover, others face structural fiscal imbalances that present a longerterm challenge. This latter case requires timely and comprehensive fiscal reform and adjustment in order to achieve fiscal sustainability.

Setting a path to fiscal reform in Asia and the Pacific

Countries in Asia and the Pacific are vulnerable to domestic and external shocks. Economic or financial crises have in recent years necessitated fiscal policy expansion and reductions in governmental revenue bases. Rising oil prices have led to greater oil and other subsidies. Natural disasters have inflicted sizable reparation costs. Expansion of fiscal spending looms over the changing needs of ageing populations and evolving requirements for public services, social welfare policies and infrastructure investment.

Basic country comparison shows that developing countries in the region tend to have lowered level of public spending relative to the size of the economy (GDP) when compared to the developed countries. Looking ahead, greater economic development may lead to increases in public spending and hence the need to raise taxes. The impact of market liberalization on the revenue collection must also be considered. For example, from the beginning of 2010, the ASEAN Free Trade Area (AFTA) has united Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore and Thailand in a commitment to abolish or reduce tariffs on all goods except some agricultural products.

Bulk of the revenue in modern tax systems stems from value-added tax and income tax.1 Income tax increases revenue and assists with income redistribution, since its burden is higher on the upper strata of the income distribution. However, excessive exemptions and allowances may result in decreased potential for revenue generation and may jeopardize redistribution impacts. A value-added tax raises revenue and is often less problematic politically than taxes based on income.

In designing fiscal reform, systematic analyses of fiscal accounts should include an attempt to (a) strengthen budgetary controls and counter-cyclical expenditure programmes, ensuring well-targeted and effective public spending aimed at correcting market failures and public goods delivery; (b) allocate sufficient amounts for public infrastructure, especially where it would enhance competitiveness and link the country with the rest of the world; and (c) strengthen the tax system to ensure efficiency, fairness and minimal distortion of economic activities and avoid disincentives.

Fiscal reform enables a country to generate a sustainable fiscal condition, promote medium-term economic growth and stability, and address poverty and equity issues. Along with other structural and institutional adjustments, fiscal reform enhances growth prospects; and helps improve the overall quality of life through equitable burden-sharing.


1 Robert J. Barro, “Government spending in a simple model of endogenous growth”, Journal of Political Economy 98, No. 5, Part 2 (October 1990), pp. S103-S126. Available from www.jstor.org/pss/2937633.
 
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