Budget spending to be cut to support ailing monetary policies

If deficit budget spending persists while tightened monetary policies continue to be deployed this year, the economy may stall, said an expert.

The economy will continue to suffer from double-digit inflation without the help of a disciplined fiscal policy, said overseas Vietnamese economist Pham Do Chi on the sidelines of a recent conference.

The rise in both budget spending and tax collection last year was caused by the so-called “index problem”, or simply said, the rise of inflation.

In 2011, gross domestic growth (GDP), inflation, and forex rate were projected to be 7 percent, 7 percent and VND19,500 per dollar.

But by the end of last year, the real GDP, inflation, and forex rate were 5.9 percent, 18.5 percent and about VND21,000 per dollar.

For that reason, tax collection increased, including the surge in import taxes and special consumption taxes, and budget spending also rose due to the devaluation of the Vietnamese dong, Chi said.

“Many said the monetary policies were the main cause for inflation, but why did lending rates hang around 18-20 percent in 2011 while inflation was still high?”

“Maintaining the high lending rate this year can be considered a suicidal act, as it will kill the local economic sector.”

“So, the remedy this time should be tightening fiscal policies,” he said.

“If the government continues the estimates for budget expenditure and collection in 2012, the risk of double-digit inflation is possible.”

The National Assembly and its Standing Committee for the State Budget should reconsider the estimates since they risk a high rate of inflation.

The estimates should be cut by tens of percentage points to relieve the pressure on monetary policy this year.

In my opinion, they should be cut by about 20-30 percent, and then the budget deficit would continue to stay within the target 4.5 percent of GDP.

Once the macroeconomic situation, represented by inflation, is stabilized, depositing and lending rates will go down, thus boosting the stock and real estate markets.

If we maintain the estimates, nominal GDP will rise, along with spending, which will lead to escalation, and a surge of money supply.

Vietnam often adds some percentage points to the estimate for the New Year’s tax collection and spending plan.

As a result, with inflation making up a big part of last year’s tax collection and spending, this year’s estimates will follow the same model, and result in a vicious cycle which will be much harder to eliminate in the long-run.

The estimates for budget collection and spending in 2012 are VND740 trillion and VND852.76 trillion respectively.

With an expected VND50.34 to be spent on debt repayment, the estimate for budget deficit is VND104.2 trillion.

Source Tuoitrenews

Tags: Vietnam banking industry, Vietnam banks, Vietnam finance