23 JUL, 2021 | (TBKTSG) – Lessons from recent economic crises show that government intervention through fiscal policies and quasi-fiscal measures is essential and should be counter-cyclical. However, the effectiveness of these policies depends on how they are implemented to avoid dangerous side effects.

Why are fiscal policies favored?

In times of economic shocks and crises, macroeconomic intervention can occur through monetary policies (central banks), fiscal policies (government), or a combination of both. In fiscal policies, the choice between reducing expenditure/increasing taxes and increasing expenditure/reducing taxes often favors the latter.

The goal of increasing expenditure/reducing taxes is to stimulate production, investment, and consumption, thereby reviving the overall domestic product (GDP) and reducing unemployment. Monetary policies primarily impact financial markets, and their effects on the overall economy have a considerable lag. In contrast, fiscal policies directly affect businesses and individuals, with a broader scope and shorter delay.

Many experts and renowned scholars (Spilimbergo et al., 2009; Kollmann et al., 2012; Romer, 2012; Izvorski, 2018) have pointed out the necessity of fiscal stimulus packages during economic challenges. Although there is ongoing debate about the timing (delay) and fiscal multipliers, there is a common understanding that fiscal stimulus policies are effective when timely, sufficiently robust, and targeted.

Narrow Gateway in Fiscal Stimulus:

On March 4, 2020, Prime Minister Directive No. 11/CT-TTg instructed the Ministry of Finance to promptly implement specific policies, including tax exemptions, reductions, fees, and a support package of around 30 trillion VND. This was a rapid and positive response from the government, although the timing is calculated not from the issuance of the directive but when businesses and citizens directly receive the support. Therefore, the concern is whether the Ministry of Finance can introduce specific policies in March to reach businesses and citizens promptly.

Regarding the stimulus amount, the immediate figure through support packages is about 0.5% of GDP, which is not small considering Vietnam’s current fiscal situation – with a high public debt-to-GDP ratio and ongoing budget deficits for several years.

Fiscal stimulus policies would be easier if the previous budget deficit was not a major concern for the government. With Vietnam’s persistent budget deficit and the public debt-to-GDP ratio approaching the National Assembly’s limit, the fiscal policy’s leeway is likely limited.

The downside of fiscal stimulus during a budget deficit is that it can exacerbate the situation, making the deficit chronic and less resilient to future significant shocks.

The focus of fiscal stimulus policies is on groups directly affected by the policies, including businesses and individuals facing the direct impact of a deteriorating economic situation. If the stimulus amount is lost (due to corruption or inefficiency) or does not reach the intended targets, the effectiveness of fiscal multipliers will not meet expectations, leading to policy failure.

This is a significant concern, given the numerous stories of fund mismanagement in public spending, infrastructure investments, and corruption issues related to policies, highlighting the challenges of effective policy enforcement in Vietnam.

Can Small Actions Achieve Significant Results?

Although the fiscal stimulus leeway is limited in Vietnam’s current situation, if the Covid-19 situation worsens globally and domestically, maximizing fiscal stimulus policies cannot be ignored.

Compared to countries with independent central banks, Vietnam has an advantage at this time as it can coordinate monetary and fiscal policies according to its needs. Following Directive No. 11, the 250 trillion VND credit support package can be formed by influencing the State Bank of Vietnam and commercial banks, credit institutions that the State has control over.

Returning to the three important aspects of effective fiscal stimulus policies – timing, quantity, and targeting – the role of the Ministry of Finance is crucial. Therefore, specific policies on increasing expenditure/reducing taxes related to domestic goods and services need to be introduced promptly.

For example, reviewing regular expenditures that may overlap with investment spending can increase the efficiency of non-salary and allowance expenditures, such as procurement. A current issue in the regular expenditure estimate reports of the budget is the lack of clarity on how much is allocated for salaries, with it being divided into 10 different categories.

Additionally, the current regular expenditures at the central level account for nearly 50% of the total 1 million VND in the state budget’s regular expenditures.

Similar fiscal policies through state-owned enterprises, such as subsidies, discounts, debt relief, and prioritizing the use of domestic enterprise products and services, should also complement mainstream policies. In the worst-case scenario, a resolution from the National Assembly may be needed to allow a short-term increase in budget deficits and an increase in the public debt-to-GDP ratio through domestic borrowing.

Policies may be easy to pass, but for citizens and domestic businesses to bear loans, the government’s level of trust must be rapidly improved.

Source: thesaigontimes