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FISCAL POLICY AND INCLUSIVE GROWTH Manila, October 2016 FISCAL POLICY AND POVERTY REDUCTION: THE CASE OF VIETNAM Nguyen Thi LeThu National Institute for Finance Ministry of Finance, Vietnam The information and view expressed herein does not necessarily represent the opinions of any organization Table of Contents 1. Vietnam’s recent economic growth and poverty reduction 2. Fiscal policies towards poverty reduction • • 4. Taxation policy Expenditure policy Policy options for period 2016-2020 2 Vietnam: Basic information Area: 331,000 km2 Population: 91,7 mil. with 54 ethnic minority groups GDP (2015): $193 bil. GDP per capita (2015): $2,320 63 cities and provinces 13 self-financed 50 receiving balancing transfer 3 Recent Economic Developments: An Overview High economic growth together with improved per capita income • Vietnam is amongst the fastest growing economies in emerging Asia, achieving an average GDP growth rate of around 6,6% over the past two decades • GDP per capita increased 6 times after 20 years • However, being an open economy, Vietnam recently exposed to external shocks GDP growth and GDP per capita 2500.00 10.00 9.00 2000.00 8.00 7.00 1500.00 6.00 5.00 1000.00 4.00 3.00 500.00 2.00 1.00 0.00 0.00 GDP per capita (USD) GDP growth (%) 4 Poverty reduction achievements • Poverty index decreased sharply from 37% in 1998 to 8% in 2014 Poverty line lower than international standards and adjusted every 5 years 3/8 MDGs achieved in advance including no.1 priority goal – poverty reduction Reduced poverty gap between different areas and between rural and urban areas Poverty index by regions 70 60 Poverty index by areas 50 50 40 45 40 30 35 20 30 25 10 20 0 15 1998 2002 2004 2006 2008 2010 2012 2014 10 Red River Delta 5 Northen Moutain 0 Northen Central and Central Coast 1998 2002 2004 2006 2008 2010 2012 2014 Central Highlands South East Total poverty index Rural poverty index Urban poverty index Mekong River Delata 5 Taxation policy and poverty reduction Vietnam tax system experienced intensive reforms towards a sustainable and equal tax system Improved domestic taxes to reduce dependence on unstable revenue (import duties, oil revenue…) Broadening tax base while reducing tax rates and giving tax exemptions and reductions to encourage investment and export 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Domestic revenue Tariff Oil revenue Grant aid 6 Taxation policy and poverty reduction Direct taxes: • • Personal income tax: • giving exemption for income of households individuals from agriculture production. • reducing tax obligations by increasing deductible amount and decreasing tax rates Taxpayer Threshold Tax rate Before 2009 high income earners (more than $270/month) No deduction 10%, 20%, 30%, 40% 01/01/200930/6/2013 Every income earner Taxpayer: $230 Dependent: $90/person 5%, 10%, 15%, 20%, 25%, 30%, 35% 01/7/2013 Every income earner Taxpayer: $425 Dependent: $170/person 5%, 10%, 15%, 20%, 25%, 30%, 35% Corporate income tax: reducing tax rates over time with many incentives and deductions to encourage investment • Standard rate reduced from 32% (1999) to 20% (2016). • A lot of incentives and deductions given to income incurred in disadvantageous areas; income of housing projects for low income people; income from agriculture production; income of companies employing female workers and ethnic minority workers; income of people credit funds and microfinance organizations, etc. 7 Taxation policy and poverty reduction Indirect taxes: • VAT: Imposing incentive rate of 5% on necessity goods and some agriculture products while most of other agriculture products are not taxable. • Excise tax: only imposed on luxury goods and services Other incentives and deductions to support farmers, workers, low income taxpayers and poor people: • Exemption of tax on agriculture land use from 2003 to 2020 and irrigation fees. • Exemption of VAT, personal income tax and corporate income tax for taxpayers having house for rent to workers, students; catering services to workers and baby sitting in fiscal year 2012 if they commit to keep their service charge unchanged. • Exemption and reduction of fees and charges for children, poor households, old people, handicapped, ethnic minority people, etc. 8 Expenditure policies for poverty reduction Total transfers as % of central revenue Fiscal transfer to narrow gaps between different provinces • Balancing transfers (unconditional transfers): 50/63 provinces receive balancing transfer • Targeted transfers (conditional transfers): • National targeted programs: • Cash and in-kind transfer 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 E2014E2015 Share of balance and targeted transfers in total transfers 100% 80% 60% 40% 20% 0% Balancing transfers Targeted transfers 9 Overview of expenditure policies for the poor National targeted programs for poverty reduction Support to get access to basic services Support to develop production • Sustainable Poverty Reduction Program • Education • Land • Healthcare • Vocational training • Poverty Reduction Program for 64 poorest districts • Pension • Production tools • Housing • Incentive credit • Poverty Reduction Program for remote and advantageous communes • Legal services 10 Specific expenditure policies for the poor National targeted programs for poverty reduction Coverage: 64 poor districts, remote and disadvantageous communes, frontier areas Specific policies: • Developing transport system • Building schools, vocational training centers, hospitals, markets, agriculture service centers, etc. • Providing support for production: • Cash and in-kind assistance • Incentive credit for households, enterprises and cooperatives • Vocational training support 11 Specific expenditure policies for the poor Support to help the poor get access to basic services Beneficiaries: Poor and “near-poor” people Specific policies: • Education and training • Exemption and deduction of school fees • Financial aid for learning materials, meals, house rent, etc. • In-kind support (rice) • Financial aid for the poor attending vocational training courses • Healthcare • Free health insurance • Meal and transportation support • Pension contribution • Government support 25% or 30% of total contribution to voluntary pension fund • Housing • Financial aid to acquire land and build houses • Incentive credit with government subsidy • Legal services • Free consultation services • Access to legal information • Others • Energy subsidy (oil, electricity) 12 Specific expenditure policies for the poor Support to help the poor develop production Beneficiaries: Poor and “near-poor” people Specific policies: • Land: Poor ethnic minority households are eligible for • Certain area of agriculture land • Incentive credit to acquire land for agriculture production • Vocational training • Financial aid or free vocational training • Support for learning materials • Meal and transportation support • Production tools • Cash support to improve agriculture land quality • Cash support for seedling, breeding stocks, vaccination, etc. • Credit policy: Low interest rate with government subsidy • Investment in agriculture production, processing and storage • Agriculture machinery, breeding stocks 13 Fiscal policy for poverty reduction: Shortcomings Too many policies stipulated in various legal documents => overlapping Many government bodies involved in designing and implementing poverty reduction policies => rising cost for administration, reducing efficiency Too many policies vs. Budget constraint => Financial resource is split into small amount => less efficient Unconditional cash transfer => the poor becoming dependent on government support and don’t have incentive to reduce poverty 14 Fiscal policy for poverty reduction: Challenges Poverty rate increase due to changes in poverty line • 2011-2015: single dimensional poverty index • • Monthly income: $20/person in rural area; $25/person in urban area 2016-2020: Multidimensional poverty index • • Budget deficit (% of GDP) 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Monthly income: $30/person in rural area; $40/person in urban area Lack of access to basic services (education, healthcare, housing, clean water, information and telecommunication, etc) Budget constraint • High and persistent budget deficit • Rapid rise in the level of public debt to GDP Budget deficit (% of GDP) Public debt and National external debt to GDP 70% 60% 50% 40% 30% 20% 10% 0% 2010 2011 2012 Public debt/ GDP 2013 2014 2015 National external debt/ GDP 15 Policy options for period 2016-2020 Taxation policy: Building a comprehensive, equal and efficient tax system • VAT: Reducing the number of non-VAT goods and goods under the VAT rate of 5% ; • 2020: Applying one VAT rate for most of goods and services • Excise tax: Broadening tax base • Corporate income tax: Reducing tax rate; reviewing incentive policies; applying CIT on some economic activities (ecommerce, thin capital, etc) • Personal income tax: Broadening tax base • Environmental tax: Applying environmental tax on goods having negative impacts on environment • Building property tax Expenditure policy: Restructuring public expenditure to make it more efficient, contain budget deficit and public debt • Building medium term fiscal framework, setting expenditure ceilings for government bodies and local authorities • Giving priority for poverty reduction and social security based on reviewing current policies and eliminating inefficient and overlapping ones • Reducing universal subsidies for public services (education, healthcare, etc) while ensuring access for the poor • Supporting the poor develop their economic activities and production instead of giving unconditional transfer (cash and in-kind) 16 Thank you for your attention