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Contemporary Issues of Public Finance and Population in Taiwan Vance Kuang-Ta Lo Associate Professor Department of Public Finance National Chengchi University March 4, 2016 1 Outlines Part I: Global Economic Situation and Outlook Taiwan’s Current Economic Situation Prospects for 2016 Taiwan’s Current Fiscal Challenges Part II: Demographic Pattern, Trend, and Projection Problems and Challenges Part III: The Sound Finance Program Tax Reform 2 Part I 3 Global Economic Situation and Outlook This part was prepared by the Department of Economic Development of the National Development Council (NDC). Quarterly updates can be found on the NDC’s website at http://www.ndc.gov.tw/encontent/m1.aspx?sNo=0001444. 4 Global Growth Faces Headwinds Global economic growth disappoints and faces rising headwinds at the close of 2015 that may well persist into the next year. Advanced Economies recovers at a modest pace. The weakness in emerging markets, especially in Mainland China, drags down the global economy. World Economic Outlook Projection OECD 2015 World 2016 Unit:% GI 2015 EIU 2016 2015 2016 2.9(3.0)3.3(3.6) 2.6(2.6) 2.9(2.9) 2.4(2.4)2.6(2.7) United States 2.4(2.4)2.5(2.6) 2.5(2.4) 2.7(2.9)2.5(2.5)2.4(2.4) Eurozone 1.5(1.6)1.5(1.9) 1.5(1.5) 1.7(1.7)1.6(1.5)1.7(1.7) Japan 0.6(0.6)1.0(1.2) 0.7(0.5) 1.0(1.0)0.7(1.0) 1.2(1.7) Mainland China 6.8(6.7)6.5(6.5) 6.9(6.8) 6.3(6.3)6.9(6.9)6.5(6.4) Note: The values in parentheses represent the previous forecast. ( OECD : Sep. 2015, EIU & GI : Nov. 2015 ) Source:1. OECD, Economic Outlook, Nov. 9, 2015 2. IHS Global Insight Inc., World Overview, Dec. 15, 2015 3. The Economist Intelligence Unit, Global Forecasting Service, Dec. 11, 2015 5 US Economic Fundamentals Remain Solid US real GDP increased at an annual rate of 2.0% in the third quarter of 2015, mainly because private consumption was strong and fixed investment grew. Since the unemployment rate was down and CPI had rebounded, the Federal Reserve raised interest rates on December 16, 2015. US unemployment rate US real GDP growth rate % (SAAR) % 6 4.6 4.3 (seasonally adjusted) 3.9 4 2.1 2 2.0 0.6 Source:US Department of Labor, Dec. 4, 2015 US one-month percent change in CPI 0 (seasonally adjusted) -2 -0.9 Q1 2014 Q2 Q3 Q4 Q1 Q2 Q3 2015 Source:U.S. Department of Commerce, Dec. 22, 2015 Source:US Department of Labor, Dec. 15, 2015 6 Euro Zone Economic Growth Slows Euro Zone real GDP growth rate slowed to 0.3% in the third quarter of 2015 (down from 0.4% in the second quarter), helped by a stronger performance by Spain (+0.8%). The European Central Bank(ECB)will continue its quantitative easing through September 2016 and will delay interest-rate hikes until late 2017. EIU forecasts Euro Zone GDP growth at 1.5% in 2015, but risks are to the downside. Euro Zone economic growth by sector (% change) Euro Zone real GDP growth rate (q/q) % 0.5 0.5 0.4 0.4 0.3 0.3 0.1 2014 2015 2016 2017 Real GDP 0.9 1.5 1.7 1.8 Private consumption 0.8 1.7 1.7 1.7 Fixed investments 1.4 2.2 2.1 2.4 Exports 4.1 4.9 3.6 3.7 4.5 5.3 3.9 3.8 Imports 0 Q2 Q3 Q4 2014 Source: Eurostat, Nov. 2015 Q1 Q2 2015 Q3 Source:IHS Global Insight Inc., World Overview, Dec. 2015 7 Japan’s Economy Grow Slightly The Japanese real GDP growth increased 0.3% in the third quarter (-0.1% in the second quarter), mainly because equipment investment grew significantly. Growth will resume in late 2015, led by an upturn in consumer spending and continued growth in residential construction. EIU forecasts that Japan will grow by 1.0% in 2015, increasing to 1.7% in 2016. Japanese economic growth by sector (% change) Japanese real GDP growth rate % 1.5 1.2 1.1 0.5 0.3 2014 2015 2016 2017 Real GDP -0.1 0.7 1.0 0.5 Private consumption -1.0 -0.8 1.2 -0.2 Fixed investments 1.1 0.3 2.6 2.7 Exports 8.3 3.0 2.4 4.1 7.2 0.8 3.2 3.8 0 -0.1 -0.7 -1.5 -1.9 Imports -3 Q1 Q2 Q3 Q4 2014 Source: The Cabinet Office, Dec. 2015 Q1 Q2 2015 Q3 Source:IHS Global Insight Inc., World Overview, Dec. 2015 8 Mainland China’s Economy Continues to Decelerate Mainland China faces overcapacity and industrial structure adjustment to the economic "new normal”. Growth in industrial output, fixed investments, retail sales, and total value of imports and exports in the first to third quarter all slowed, this year's economic growth forecast is less than 7%, a record low since 1990. The Service sector for the first 3 quarters grew by 8.4%, while its share of nominal GDP increased to 51.4%, the final consumption expenditure contribution rate is was 58.4%, showing consumption has gradually become the main driver of China's economic growth momentum. Mainland China’s real GDP growth rate 7.5 % 7.4 7.3 7.2 7.2 7.0 6.9 6.5 Q2 2014 Q3 Q4 Q1 Economic Indicators 2014 2015 Jan.-Nov Industrial Output 8.3 6.1 Investment in Fixed Assets 15.7 10.2 Total Retail sales of Consumer Goods 12.0 10.6 Total Value of Imports and Exports 3.4 -8.5 7.0 7.0 Q1 Growth rates of main economic indicators (% change) Q2 Q3 2015 Source:National Bureau of Statistics of the People’s Republic of China, Oct 20, 2015 Source:National Bureau of Statistics of the People’s Republic of China 9 Taiwan’s Current Economic Situation 10 Economic Growth Slowed Further In Q3 2015, real GDP grew at a rate of -0.63%, lower than the 0.10% previously projected by the Directorate-General of Budget, Accounting and Statistics (DGBAS). Due to the sluggish demand in global consumer electronic products, and the crowding out effect from the expanded supply chain in Mainland China, Taiwan’s commodity exports decreased. The seasonally adjusted annual rate (SAAR) was -1.20%. Real GDP Growth % y/y(%) 10 4.03 6.55 3.63 4.04 1.46 0 -5 5.13 3.66 3.18 SAAR (%) 6.73 6.08 5 forecast 2.51 1.47 4.15 3.31 0.57 4.26 0.80 0.91 -0.63 1.90 -1.20 -1.20 0.49 -4.50 -10 Q1 Q2 Q3 2013(2.20%) Q4 Q1 Q2 Q3 2014(3.92%) Note: : DGBAS also revised the national accounts for 2013 and 2014 Source: Directorate-General of Budget, Accounting and Statistics (DGBAS), Nov. 2015 Q4 Q1 Q2 Q3 2015(1.06%) Q4 11 Foreign Trade Momentum Curbed Total exports contracted by 3.01% year-over-year in Q3 2015, lower than the -0.74% growth in Q2 2015, mainly due to the weak demand in global consumer electronic products, coupled with the crowding out effect from the expanded supply chain in Mainland China. Imports fell by 2.24% from a year earlier, with the decrease in consumption and exports. The Growth Rate of Real Goods and Service Exports and Imports forecast % 10 8 6 4 2 0 -2 -4 -6 export growth Import growth 8.94 5.18 5.22 4.62 4.38 6.44 5.09 6.13 7.54 3.43 6.14 1.74 4.55 4.14 3.61 2.43 2.87 2.90 -2.24 -0.37 0.90 -0.74 -1.09 -3.01 Q1 Q2 2013 Source:DGBAS, Nov. 2015 Q3 Q4 Q1 Q2 Q3 2014 Q4 Q1 Q2 Q3 Q4 2015 12 Major Trade Partners Exports for the first 11 months of 2015 to the ASEAN-6, China (including Hong Kong), Europe, and Japan declined by 14.3 %, 11.9%, 11.6% and 2.9% respectively compared with the same period last year. Changes in Two-Way Trade with Major Trading Partners (y/y%) Total 21.1 2004 8.8 2005 12.9 2006 10.1 2007 3.6 2008 -20.3 2009 34.8 2010 12.3 2011 -2.3 2012 1.4 2013 2014 2.7 2015Jan.-Nov. -10.3 USA 8.3 1.3 11.2 -0.9 -4.0 -23.5 33.6 15.6 -9.3 -1.2 7.1 -1.2 Exports Japan Europe China (incl. ASEAN Total Hong Kong) 6* 11.1 9.4 7.9 -2.2 10.2 -17.4 24.2 1.2 4.2 1.2 3.5 -2.9 14.7 -0.8 10.5 9.7 4.6 -24.6 30.1 6.2 -7.8 -3.5 3.5 -11.6 28.8 12.2 14.8 12.6 33.0 13.8 13.8 16.7 -0.8 7.3 -15.9 -21.5 37.1 37.2 8.1 22.7 -4.4 9.8 2.2 3.9 2.8 1.2 -11.9 -14.3 Imports USA Japan Middle China (incl. ASEAN East Hong Kong) 6* 34.6 47.7 16.2 31.8 28.2 33.6 5.3 36.5 16.2 3.8 8.2 -2.8 0.5 30.1 20.1 10.4 11.0 7.1 11.7 11.9 1.7 8.2 17.0 -0.8 1.2 39.9 10.2 8.0 9.7 -0.7 -42.2 -22.3 -22.8 -27.5 -31.0 -22.1 39.4 47.1 45.6 44.1 39.8 43.3 0.5 14.7 20.5 13.4 12.0 1.5 20.2 -3.8 -3.9 -3.9 -8.4 -8.9 -0.2 6.8 -9.2 0.6 1.6 3.3 1.5 8.8 -3.4 -7.5 12.4 3.4 -16.5 -3.2 -7.2 -41.4 -8.3 -16.1 *ASEAN 6 refers to Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam Source:Ministry of Finance, Dec. 2015 13 Domestic Consumption Growth Slowed Private consumption grew 0.5% from a year earlier in Q3 2015, lower than the 3.55% growth in Q2 2015, while the stock market’s trading value and tourists decreased. forecast Private Consumption Growth y/y, % 5 4 3 2 1 0 Q1 Q2 Q3 2013 (2.34%) Source: DGBAS, Nov. 2015 Q4 Q1 Q2 Q3 2014 (3.33%) Q4 Q1 Q2 Q3 Q4 2015 (3.05%) 14 Domestic Investment Up Slightly Gross fixed capital formation was up by 3.1% year-over-year in Q3 2015, with private enterprise gross fixed capital formation increasing by 5.11%, higher than the -0.64% of Q2. A rise in semiconductor and train locomotive investment was partially offset by a decrease in construction engineering investment. 3 0 Private fixed i nvestment forecast Public enterprise fixed investment y/y, % G o v e r n m e n t fixed i nvestment 20 Gross fixed capital formation 10 0 -10 -20 -30 -40 Q1 Q2 Q3 2013 Total Private enterprises Government Public enterprises Source: DGBAS, Nov. 2015 5.30 7.09 -2.79 2.99 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2014 2015 1.76 3.17 -7.36 5.31 0.93 2.02 -2.53 -6.06 Q4 15 Employment Remains Steady The unemployment rate stood at 3.91% in November 2015, up by 0.01 percentage points over the previous month. The seasonally adjusted unemployment rate increased by 0.05 percentage points to 3.84%. The labor force participation rate increased by 0.01 percentage points over the previous month to 58.74%, up 0.08 percentage points compared with that of a year earlier. % % 59.0 6.0 58.74 58.5 5.5 58.0 5.0 57.5 4.5 3.91 57.0 4.0 Labor force participation rate (left scale) 56.5 3.5 Unemployment rate (right scale) 3.0 56.0 1 3 7 11 5 9 1 7 11 3 2012 2013 2014 2015 9 1 5 11 3 7 1 5 9 3 7 11 5 9 16 Prices Stable Taiwan’s CPI in November 2015 moved up 0.53% compared with the same month last year, mainly due to the 30.5% increase in the vegetables index. In addition, the lowering of gas and electricity prices led to a decline in prices of water, electricity, and gas of 13.65%. Core prices (excluding fruit, vegetable and energy prices) increased by 0.86%. The WPI decreased by 7.75% year-over-year, due to the decline in indexes for petroleum and natural gas. y/y, % 4 0.53 0 -4 -7.75 CPI WPI -8 -12 1 3 5 7 9 11 1 2012 Source: DGBAS, Dec. 2015 3 5 2013 7 9 11 1 3 5 2014 7 9 11 1 3 5 7 9 11 2015 17 Stock Index Continues to Fall The average closing price of TAIEX was 8,502 in November 2015, down by 0.6% from the previous month, while it decreased by 5.7% compared with the same month the previous year. Stock Index Source:Taiwan Stock Exchange, Nov. 2015 18 Prospects for 2016 19 Economy Gradually Improve in 2016 According to DGBAS’s latest estimation in November, GDP growth rate in 2015 is forecast to be 1.06%, down 0.5 percentage points over August’s forecast, mainly due to weak domestic demand and a slump in exports. The world economy is anticipated to perform better in 2016, which will sustain Taiwan's export growth. Moreover, domestic public spending will increase. Real GDP is forecast to grow by 2.32% in 2016. Economic Outlook Contributions to GDP growth rate (percentage points) GDP growth rate (%) GDP growth rate 6.00 6 3.92 3.80 4.00 2.06 4 2.20 2.32 1.06 2.00 2 0.00 0 -2.00 -2 Contributions of domestic demand -4.00 year Contributions of net foreign demand -4 2011 2012 Source: DGBAS, Nov. 2015 2013 2014 2015 f 2016 f 20 Exports Fall in 2015 But Expected to Revive in 2016 Taiwan's exports plummeted due to the sluggish demand in global consumer electronic products, the crowding out effects from the expanded supply chain in Mainland China, and the falling price of crude oil. Real goods and services exports are projected to grow by 0.15% in 2015. With the gradual recovery of the global economy, real goods and services exports are projected to rise by 4.74% in 2016. The Growth Rate of Nominal Goods Exports % 10 5 % (y/y) 2015 growth rate: -10.16% 5.33 6.77 6 0.10 0 -5 Goods and services exports 3.50 4 -9.83 -15 Q1(r) 2 -4.19 -4.18 -10 quarter 8 The Growth Rate of Real Goods and Service Exports and Imports -12.23 -13.87 Q2(r) Q3(p) Q4(f) Q1(f) 2015 Source: DGBAS, Nov. 2015 2016 growth rate: 1.97% Q2(f) Q3(f) 2016 Q4(f) 0.41 5.91 4.74 5.65 0.86 3.4 0 -2 forecast 4.25 0.15 -1.78 -4 year 2012 Goods and services imports 2013 2014 2015 f 2016 f 21 Private Consumption to Remain Stable In the first half of 2015, consumer spending rose solidly because of increasing employment and rising wages, plus increasing numbers of people traveling abroad. However, in 2015 Q3, the weak economic data weighed on consumer confidence. In 2015 Q4, the government launched a consumption-boosting program that will stimulate domestic consumption. Overall, private consumption is projected to rise by 2.55% in 2015. In 2016, private consumption is expected to increase only by 1.76%, owning to the end of the consumption-boosting program and the fallout from a disappointing economy in 2015. The Growth Rate of Private Consumption (y/y) 2015 growth rate: % 2.55% 2016 growth rate: 1.76% quarter Source: DGBAS, Nov. 2015 22 Domestic Investment to Grow Steadily In the first half of 2015, private fixed investment showed only slight growth. In 2015 Q3, semiconductor manufacturers continued to invest in advanced technologies, and increased investment in public transportation will help boost private investment. However, tepid construction investment affected by the slowdown in the housing market will restrain private investment. Private fixed investment is projected to increase by 2.02% and 0.97% in 2015 and 2016, respectively. Government fixed investment is expected to decrease by 2.53% in 2015, but to rise by 3.60% in 2016, mainly due to the government’s expansionary fiscal policy. % The Growth Rate of Private Investment (y/y) 6 5.11 5 4 2.71 3 2.26 2 1.33 0.66 0.73 1 0 -0.04 -0.64 quarter 1 Q1(r) Q2(r) Q3(p) Q4(f) Q1(f) Q2(f) Q3(f) Q4(f) 2015 Source: DGBAS, Nov. 2015 2016 The Growth Rate of Fixed Investment % 10 7.09 Private sector .0 0 -0.35 2.99 0.00 -7.42 5.31 forecast 2.02 3.17 -2.53 3.60 3.60 0.97 -7.36 -2.79 -6.06 10.00 -10.95 Government Public enterprises 20.00 year 2012 2013 2014 2015 f 2016 f 23 Forecasts for Taiwan’s Economy Real GDP (yoy,%) Consumer Price Index (yoy, %) 2015 f 2016 f 2015 f 2016 f DGBAS (2015.11) 1.06 [1.56] 2.32 [2.70] -0.31 [-0.19] 0.84 [0.74] CIER (2015.12) 0.93 [0.90] 2.24 [2.27] -0.31 [-0.46] 0.81 [1.03] TRI (2015.12) 0.98 [3.35] 2.06 -0.33 [0.29] 0.54 Yuanta-Polaris (2015.12) 0.89 [1.15] 1.93 [2.30] -0.28 [-0.21] 0.82 [0.82] TIER (2015.11) 0.83 [3.11] 1.84 -0.43 [0.03] 1.14 IEAS (2015.7) 3.24 [3.38] - -0.33 [0.72] - Global Insight (2015.12) 1.0 [0.9] 2.0 [2.0] -0.3 [-0.3] 1.0 [1.0] ADB (2015.12) 1.0 [1.6] 2.4 [2.6] -0.2 [-0.5] 1.1 [0.5] EIU (2015.12) 1.1 [1.1] 2.1 [2.1] -0.2 [-0.2] 1.7 [1.7] IMF (2015.10) 2.2 [3.8] 2.6 [4.1] -0.1 [0.7] 1.0 [1.3] DGBAS = Directorate-General of Budget, Accounting and Statistics, ROC (Taiwan) ; CIER = Chung-Hua Institution for Economic Research, Taipei ; TRI = Taiwan Research Institute ; TIER = Taiwan Institute of Economic Research, Taipei ; Yuanta-Polaris = Yuanta-Polaris Research Institute ; IEAS = Institute of Economics, Academia Sinica ; ADB = Asian Development Bank ; EIU = Economist Intelligence Unit ; IMF = International Monetary Fund. [ ] indicates the value of previous forecasts 24 Remarks (1/2) Due to continuing weak global demand, Taiwan’s exports have seen double-digit year-on-year contractions in value in most months of 2015. However, domestic demand remains moderate to sustain an economic growth momentum. According to DGBAS’s latest estimation in November, Taiwan’s GDP growth is expected to decrease by 0.63% in 2015 Q3, but to rise by 0.49% in 2015 Q4. In 2015, real GDP is forecast to grow by 1.06%. 25 Remarks (2/2) In 2016, Taiwan's GDP is projected to grow by 2.32% since the world economy is anticipated to perform better in the future. Nevertheless, the Mainland China economy shows a downward pattern, and because emerging markets could face a liquidity crisis, it means caution is still needed in the near future. 26 Taiwan’s Current Fiscal Challenges 27 Our Current Fiscal Situation From 2008 to 2014, the annual expenditure is usually greater than the annual revenue, and the budget fiscal deficit of 2014 was US$ 7.1 billion. If we take the repayment of debt into consideration, the total fiscal deficit is US$ 9.2 billion, which should be balanced mainly by the issuance of debt. US$ billion Debt Repayments Difference between revenues and expenditures 75.0 66.4 60.0 30.0 Revenues Expenditures 63.5 64.0 63.2 62.1 28.0 64.0 58.3 54.7 26.0 24.0 55.7 51.8 45.0 55.6 57.7 56.9 22.0 20.0 49.9 18.0 2.2 16.0 2.20 14.0 30.0 12.0 2.2 15.0 2.2 14.6 3.1 2.6 13.5 8.3 7.6 4.4 3.6 0.0 2008 10.0 2.1 2009 2010 2011 2012 2013 8.0 6.0 7.1 4.0 2.0 2014 0.0 Year 28 However, the outstanding debt in Taiwan has shown an upward trend. The ratio of outstanding debt to the average nominal GDP for the previous three fiscal years increased from 30.7% in 2008, 37.5% in 2013, and 38.1% in 2014, which is approaching to the legal debt ceiling of 40.6%. Therefore, it is quite difficult to balance our fiscal deficit by the issuance of debt. If the government does not adopt any reform measure, we may face fiscal difficulty in few years. 29 Gradual Increase in Statutory Expenditure The statutory expenditures have also shown an upward trend from 2008 to 2014. The overall figures also show that our expenditures are quite rigid and inflexible. US$ billion % 70 60 57 60 57 37 39 30 20 64 65 100 90 50 40 60 65 65.2 39 42 68.9 69.9 44 44 45 80 68.8 69.9 69.5 64.5 70 60 10 0 50 2008 2009 2010 2011 General budget expenditure 2012 2013 2014 Year Statutory expenditure Ratio 30 Increase in Expenditures due to Change in Major Policies Moreover, the structure of the population is changing. For example, a low fertility and an aging population are having an impact on related policies. In addition, we are planning to implement the major policies of “12-Year National Fundamental Education” and “Long-Term Care” among others. And, thus, we expect that the related expenditures will be on the increase. Impact of a low fertility and aging population on major policies Increase in related expenditures Plans to implement major policies of “12-Year National Fundamental Education” and “LongTerm Care,” etc. 31 Revenue Structure and Tax Burden Ratio As for our revenue structure, tax revenue composes the main part of the revenues. The ratio of tax revenue to total revenues was 70.4﹪in 2013. However, our tax burden ratio was only 12.6% in the same year. This means that there is still room for raising tax revenue. Revenue Structure Tax Burden Ratio % US $ billion 50 45 40 35 30 25 20 15 10 5 0 General budget tax revenue Tax burden ratio 41.43 42.68 42.38 40.11 40.74 13.9 35.05 36.08 15.0 14.5 14.0 13.5 12.9 12.8 12.6 13.0 12.5 12.3 12.0 12.0 11.5 11.0 2008 2009 2010 2011 2012 2013 2014 Year 32 Remarks (1/5) We think there are three main challenges to Taiwan’s fiscal account, which lead to concern over continued fiscal deficits and rising government debt level. (1) Sub-trend GDP growth With its high export dependency, Taiwan’s economic growth is negatively affected since the onset of the global credit crisis in 2008. Weakened consumption demand in the developed markets have been negatively affecting Taiwan’s export sector and the overall economy. 33 Remarks (2/5) The growth slowdown has impacted the fiscal accounts in two ways: First, it has slowed the growth in fiscal revenue. Taiwan’s general government net revenue growth has slowed to 0.8% per year from 2008 to now, compared to 3.8% per year from 2004 to 2007. Second, it has expedited the growth in fiscal expenditure. Because of the slowdown in growth, the government has to allocate more spending on infrastructure projects to boost the economy. As a result, net general government expenditure growth has accelerated to 3.5% per year between 2008 and now, up from 0.9% per year between 2004 and 2007. 34 Remarks (3/5) (2) Low tax burden Taiwan’s tax revenue represented only about 12.2% of GDP in 2012, which is much lower than other countries. 35 Remarks (4/5) (3) An aging population We think an aging population is the most serious challenge to Taiwan’s fiscal condition in the coming years. According to the Council for Economic Planning and Development (CEPD), Taiwan’s population is expected to rapidly age starting from 2013 onwards. The percentage of old-age population (defined as age 65 and above) is expected to rise from 11.5% of the total population in 2013 to 14.6% in 2018, and continue rising in subsequent years. At the same time, the working-age population (defined as age 15 to 64), is expected to shrink from 74% of total population in 2013 to 72.7% in 2018. The old-age dependency ratio is hence expected to drop from around 6.4 in 2013 to 4.9 in 2018, and continue deteriorating. 36 Remarks (5/5) The aging of Taiwan’s population is structural, which makes it very difficult to alter by the government over the medium term. This should have serious implications on the government’s tax revenue, and more importantly, on the government’s social security and pension-related spending. In 2011, social security and pension expenditure represented 5.5% of GDP and 28.7% of the general government net expenditure. The ratios are projected to rise further to over 7% of GDP and 33% of government expenditure in 2018 as the population ages, assuming no effective reform measures are introduced to avert the trend. 37 Part II 38 Contemporary Issues of Population in Taiwan (Special thanks to Prof. Jr-Tsung Huang for sharing this PPT) I. Overview The age composition of population has become a major issue in countries. Based on the definition from World Health Organization (WHO), the percentage of elders over 65 years old > 7% : Aging 14%: Aged 20%: Super-Aged Elderly Population 22.0 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Total, % of population, 2014 Changes in people structure toward aging will affect the macroeconomic interior, especially the government fiscal, and might have economic loss from a declining working-age population. According to the data, the total population in Taiwan was last recorded at 23,492,074 people in 2015 from 15,927,167 in 1974, changing 47.4% during the last 51 years. Based on medium-variant projected population, the peak population of Taiwan will reach 23.5–23.6 million during 2019–2026, representing an increase of 100,000–230,000 over 2014. By 2060, the population will have fallen to approximately 16.9–19.5 million, approximately 72%– 83% of the population in 2014. However, based on medium-variant projection, negative population growth will occur in 2019 at the earliest and in 2026 at the latest. II. Significant Decline in Fertility Figure 3 presents a time trend of general fertility rate (GFR, hereafter) and total fertility rate (TFR, hereafter) of Taiwan during 1981-2014. TFR has been lower than replacement level of 2.1 since 1985. In 1985, the TFR was 1.88. It was even lower than 1 in 2010, only 0.895. General fertility rate (GFR) the number of births in a year divided by the number of women aged 15–44, times 1000. It focuses on the potential mothers only, and takes the age distribution into account. Let B = Number of birth Let W15-44 = Number of women of reproductive ages Total fertility rate (TFR) the total number of children a woman would bear during her lifetime if she were to experience the prevailing age-specific fertility rates of women. TFR equals the sum for all age groups of 5 times each ASFR rate. Age Specific Fertility Rate (ASFR) = (Number of births to women in age group i / Number of women in age group i) x 1000 Total Fertility Rate (TFR) = (The sum of the ASFR x The number of years in each age group) / 1000 Interestingly, the fluctuations of both fertility rates shown in Figures 3 follow Taiwanese people’s preference of some peculiarly Chinese characteristics. For example, Dragon is most auspicious, but Tiger is most stigmatized. Snake is also less auspicious. Therefore, every Taiwanese parent is hoping to have a Dragon baby, but not a Tiger baby. Rat Ox Tiger • Positive aspects: Intelligent, Charming and Confident • Negative Aspects: Jealous, Selfish, Ruthless • Positive aspects: Hardworking, Loyal, Patient, Good Hearted • Negative Aspects: Critical, Petty and Vain • Positive aspects: Independent, Productive and Loyal • Negative Aspects: Stubborn, Anxious and Moody Rabbit • Positive aspects: Wellmannered, caring and sensible • Negative Aspects: Insecure, Pessimistic and Sly Dragon • Positive aspects: Intelligent, Charming and Confident • Negative Aspects: Jealous, Selfish, Ruthless Snake • Positive aspects: Hardworking, Loyal, Patient, Good Hearted • Negative Aspects: Critical, Petty and Vain Horse • Positive aspects: Independent, Productive and Loyal • Negative Aspects: Stubborn, Anxious and Moody Sheep Monke y • Positive aspects: Wellmannered, caring and sensible • Negative Aspects: Insecure, Pessimistic and Sly • Positive aspects: Intelligent, Charming and Confident • Negative Aspects: Jealous, Selfish, Ruthless Rooster Dog • Positive aspects: Hardworking, Loyal, Patient, Good Hearted • Negative Aspects: Critical, Petty and Vain • Positive aspects: Independent, Productive and Loyal • Negative Aspects: Stubborn, Anxious and Moody Pig • Positive aspects: Wellmannered, caring and sensible • Negative Aspects: Insecure, Pessimistic and Sly According to DHRD (2014), it is shown in Figure 6 that after the curves of the crude birth rate and crude death rate intersect in 2019, the natural population increase will be zero and start to shift from naturally increasing to naturally decreasing. More seriously, the rate of natural population increase (RNPI=CBR-CDR) is expected to be –13.3‰ in 2060. Late marriage and childbearing are factors causing such low fertility rate in Taiwan. Therefore, during their peak period of fertility, most women are still studying in college or university. The average age for female to have their first childbirth was 22.9 years in 1975, increased to 30.5 years in 2014. Another factor causing low fertility rate is the increase in female labor force participation. Figure 7 indicates that the female labor force participation rate increased by 11.61% over the past 37 years, from 39.13% in 1978 to a historic high of 50.74% in 2015 It is thus roughly speaking that in Taiwan the birthrate declined as more women joined the work force. Taiwanese women exhaust themselves struggling on several fronts: their jobs, household work and family duties. With the burden of childrearing and family care resting on their shoulders, Taiwanese women face heavy physical and mental pressure. % 80 75 70 65 60 55 50 45 40 35 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 All Source: National Statistics, ROC, Taiwan. Male Female FIGURE 7: Labor Force Participation Rate By Gender (1978-2015) Year III. The Coming Aging and Aged Era According to Figure 8, the share of Aged 65 and above has an upward trend during 1980 to 2060. Taiwan has been considered as an aging country since 1993. Taiwan is further forecast to become an aged society and super-aged society in 2018 and 2025, respectively. As pointed out by Hsueh and Wang (2008), the aging rates will grow faster in Taiwan than in most of the developed regions in the future. It will take only 25 years for the aged portion of the Taiwan population to rise from 7% to 14%, second only to Japan (taking only 24 years) in terms of the shortest time span. Taiwan’s population aging is the result of low death rate due to advance medical technology, low birth rate, and prolonged life expectancy. Figure 9 shows the life expectancy of all Taiwanese, male and female people. Years 85 83.19 83 81 79.84 79 76.72 77 75 73 71 69 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 Both Male Female FIGURE 9: Life Expectancy of Taiwan by Gender (1981-2014) Source: Department of Household Registration Affairs, Ministry of Interior, ROC, Taiwan. Year IV. Challenges Caused by Population Problems It is imperative for Taiwan to think ahead and be prepared for the major issues that an aged society will have to face, such as aging labor force, higher education, dependency ratio, the pension crisis, healthcare reform, and long-term care. The Decline in Working Population According to by DHRD (2014), it is shown in Figure 11 that the pink line representing the number of elderly will be steeper after 2016 than before. It means that the aging problem will be more serious after 2016 when the proportion of the population represented by the elderly will exceed that represented by children, and then continue to rise. 4.2 Challenges of Higher Education Prior to 1994, The government implemented rather strict controls over the establishment of new higher education institutions (HEIs, hereafter). Beginning in the mid-1990s, higher education in Taiwan experienced a period of unprecedented expansion in response to global competition, domestic political elections, and rapid social change. According to Tsai (2010) and Chang (2014), many private HEIs, especially in more remote areas, have found themselves confronted with a serious shortage of student recruits and a dozen HEIs have encountered operational difficulties arising from this shortage. is expected that more universities – up to one-third of the total – will likely face forced closures or mergers after 2016, when the size of the 18 year old cohort declines for the first time. It Changes in the Dependency Ratio According to DHRD (2014), it is shown in Figure 12 that according to the total dependent population (the child and elderly population), every 100 persons of working age (15-64 years) needs to support is approximately 35.28 people in 2015. With the rapid growth of the elderly population, this figure will increase to approximately 96.9 people by 2060. By 2016, the old-age dependency ratio will surpass the young-age dependency ratio, meaning that elderly people will outnumber unemployed youth. Figure 13 shows the population pyramid of Taiwan in 1960, 2015, and 2060. One can observe the changes in the shape of population pyramid of Taiwan over time. In 1960, 2015, and 2060, there are approximately 21, 5.9, and 1.3 people in their prime to support one elderly person, respectively. 77 Crisis of Pension Funds According to the Ministry of Finance (MOF, hereafter), the government had a general budget of NT$1.95 trillion in 2015, and NT$141.8 billion is allocated to the pension fund. The real threat to pension system is Taiwan’s demographics. Although population aging is a universal phenomenon, the problem is particularly severe in Taiwan. Using the public servant pension fund as an example, the public servant pension fund is reserved for the nation's retired civil servants, military personnel and public school teachers. The public servant pension fund was reported to run into a deficit for the first time in 2015. For labor pension schemes, it will be similarly burdened by the sheer number of recipients. And there will be fewer workers contributing tax dollars to support the whole system. Medical Care of Elder Chen (2010) indicated that regardless of sex, healthcare expenses grow with age. In Taiwan, the average healthcare cost was approximately NT$27,433 per person per year in 2005. The cost for an elderly person aged 60–69 years and that of an elderly person aged over 70 years were, respectively, three and five times higher than the average cost. Chen et al. (2013) pointed out that currently, according to government statistics, Taiwan spends no more than 7% of its GDP on health care, whereas during 1996– 2008, there was a 38% increase in the older population (people age≥65 years) and the healthcare expenditure increased by 169% in this age group. In the next 13 years, Taiwan’s older population will double, and the current healthcare system will definitely collapse if no healthcare reform is conducted in the future. V. Concluding Remarks The demographic dividend which powered Taiwan’s growth in the 1970s and 1980s is now turning into a demographic deficit. Taiwan needs well preparations for dealing with challenges stemming from its low birth rate and rapidly aging population. Part III 84 The Sound Finance Program 85 The Sound Finance Program Measure Control of the financing amount from the yearly debt Estimation of the yearly loan cap based on GDP growth rate Restructuring of expenditures Promotion of PPIP Review of statutory and non-statutory expenditures Enhancement of the operational efficiency of public-owned enterprises Multiplication of channels for the cultivation of sources of revenue PPIP: Private Participation in Infrastructure Projects Review of the policy of privatization and release of public-owned shares Activation of public-owned assets Realization of the principle of user charge Appropriate tax reform to inject revenues 86 Measures Control of the financing amount from the yearly debt Debt ceiling : 40.6% Estimation of the yearly loan cap based on the GDP growth rate Restructuring of expenditures Review of statutory and non-statutory expenditures Promotion of PPIP (Private Participation in Infrastructure Projects) As regards to control of the financing amount from the yearly debt, due to the debt ceiling, we will estimate the yearly loan cap based on the GDP growth rate so as to control the financing amount from the yearly debt. As for the restructuring of expenditures, we are not only reviewing statutory and nonstatutory expenditures to reduce inefficient expenditures, but are also encouraging private participation in infrastructure projects to reduce expenditures. 87 Measures Multiplication of channels for the cultivation of sources of revenue: Enhancement of the operational efficiency of publicowned enterprises Review of the policy of privatization and release of public-owned shares Activation of public-owned assets Realization of the principle of user charges Appropriate tax reform Among the channels for the cultivation of sources of revenue, we are enhancing the operational efficiency of public-owned enterprises so as to increase their earnings. Furthermore, we are reviewing the policy of privatization and the activation of public-owned assets to increase revenues from public-owned properties. In addition, we are realizing the principle of user charges to increase revenues from fees. 88 Moreover, we focus on adjusting the tax system to collect sufficient revenues. Tax Reform for Fiscal Sustainability and Economic Restructuring 89 Tax Reform for Fiscal Sustainability and Economic Restructuring Rationales To achieve fiscal sustainability and carry out economic restructuring, we are conducting a reform of our tax system implemented as follows: Feedback tax Fiscal Sustainability Economic Restructuring Reduction of the tax burden of low income people Tax incentive to meet the need for economic restructuring 90 Fiscal Sustainability - Feedback Tax Increase in the taxation of high-income people Dividends: full imputation partial imputation Taiwan used to operate an imputation tax system in relation to the taxation of dividend income for resident individual shareholders. That is, when a domestic enterprise distributes dividends to resident individual shareholders, income tax paid at the corporate level is treated as imputation tax credit, which can be fully offset against the resident individual shareholder’s income tax liability. 91 Fiscal Sustainability - Feedback Tax Considering the Full Imputation Method adopted in our Integrated Income Tax System before gave more advantage to high-income people whose main income was dividends. Under the proposed amendment, the imputation tax credit which can be offset against the resident individual shareholder’s income tax liability will be reduced by one-half. 92 Fiscal Sustainability - Feedback Tax Increase in the taxation of high-income people. In the past, an individual with annual net taxable income over TWD 4.4 million is subject to a progressive tax rate of 40%. Currently, an individual’s annual net taxable income exceeds TWD 10 million, the applicable progressive tax rate will be increased to 45%. Net Taxable Income of year 2015 (NT$) Tax Rate 0 - 520,000 5% 520,001 - 1,170,000 12% 1,170,001 - 2,350,000 20% 2,350,001 - 4,400,000 30% 4,400,001 -10,000,000 40% 10,000,001 and above 45% 93 Fiscal Sustainability - Feedback Tax Increase in the taxation of profitable industries Business taxes imposed on banking and insurance industries are increased from 2% to 5%. The 2% business tax for other financial industries, such as the investment trust industry will remain unchanged. 94 Fiscal Sustainability - Reduction of the Tax Burden of Low Income People Increase of certain deductions (e.g. standard deduction, special deduction for wage income, etc.) with an aim to improve income distribution. The tax reform package includes a raise of the income tax credit from NT$79,000 to NT$90,000 for salaries or wages and from NT$108,000 to NT$128,000 for the disabled or handicapped. The MOF estimates that over 6.47 million taxpayers could benefit from it, reducing a little the inequality gap between wage earners and capital holders. 95 Economic Restructuring-Tax Incentives Enhancement of employment opportunities Provision of 130% of the salary of newly recruitment as deductible expenses Industrial restructuring Tax credit for R&D 15% tax credit within 1 year Or 10% tax credit within 3 years 96 Economic Restructuring-Tax Incentives Removing obstacles in the movement of goods, people and capital -- Setting-up of Free Economic Pilot Zones (FEPZs) In respect of “goods”: Foreign enterprises carry the limited logistic functions and export the goods -exempt from income tax In respect of “people”: Qualified foreign experts 50% of the salary is tax exempted in the first 3 years In respect of “capital”: The earnings distributed by locally-owned overseas enterprises back to local shareholders for real investment: tax exempt 97 Thank you 98