Your children will pay for budget gap

September 19, 2012

As our coal exports have basically stopped and the “Dutch disease”is relapsing in our economy, budget revenue has fallen to leave a gap of MNT 1.2 trillion (almost one billion USD).
The parliament made amendments to the 2012 budget law of Mongolia last Friday. It looks like that the amendment was aimed at reallocating the spending power of ministers after the merging and separating of ministries according to the new structure of the cabinet rather than making preparations for the coming crisis.
The public budget inherited from the former administration had a spending that made up 40 percent of GDP and a deficit equaling three percent of it. After the amendment, its revenue reduced by MNT 694.4 billion to MNT 5631.7 billion and it’s spending also decreased by MNT 155.5 billion to MNT 6312.2 billion. As a result, the budget deficit was increased by MNT 317.8 billion reaching MNT 781.9 billion, which equals 4.8 percent of GDP.
While budget deficit is growing with a crisis on its way, it is demanded that we cut our spending at least as much as the budget revenue shortage, try not to have more deficit and increase our foreign exchange reserves. But, why is the new government taking the exact opposite actions?
The only changes the government made were how much would be divided between whom and how it would be spent. They never mentioned about where and how this money would be acquired, how to use it wisely, how the crisis will be handled or how much would be put into reserves. In order to overcome the budget deficit, the new government has decided to get loans through issuing bonds on the international market and to increase taxes.It is absolutely needed to maintain a strong supervision on politicians who are pursuing a policy to stop the operations of foreign companies that are dragging our economy forward. It looks like such those politicians are trying to misuse public property for their own good.
Government operations have to be efficient, capable and transparent regardless of what political party has the ruling power.

On borrowing more

The Development Bank of Mongolia raised USD 580 million after its debut of issuing government guaranteed bond on the international market.We have spent six months losing MNT 100 million every day paying the loan interest because there were no calculations or whatsoever about how the loan would be used. A month ago, we finally started spending this money: MNT 100 billion on railroad construction and MNT 50 million on building new apartment buildings.
Both the chairman of the board and the chief executive officer of the bank had resigned to honor their code of professional ethics and objecting to using the loan for fulfillment of election promises.The Chief Executive Officer of Erdenes Tavantolgoi LLC has already given in MNT 410 billion revenue of the company under pressure from the government.
The new government has made a decision this weekthat the Development Bank should issue additional bond worth USD 5 billion. Although N.Batbayar, the new Minister of Economic Development, proposed that the government should be issuing its own bonds, they viewed that the Development Bank, not the government, should be the one to do it during a crisis. They say that, even though the interest rate of those bonds will be high, it will be spent mid to long term on accelerating the economy, making long term investments for development and promoting exports rather than making up for the budget spending.
This Minister is going to get a loan that will be paid by our children in the future and spend it on making construction investments, accelerating the economy and financing an import substitution and export promotion policy. Furthermore, the money will be spent on project finances of the national railroad network, Sainshand industrial park, Tavantolgoi mine and other huge industrial and infrastructure projects.
While getting a loan on the behalf of its citizens and wasting it, the government, which is not even able to build proper roads, is taking a risky action to imagine that heavy industries such as steel and cement ones would be built and their product would be introduced on the international market and China would buy them right away.The private sector, not taxpayers, should be bearing this risk and the implementation has to be done through domestic and foreign direct investment. Infrastructures such as transportation and electric power can be invested by the government and be delivered at doorsteps of industrial parks.
There is a strong need to draw a line in between what exactly the government has to do and not to do at all. The government should not be involved in things that can be done by the private sector. Their task is to provide people with all conditions and standards essential to social welfare and make sure of their implementation.

On tax increase

In order to fill the budget gap, the government is actively looking for means to increase its revenue rather than implementing spending cuts and freezing some of its investments. Excise taxes imposed on alcohol, tobacco and petrol have already been raised. Apparently, in spite of being incapable of collecting the existing taxes, they are going to create new ones.
A clear example of a law that is disappearing due to lack of implementation is the Value Added Tax (VAT) Law. This law has played a significant role in strengthening the underground economy and encouraging corruption. About 5000 directors and accountants from 2000 companies who either failed to obey or misused this law to gain unlawful profits are being held responsible for their actions. This is the ending of this law, butit looks like that the law will vanish and commercial tax is most likely to replace it.
Can you remember the Democratic Party’s election promise to collect one percent tax from small and medium enterprises?As of 2011, one third of 66 thousand economic entities in Mongolia paid MNT 3.1 trillion for taxes, 90 percent of which was paid by 330 companies (two percent of all economic entities) only.
This means that imposing one percent tax on small and medium enterprises (enterprises with less than nine employees) will not make a significant difference in income. However, it will contribute to acquiring reliable information, which is the main purpose of VAT. Furthermore, the cost of collecting tax will decrease because small companies will not cause a problem when they pay one percent tax. We should always remember that paying taxes creates responsibility.
Whether the government is efficiently spending the collected tax or not always has to be clear. Let us look at the above example again. How should we see the fact that the government does not know a single thing about not 200, but 2000 companies escaping from taxes? Can the government carry out its main task to enforce laws? Why are the tax-paying companies suffering while those that avoid taxes are gaining? Which of them will win when there is a low cost competition in the market?
Another example: Is there any need to speak of quality of buildings or safety when not eight, but 80 constructions can be built without a permit in Ulaanbaatar? Why does anyone have to be granted a construction permit when they already have a land permit? There would not be a problem if they informed of building layouts and plans accordingly, announced safety standards and stopped any construction in case of a violation.Who else other than government officials (soon to be called “public servants”) gains from inventing a permit that can only be granted after two or three years of trying?
It is time the government planned its budget not only in terms of input, but also in terms of output and impact it would bring to community and society and implemented it based on result-based management. If the government talked about responsible managing instead of robust spending, everyone would get a better idea. In which ministry in the Government of Mongolia the economic risk management team exists?
Let us call for our new government to plan the budget so that it will be efficiently spent without deficit, tie budget revenue to its spending and properly manage potential risks.

Translated by B.AMAR

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