US embassy cable - 05TAIPEI498

UNCLAS SECTION 01 OF 03 TAIPEI 000498 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA 
 
USTR FOR SCOTT KI 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/ZELIKOW AND WISNER 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EINV, EFIN, ECON, TW 
SUBJECT: Revenge of the Budget Cutters 
 
SUMMARY AND COMMENT 
------------------- 
 
1.  (SBU) Taiwan's Legislative Yuan (LY) passed the 
government's 2005 central budget during its final session. 
The opposition Kuomintang (KMT) Party and People First Party 
(PFP) used their legislative majority to slash funding for 
some government agencies.  The deepest cuts seemed 
politically motivated.  The cuts will slow Taiwan's 
privatization of state-owned enterprises (SOEs) and efforts 
to promote research and development.  The final LY session 
was more notable for what it did not do than for what it 
accomplished since it failed to even consider most pending 
legislation, including several bills of economic importance 
such as the creation of a National Communications 
Commission, re-funding the Financial Reconstruction Fund, 
and a bill for reorganization of the executive branch.  The 
LY performance in its final session demonstrated again how 
preoccupation with narrow political issues is blocking 
progress on Taiwan's national priorities.  END SUMMARY AND 
COMMENT. 
 
Day Late, Dollar Short 
---------------------- 
 
2.  (SBU) The LY passed the 2005 central government budget 
just before midnight January 20, 2005 during a marathon 
final session that lasted 28 hours.  The approved budget 
slashed the Chen Administration's 2005 funding request by 
nearly 5% (NT$71.6 billion (US$2.2 billion)) to NT$1,402.7 
billion and cut spending by a little under 2% (NT$27.2 
billion to NT$1,625.6 billion).  It was the biggest cut in 
the central government budget in three years and will 
increase Taiwan's 2005 budget deficit to NT$277.3 billion, 
more than had been projected in the Administration's budget 
proposal, but still less than the 2004 deficit.  The 2005 
fiscal deficit, which includes the budget deficit plus debt 
repayment, will reach NT$336.1 billion. 
 
3.  (SBU) Taiwan's Budget Bureau section chief Lin Shuen-yu 
told AIT/T the deficit would be financed by NT$255 billion 
of bonds with the remaining NT$81.1 billion coming from past 
government savings.  Lin estimated that outstanding debt 
would reach NT$3,668 billion or 35.7% of GNP by the end of 
2005, a lower percentage than found in most developed 
nations and much lower than Singapore's 112% or Japan's 
whopping 169%, although higher than South Korea's 21%. 
 
Retaliation Against Key Agencies 
-------------------------------- 
 
3.  (SBU) Local media speculated that the funding cuts were 
retaliation by the opposition parties against government 
agencies that acted contrary to the opposition party 
interests.  Reports noted that the Government Information 
Office (GIO) fought to take broadcast channels away from the 
KMT-owned Broadcasting Corporation of China, and was 
punished with the deepest budget cut, nearly 13% less than 
the requested funding level.  GIO Director General Lin Chia- 
lung's representational fund was totally removed and funding 
for legalization of underground broadcasting stations (which 
would acquire frequencies taken back from the Broadcasting 
Corporation of China) was cut in half.  The LY also cut by 
half funding for GIO public interest programs, which 
broadcast numerous pro-administration reports during the 
March 20, 2004 presidential election campaign.  Proposed 
funding of NT$12 million for the GIO's press release and 
coordination program, which also distributed pro- 
administration political material, was cut by 95% to only 
NT$0.6 million. 
 
Education and Justice Targeted 
------------------------------ 
 
4.  (SBU) The opposition-controlled LY also slashed the 
budget for operations controlled by the Education Minister 
Du Chen-sheng and National Physical Fitness Council Chairman 
Chen Chuan-shou.  Opposition KMT/PFP parties were reportedly 
upset with these officials' strong support of the ruling 
party and their efforts to promote local Taiwan history and 
geography in school textbooks.  The judiciary was also 
apparently targeted for partisan reasons.  In December 2004 
Taiwan's high court ruled that the committee formed by the 
LY to investigate the election-eve shooting of President 
Chen Shui-bian and Vice President Annette Lu was 
unconstitutional.  Local media saw it as retaliation that 
the LY stopped all funding for allowances and overseas trips 
for all of the high court's justices. 
 
Economic Impact 
--------------- 
 
5.  (SBU) The LY approved budget cut by 20% funding for 
Ministry of Economic Affairs (MOEA) efforts to promote 
private research and development activities.  The cut will 
prevent research and development spending from reaching the 
announced target of 3% of GDP by 2008.  Other cuts included 
total elimination of revenues from sales of equity shares in 
state-owned enterprises, removing the legal basis for the 
privatization programs being conducted by the MOEA and MOF. 
The LY also passed a resolution to block increases in 
national health insurance premiums without express consent 
of the LY, a move that will make it more difficult to 
resolve the national health insurance system's financial 
problems. 
 
COMMENT 
------- 
 
6.  (SBU) The 2005 budget, and the hundreds of bills not 
even addressed by the LY, signal continued political 
gridlock over national economic priorities.  Longstanding 
efforts to address pressing economic issues - financial 
sector reform, privatization and R&D policy - have once 
again been set aside as the major political parties jockey 
for position.  While the Administration has put in place a 
new financial supervisory system, it has failed to secure 
funding to deal with the several banks already taken over by 
bank regulators and additional banks and credit coops that 
are very weak.  Taiwan's stuttering steps towards WTO- 
mandated privatization of state-owned enterprises have again 
been blocked.    In addition, Taiwan's Department of Health 
will find it more difficult to address the deficit spending 
of the national health insurance program.  These are further 
another examples of politics impeding the implementation of 
already established policy.  The inability of the government 
to pursue a coherent macro economic strategy will have 
negative consequences for Taiwan's long-term economic 
health.  The increased budget deficit and the consequent 
rise in interest rates will have a negative effect on the 
competitiveness of Taiwan firms. 
 
PAAL