US embassy cable - 05TAIPEI2887

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 002887 
 
SIPDIS 
 
STATE PASS AIT/W 
 
E.O. 12958: DECL: 02/01/2015 
TAGS: PREL, PGOV, MARR, CH, TW, Military Issues, Cross Strait Politics, Domestic Politics, Foreign Policy 
SUBJECT: PRESIDENT ENDORSES INCREASE IN DEFENSE SPENDING 
 
REF: TAIPEI 2745 
 
Classified By: AIT Acting Director David J. Keegan, Reason: 1.4 (B/D) 
 
1. (C) Summary: President Chen Shui-bian endorsed a proposal 
to move Taiwan's defense spending towards 3.0 percent of GDP 
during a closed-door June 29 National Security Council (NSC) 
meeting attended by the Premier and other senior Executive 
Yuan (EY) officials.  NSC officials who proposed the increase 
told AIT that the President's endorsement should help 
Minister of National Defense (MND) Lee Jye in upcoming 
negotiations with the EY over the FY2006 budget.  In addition 
to backing a medium term increase in defense outlays, 
officials at the June 29 NSC meeting also agreed in principle 
to allow MND to keep the proceeds from the sale of MND 
property around the island.  In the past, proceeds went into 
the EY's general coffers, making MND reluctant to dispose of 
its considerable stock of under-utilized property.  NSC 
officials express cautious optimism that defense spending can 
reach the 3.0 percent of GDP target in 2-3 years, but say 
that it will be difficult to secure Legislative Yuan (LY) 
approval for funding levels higher than that.  End Summary. 
 
Setting the Direction 
--------------------- 
 
2. (C) NSC Senior Advisor (responsible for political and 
media affairs) Lin Jin-chang told AIT that President Chen 
Shui-bian offered an unambiguous endorsement for increasing 
Taiwan's regular budget levels during a June 29 NSC meeting 
convened to discuss the defense policy portion of the 
proposed National Security Report (Reftel).  Lin said that 
the NSC proposed increasing Taiwan's defense spending to 3.0 
percent of GDP over the next several years.  This target, he 
continued, would include funding from the annual defense 
budget and the proposed Special Defense Procurement Budget, 
but exclude money earmarked for veterans welfare.  The June 
29 meeting was attended by senior NSC officials and cabinet 
members in addition to President Chen, Vice President Annette 
Lu, and Premier Frank Hsieh. 
 
3. (C) Lin noted that the President's June 29 remarks should 
give MND Minister Lee Jye a major leg up in upcoming budget 
negotiations with the EY.  The EY traditionally makes 
significant cuts to budget requests submitted by individual 
ministries before forwarding the general budget to the LY in 
September.  The EY generally seeks to make reductions uniform 
across ministries, unless there is a compelling political or 
policy reason to favor an individual account.  Lin said that 
last year, MND was told by then-Premier Yu Shyi-kun that MND 
should be happy with its flat-line budget, since most other 
ministries were forced to reduce spending from FY2004 levels. 
 
4. (C) Lin said the President's clear instruction, in the 
presence of the Premier, Finance Minister, and other EY 
leaders, should provide Hsieh the political cover he needs to 
buck tradition and support an increase for MND.  "He can tell 
other ministries that he is simply following the President's 
orders and absolve himself of all blame," Lin said.  The key 
now will be follow-up, Lin added.  "Lee Jye is a straight 
guy, but not the best political operator around," Lin 
remarked, "we (the NSC) may need to stiffen his spine a bit 
before he goes head-to-head with the EY." 
 
Creative Accounting 
------------------- 
 
5. (C) NSC Senior Advisor (and former LY Defense Committee 
Co-chair) Chen Chung-hsin told AIT that the June 29 meeting 
also discussed increasing MND's funding from off-budget 
sources.  Chen said that the most important decision at the 
meeting was agreement by the EY to waive rights to the 
proceeds of MND land sales.  Chen noted that MND has been 
unwilling to sell off expensive properties it owns around the 
island (including two large lots in the high-priced vicinity 
of AIT) because the proceeds previously went into the 
government's general coffers.  Selling or leasing this land 
could provide MND with an immediate inflow of cash for both 
procurement and operational accounts, he added. 
 
Spending More, Spending Smarter 
------------------------------- 
6. (C) Coming out of the June 29 meeting, Chen expressed 
confidence that the EY would request, and the LY would 
approve, increases in defense spending to 3.0 percent of GDP 
through the regular and multi-year special budget processes 
by FY2008-9.  Chen noted, however, that increases beyond 3.0 
percent would be a much harder political sell.  Given this 
reality, Chen asserted that Taiwan's military needs to focus 
more on managing its spending priorities.  During the June 29 
meeting, Chen said he argued for a review of pending 
procurement programs with an eye towards withdrawing requests 
to purchase certain systems, such as Apache attack 
helicopters and Paladin artillery systems.  He added that 
Taiwan needed to husband resources in order to fund the 
replacement of aging fighter aircraft, upgrade C4ISR systems, 
and prepare for possible USG approval for the sale of Aegis 
destroyers. 
 
Comment: Step Forward 
--------------------- 
 
7. (C) There seems to be a quiet consensus emerging in favor 
of increasing defense spending over the medium term, at least 
among those directly involved in the defense policy process. 
Ruling and opposition leaders on the LY Defense Committee 
have told AIT they are willing to endorse sustained increases 
in MND funding, as long as they can be convinced that the 
ministry has its priorities right.  Of course, this 
apparently reasonable caveat has been the hook for much of 
the protracted opposition to the Special Defense Budget.  The 
President's intervention is also a positive development. 
Last year, the NSC tried to back the MND in its budget battle 
with the EY, but the President appeared to remain on the 
sidelines.  AIT will seek opportunities to assist those in 
the Taiwan government seeking a strategic increase in 
Taiwan's defense outlays, focusing our immediate efforts on 
persuading the EY leadership to accept proposed spending 
increases by MND.  We will also register with the new KMT 
Chairman elected on July 16 that leadership on defense 
spending is the most effective way to establish credibility 
with Washington. 
KEEGAN