BUDGET DEFICIT IN VIETNAM, FACTS AND SOLUTION

VIETNAM GENERAL CONFEDERATION OF LABOR TON DUC THANG UNIVERSITY BUSINESS ADMINISTRATION MACROECONOMICS REPORT BUDGET DEFICIT IN VIETNAM, FACTS AND SOLUTION Instructor: Pham Van Quynh Class: Macroeconomics Group: 21 Ho Chi Minh City, December JOB ASSIGNMENT SHEET Full name Student code Work section Percent of work Le Ngoc Minh Anh 721D0046 Report Presentation 100% Nguyen Tuan Bao 720I0133 Make powerpoint Find pictures and figures Vu An Phong 721D0018 Do part 1: The concept of budget deficit Nguyen Vu Hoang Phuong B20I0093 Nguyen Tien Dat B20I0135 Do part 2: The fact of VN’s budget deficit 100% 100% 100% Do part 3: Solutions to VN’s budget default Page BUDGET DEFICIT IN VIETNAM, FACTS AND SOLUTION I INTRODUCTION STATE BUDGET DEFICIT IN VIETNAM, FACTS AND SOLUTION II A The concept of budget deficit The definition of State budget & budget deficit: Causes of budget defict: Impacts of budget deficit on economy III THE FACT OF VIETNAM'S BUDGET DEFICIT Vietnam has a continuous budget deficit for more than 10 years in the period 20 State budget deficit due to Covid-19 pandemic SOLUTIONS TO VIETNAM'S BUDGET DEFAULT IV A Government issues more money Issue more money Advantage and disadvantage B Use the national foreign currency reserve fund Concept: Types of foreign exchange reserves Foreign exchange reserves in Vietnam 2016-2021 Advantage and disadvantage C Another solution V VI Bond issuance Increase taxes: Cut down on expenses CONCLUSION REFERENCE Page I INTRODUCTION Nowadays, countries around the world and including Vietnam always have to face with many difficult problems, instability and affect the macro economy State budget deficit This is an extremely sensitive issue, especially for a developing country like Vietnam In the context of the global economy having great fluctuations such as: high oil and gas prices, financial crisis in the US, inflation in many parts of the world, etc., finding solutions about the state budget deficit in countries around the world in general and in Vietnam in particular is extremely urgent and necessary In our country, the level of budget deficit is increasing and increasingly negatively affecting people's lives as well as the whole economy This is one of the risks of economic crisis, increasing inflation, making it difficult for the government to implement fiscal and monetary policies So what is a budget deficit? What is the current state of the budget deficit problem in Vietnam? What is the solution to overcome the state budget deficit? This report with the topic "State budget deficit, facts and solutions" is the research process to find answers to the above questions This report contains three major points: A General theoretical overview of the Budget Deficit B The Facts of State of budget deficit in Vietnam C Solutions to the problems of budget deficit in Vietnam However, the state budget deficit is a macro issue, with limited knowledge as well as theoretical level, so our report can hardly avoid shortcomings Therefore, we hope that you will give your comments to improve the discussion We sincerely thank Mr.Quynh Page II STATE BUDGET DEFICIT IN VIETNAM, FACTS AND SOLUTION A The concept of budget deficit The definition of State budget & budget deficit: 1.1 What is State budget? According to traditional economists, the State Budget is a conditional document that precisely details the annual government revenues and expenditures According to contemporary economists, the State Budget is the balance sheet that details the cash receipts and outlays made during the state's most normative period The Law on State Budget, which introduced the idea of the State budget, was passed on March 20, 1999, during the 9th session of the 19th term of the National Assembly As a result, the State budget is the total estimated state revenue and expenditures that have been approved by a qualified state agency and put into action over the course of a year to ensure the accomplishment of the State budget's objectives Government 1.2 What is budget deficit? It is an instance where budget expenses outpace revenues This circumstance may be brought on by inefficient budget spending, an urgent expense for which compensation has not been received, or corruption Bonds are frequently issued to make up the budget gap A government deficit that is greater than 5% of GDP is regarded as dangerous Budget deficits are divided into two categories in modern public finance: structural deficits and cyclical deficits - Deficits that are caused by specific government policies, such as tax rates, social insurance subsidies, or the amount spent on defense and education, are known as structural deficits - Cyclical deficits are deficits brought on by high or low levels of output and national income, which depend on the state of the business cycle For example, when Page the economy is in recession, an increase in the unemployment rate will lead to a decrease in tax revenue while the budget expenditure on unemployment benefits increases The total amount of money lent by governments at all levels, from the federal to the local, is referred to as public debt, also known as the national debt or government debt - Causes of budget defict: 2.1 State tax loss: Other than natural resources, state-owned enterprises, loans, and aid, taxes are the primary and most reliable source of income for the state budget But there are still a lot of issues with our legal system Poor management has produced loopholes that people and entities can use to evade taxes, resulting in a sizable loss of revenue to the state budget Usually The quantity of cigarettes smuggled into our nation in 2008 resulted in a loss of tax revenue, depleting the state budget by 2,500–3,000 billion VND - Additionally, the amount of illegally imported cigarettes drains the nation's foreign exchange reserves by about $200 million USD annually, driving up unemployment and negatively impacting economic growth The State lost at least VND 500 billion in revenue due to the amount of sugar smuggled in 2012, including 5% of import tax (roughly VND 250 billion) and 5% of VAT (roughly VND 250 billion), but excluding hundreds of billions in income tax - In addition, tax increases, decreases, and exemptions give businesses more money with which to maintain and increase production The tax exemption, tax reduction, or late collection, however, affects other budget expenses and results in a deficit in the state budget 2.2 Large, scattered, inefficient public investment: Vietnam's total social investment from 2001 to 2010 was among the highest in the world, averaging more than 40% of GDP, and reading speed increased by more than 18% Page annually In which public investment is the main focus; despite a recent trend toward decline, it still accounts for roughly 40% of all social investment Our nation received a sizable amount of foreign funding in 2007 and 2008 to ramp up investment in the construction of infrastructure and significant national projects to further the interests of the nation's development However, in reality, the issue of sporadic investment causing waste in communities and the development of significant national projects has not yet been fully addressed also it still slow and inefficient, has wasted state budget resources and prevented the development of regions, is the main cause of state budget darkness Besides, public administration - task translation of them we are too inefficient It is this inefficiency that makes the budget deficit even worse Page Value (thousan billion VND) 2001 170.5 2002 200.1 2003 239.2 2004 290.9 2005 343.1 2006 404.7 2007 532.1 2008 616.7 2009 708.8 2010 830.3 2011 877.9 Page 2.3 Government raise capital to stimulate demand * There are way to capital to stimulate demand - Frist Capital: + After launching a comprehensive stimulus package, the government implemented tax reduction policies in an effort to free up more funds for investment To maintain growth above 6% to 6.5% in 2009, we must take action, encourage production, and increase consumption + Numerous sources of disbursement are included in the overall government stimulus package To continue borrowing money to fund specific projects like schools, hospitals, transportation infrastructure, and irrigation, the government first issues bonds Next, allocate funds to social housing development - Second Capital: +Exemption from, postponement of, or delay in tax collection to allow for business investment sources is the second method used to boost demand - Third Capital: + The third source is that the Government will use the Government's State Reserve Fund to invest for a number of purposes, mainly to support production and business, product consumption to promote consumption + After the government meeting at the end of the month, there will be a resolution, and the government will then announce the stimulus package Based on my calculations, the package will cost about 100 trillion dong As a result, there are regulations for small and medium-sized businesses, including rules for product production and consumption - The issuance of government bonds, tax exemptions and reductions, and the use of the State Reserve Fund are the three main funding sources the government uses to stimulate Page demand On the one hand, using the activation solution package encourages consumption and economic expansion But it will at least fall within the extremely high budget growth range of 8–12% of GDP 2.4 The relationship between development investment spending and recurrent expenditure has not been focused State budget expenditures of the years This is one of the causes of budgetary stress, budget deficit pressure (Especially regional budgets) We can see this through the decentralization of revenue sources and spending responsibilities between budget levels as well as the additional mechanism from the higher budget to the lower budget According to the annual budget estimates, local budgets are allocated revenue sources to match particular spending tasks Page 10 From 2004 to 2011, the continuous budget deficit led to a rapid increase in public debt Vietnam's total public debt increased from about 40% of GDP at the end of 2007 to 57% of GDP at the end of 2010 and decreased only slightly in 2011 At the same time, Vietnam's external debt also increased from 32 % up to nearly 42% of GDP Vietnam's public debt over the years (% GDP) In 2009, the budget deficit figure for 2009 alone excluding principal payments as reported by the Ministry of Finance was 3.7% of GDP, while the corresponding figure of the Asian Development Bank ( ADB) and the International Monetary Fund (IMF) are much higher, at 6.6% and 9.0% of GDP, respectively In the two years 2009-2010, on average, Vietnam's budget deficit is among the highest compared to other countries in the region, at about 6% of GDP per year This number is about times higher than the corresponding figure of Indonesia, times that of Thailand Page 15 Budget deficits in some Asian countries 2009 - 2010 (% GDP State budget deficit due to Covid-19 pandemic 2.1 Vietnam's budget deficits in covid 19 spending in 2020 The Ministry of Finance said that the total state budget balance collected in months reached VND 881.9 trillion, equaling 58.3% of the estimate, down 12.4% over the same period in 2019 Of which, domestic revenue was estimated reached 733.98 trillion dong, equaling 58.1% of the estimate, down 9.7% over the same period in 2019; revenue from crude oil was estimated at 25.48 trillion dong, equaling 72.4% of the estimate, down 35.6% over the same period in 2019; revenue from import-export activities was estimated at 121.5 trillion dong, equaling 58.4% of the estimate, down 19.4% over the same period in 2019 Page 16 State budget balance through the months of 2020 ( The Ministry of Finance Vietnam) According to the Ministry of Finance, in the first eight months of 2020, the economy was greatly affected by the Covid-19 epidemic Along with that, the implementation of the Government's solution packages to support businesses, organizations and individuals affected by the epidemic has caused a deep decrease in budget revenue in the first months of the year, especially from April to present Regarding state budget expenditure, the accumulated state budget expenditure in months reached VND 975.6 trillion, equaling 55.8% of the estimate, an increase of 8.2% over the same period in 2019 As a result, the 8-month state budget deficit was at 93, trillion VND, a sharp increase compared to 75.7 trillion VND in the first months of 2020 Accordingly, the difficult economic context due to the epidemic and the implementation of about 30% of the fiscal support package caused the state budget revenue to continue to decrease in months, while accelerating disbursement of support packages Page 17 and public investment causing state budget expenditure to increase significantly compared to the same period in 2019 With an increase in state budget expenditures to respond to new developments of the Covid-19 epidemic and support economic recovery, BIDV Research and Training Institute forecasts that the state budget deficit/GDP in 2020 will be at 5.2 - 5.4%, higher than the target set at the beginning of the year (below 4%), but still lower than the average of emerging countries (about 10.6%) In the Vietnam Macroeconomic Update Report in August 2020, the World Bank (WB) commented that since April, state budget revenue has been decreasing significantly due to a combined decrease in economic growth with tax deferral measures for individuals and businesses in response to the crisis State budget balance is more difficult when spending has to be increased to cope with the epidemic, to realize the goal of increasing public investment to stimulate economic recovery 2.2 State budget deficits of countries during the covid 19 pandemic According to the report of trading Economics, we see that the percentage of state budget deficits in countries as a % of GDP increased sharply in the time before and after the covid 19 pandemic In it, we see that Canada has a high rate the state budget deficit is about 15% of GDP in 2020, a sharp increase compared to 2017 is about 0.5% of GDP then to the US is 14% of GDP in 2020 compared to about 3% in 2017 Page 18 State budget deficits before and after the covid-19 pandemic in countries (as %GDP) Although the covid situation in 2020 has a complicated effect on China, the state budget deficit is about 4% of GDP in 2020 and has not increased compared to 2017 As for Vietnam, the state budget deficit increased less than the five countries Canada, the United States, Japan, Indonesia, South Korea and Thailand at about 6% of GDP in 2020 compared to about 4% in 2017 Looking at the chart ,the report of Trade Economic demonstrate the public debt situation of countries during the Covid 19 Pandemic In which, Japan has the highest ratio at about 266.2% and Indonesia has the highest public debt ratio the smallest with about 38.5% For Vietnam, the chart shows that the public debt ratio of Vietnam in 2020 is 46.7%, down about 10% compared to 2019 is about 55% Page 19 Public debt ratio in countries in 2020 From the above data, it can be seen that the Covid situation strongly affects the state budget deficit and the public debt ratio of countries, especially countries such as the US and Canada Meanwhile, Vietnam has a moderate deficit Page 20 IV SOLUTIONS TO VIETNAM'S BUDGET DEFAULT There are numerous ways for the government to make up the budget deficit, including increasing revenue from taxes, fees, and charges, reducing budget expenditure, domestic debt, and foreign debt, issuing money to offset spending, and so on Which method and source is used depends on the country's economic conditions and economic and financial policies at the time The state budget deficit, which has an impact on the macroeconomics, is heavily reliant on solutions to offset the state budget deficit Each compensating solution has an impact on the macroeconomic balance Essentially, countries all over the world frequently use solutions primarily to deal with the state budget deficit in order to offset the state budget deficit A Government issues more money Issue more money 1.1 Concept Money is a universal equivalent for the exchange of goods and services Money is accepted by everyone, issued by the State and secured by other assets such as gold, precious metals, bonds, foreign currencies Money is a universal equivalent for the exchange of goods and services Money is accepted by everyone, issued by the State and secured by other assets such as gold, precious metals, bonds, foreign currencies Issuance of money is the supply of money into circulation as a means of payment 1.2 Money issuance execution tool – Through credit operations between the central bank and commercial banks Based on the credit demand of the economy, based on the additional money supply in the plan year, based on the objectives of the monetary policy, the borrowing needs of credit Page 21 institutions The Central Bank provides short-term loans to credit institutions in the form of refinancing: Discounting, rediscounting of valuable documents, loans secured by valuable documents and other types of loans When the Central Bank lends to credit institutions, it increases the amount of cash in circulation or increases the deposit balance of credit institutions at the Central Bank The result increases central money (MB) Thus, through the Central Bank lending to commercial banks, the Central Bank has released an amount of money into circulation and the commercial bank receives a credit from the central bank as a source of capital to help the commercial banks Commercial banks expand business activities – Open market channel Through open market operations, commercial banks buy valuable papers in the market That put a volume of money into circulation, the goods that the Central Bank buys are bills, bonds and bonds Short-term valuable documents When the Central Bank buys valuable documents in the market, money from the Central Bank goes into circulation, resulting in the money supply increasing by the value of that valuable paper Valuable documents held by the Central Bank become the assets of the Central Bank corresponding to an increase in the liabilities side or cash or money reserves This channel is being used widely, especially in countries with developed economies because it is a very flexible channel – Money issuance channel through the state budget In the process of revenue and expenditure activities of the budget, usually revenues are seasonal and expenditures are frequent, so at a time the budget may be short of short-term capital To meet the spending needs, with the consent of the government, the National Page 22 Assembly, and the Central Bank, advance to the budget according to the regulations of the government in various forms to handle the shortfall Thus, the central bank has provided a volume of money for the spending budget That means the Central Bank has issued the money through the budget channel – Issue money through foreign exchange channel When the Central Bank makes foreign exchange purchases in the foreign exchange market, it is also a channel for issuing money When the central bank buys foreign currency, the central bank's foreign currency reserves increase, at the same time an amount of money is also put into circulation through the payment of money to organizations and individuals that sell foreign currency to the central bank Conversely, when the central bank sells foreign currency, the central bank's foreign currency reserves decrease, the central currency also decreases Advantage and disadvantage 2.1 Advantage Issuing more money to cover the shortfall can help quickly meet the need to cover the deficit, without causing debt repayment pressure 2.2 Disadvantage Printing more money and putting it into circulation while the output of the economy does not increase will cause prices to rise and inflation to occur This makes people's life difficult, not only economic but also social and political problems of the country can be seriously affected B Use the national foreign currency reserve fund Concept: State foreign exchange reserves, often referred to as foreign exchange reserves or foreign currency reserves, are the amount of foreign currency held by the central bank or monetary authority of a country or territory Page 23 This is a type of State property stored in the form of foreign currency (usually strong foreign currencies such as: US Dollar, Euro, Japanese Yen, etc.) for the purpose of international payment or to support the value of currency nation - Types of foreign exchange reserves Cash reserves, balances of deposits in foreign currencies at foreign banks - Bonds, bills of exchange, or other debit documents issued by banks of foreign governments, international monetary and financial institutions, and overseas banks - Gold and some other forms of foreign exchange Foreign exchange reserves in Vietnam 2016-2021 Currently, Vietnam still has a surplus trade balance, foreign exchange reserves are at the highest level in history, while the macro economy is maintained stably According to data of the International Monetary Fund (IMF), Vietnam's foreign exchange reserves by the end of 2021 will reach 105 billion USD This is a record high level of foreign exchange reserves of Vietnam, marking a series of strong increases between 2016 to 2021 Foreign exchange reserves in Vietnam 2016-2021* (IMF) Page 24 Advantage and disadvantage - Advantages: + Abundant foreign exchange reserves will help the SBV have plenty of room and suitable solutions in managing monetary policy, especially in flexibly managing and stabilizing exchange rates, improving the value of the dong, from That increases the confidence of foreign investors as well as the majority of the domestic population + Obviously, when the foreign exchange market is stable, it will help foreign investors confidently participate and contribute capital to invest in the Vietnamese market because they have less to worry about exchange rate risks, thereby helping to attract more investors foreign currency capital and help the State Bank have more opportunities to continue to increase foreign exchange reserves And the amount of foreign exchange reserves increased sharply, helping the operator to have more tools and resources to stabilize the exchange rate when needed + Increased foreign exchange reserves can also help improve Vietnam's credit rating in the future, when debt repayment capacity has increased significantly This will help the Government reduce borrowing costs if it plans to issue foreign currency bonds in the international market in the near future In addition, the strong purchase of foreign currencies by the State Bank and the corresponding injection of VND into the market helped the liquidity of the banking system continue to remain at a high level, creating conditions for interest rates to remain quite stable in the liquidity period is usually under year-end pressure - Disadvantages: It adversely affects the exchange rate, reduces the competitiveness of goods in exports and can have a negative impact on the movement of investment capital flows Page 25 C Another solution Bond issuance This solution, in addition to being simple to implement and assisting the government in avoiding outside influence or pressure, supplies the financial market with a significant amount of high-quality, low-risk goods However, the ability to borrow using state bonds is restricted to the quantity of private sector savings; on the other hand, the government's borrowing need would drive up market interest rates, producing investment crowding for the private sector Increase taxes: There are two ways to increase taxes: the first is to increase tax rates This measure can increase budget revenue immediately, but it is not supported by the people, and in the long run, it will negatively affect the economic - monetary situation In fact, whether tax rate increases are feasible or not depends on the resilience of the economy, the efficiency of the collection management system and the efficiency of each tax, both direct and indirect Increasing the direct tax rate will increase State budget revenue and stimulate economic growth But when exceeding the tolerance limit of the economy, increasing direct tax rates will promote tax evasion, not stimulate economic growth Second, expand and nurture revenue sources, effectively combat revenue loss This measure not only helps increase budget revenue but also ensures the fairness of the obligation to contribute to the State budget However, this measure is difficult to implement and must be implemented for a long time, as well as synchronous coordination with the system of other policies to be effective Cut down on expenses For developing countries, savings are constrained by per capita income Therefore, in order to maintain economic growth and expand investment, it is required that the State Page 26 increase budget savings on the basis of a combination of tax policies and state budget expenditures In addition to a reasonable tax increase, it is necessary to establish an effective state budget spending policy Spending cuts have little negative effect on private sector savings However, budget spending cuts only have positive effects when the State cuts wasteful and unreasonable expenditures, subsidies for society and State-owned enterprises on the basis of socialization Provision of public services and reform of the state economic sector Thus, it is necessary to distinguish between waste and increased spending to stimulate demand; between efficiency and thrift with arbitrary cuts in state budget spending Page 27 V CONCLUSION State budget deficit is a headache for every country, including Vietnam The state budget deficit is the cause of negative impacts on people's lives and imbalances in the macro economy: investment retreat, trade balance deficit, etc Besides, it is also closely related to inflation Therefore, a careful study of the State budget deficit is essential The state budget is a very effective and important macro-regulating tool Through that, the State performs its functions and tasks such as regulating and guiding the market, orienting investment, ensuring social justice, stability and economic growth In fact, in recent years, the state budget deficit in Vietnam is at an alarming level and is somewhat higher than that of other countries in the region This has greatly affected the economic situation in our country, especially after a long period of suffering the ravages of war and recently due to Covid-19 There are many solutions to the deficit problem but each solution has side effects on the economy To overcome the budget deficit, it is necessary to combine many measures with an appropriate level This requires the art of macroeconomic management to both limit and neutralize the negative aspects, promote the positive side to limit the negative impacts on the macroeconomic objectives Our research and analysis above only partially reflect the current state of Vietnam's state budget Hopefully, this report will provide an important piece of information for students as well as those who want to learn about the State Budget of Vietnam Due to limitations in many aspects, the work also contains errors We are looking forward to receiving sincere comments from you to improve the essay Page 28 VI REFERENCE https://vneconomy.vn/3-nguon-von-de-kich-cau.htm https://ndh.vn/vi-mo/tham-hut-ngan-sach-va-no-cong-cua-viet-nam-angtang-nhanh-1070652.html https://thesaigontimes.vn/giai-ma-tham-hut-ngan-sach-cua-cac-nuoc/ https://baodauthau.vn/covid-19-va-noi-lo-tham-hut-ngan-sach-nhanuoc-post95641.html https://cafef.vn/du-tru-ngoai-hoi-viet-nam-se-som-vuot-xa-moc-100-tyusd-20210328090604617.chn https://vneconomy.vn/ty-le-no-cong-gdp-cua-viet-nam-khong-ngung-giam.htm Page 29 ... VN’s budget deficit 100% 100% 100% Do part 3: Solutions to VN’s budget default Page BUDGET DEFICIT IN VIETNAM, FACTS AND SOLUTION I INTRODUCTION STATE BUDGET DEFICIT IN VIETNAM,. .. interest rates or interfere with investment The demand for money will rise in line with the increase in the state budget deficit, rising expenses, falling revenues, and multiplied increases in. .. finding solutions about the state budget deficit in countries around the world in general and in Vietnam in particular is extremely urgent and necessary In our country, the level of budget deficit