Jun 28, 2018 / 18:53

Efficient budget spending - an alternative for VAT rate hike

The Ministry of Finance (MoF)`s proposal on hiking the value added tax (VAT) rate is expected to have a major impact on low-income earners, for which experts suggested improving state spending`s efficiency as an alternative.

Last August, the MoF proposed to increase the country's VAT from the current maximum rate of 10% to 12% in a bid to boost state revenue. The proposal, however, has stirred concern among experts as a higher VAT rate will considerably have a larger effect on the poor than higher income earners. 
The overview of the conference. Source: Ngoc Thuy
The overview of the conference. Source: Ngoc Thuy.
Nguyen Viet Cuong, Vice Dean of the Institute of Public Policy and Management under the National Economics University, calculated that an increase of 20% in the rate of VAT would lead to a reduction of 0.89% in average consumption, contributing 0.26 percentage points to the poverty rate, or 240,000 of new poor.

"The poverty rate will increase, in which the near-poor will suffer the most, while the rich will experience a slight reduction in consumption," Cuong warned at a conference held by the Vietnam Institute for Economic and Policy Research (VEPR) on June 28 evaluating the impact of a VAT rate hike on the economy.

Cuong also revealed there is high chance people recently escaping poverty will return to be poor because of an increase in VAT.

Sharing the same view, senior economist Le Dang Doanh said the government is under huge pressure to increase its state budget through higher taxes, which are currently the major source of budget revenue.  Accordingly, revenue from VAT currently accounts for 25% of state budget and one third of Vietnam's total tax revenue.

"Higher VAT will affect people with high consumption, however, the increased amount will have less effect on the rich than the poor," Doanh said to Hanoitimes.

Nguyen Tien Dung from the Vietnam National University assessed tax increase will reduce social welfare. "Worryingly, if the additional amount is to cover the frequent spending, there will be a negative impact to economic growth."

Efficient spending more urgent priority

Nguyen Duc Thanh, Director of VEPR suggested instead of increasing tax rate, the government should consider enhancing efficiency in spending, which accounts for 28% - 31% of GDP annually.

"Despite limited revenue, Vietnam's frequent spending has been rising steady in recent years. This resulted in a decline in investment spending and causing negative impact on long-term economic growth."

According to the VEPR, the average public debt ratio in emerging countries currently stands at 57% of GDP, lower than that of Vietnam at 61.3% in 2017. The public debt, therefore, is having a negative impact on Vietnam's economy and posing a high risk in the future.