Fiscal decentralization and local budget management in Vietnam
Fiscal decentralization and local budget management in Vietnam Le Thi Mai Lien National Institute for Finance Ministry of Finance Lombok, Indonesia 7 -8 May 2015
Outline 1. Legal basis for fiscal decentralization and local budget management 2. Overview of Vietnam’s recent fiscal performance 3. Local government system in Vietnam 4. Local budget system 5. Decentralization of local budget in Vietnam 6. Middle-term budgeting 7. Performance-based budgeting; Program performance budgeting 8. Local budget allocation 9. Transparency and disclosure of local finance 10. Reforming fiscal decentralization in Vietnam: The way forward
1. Legal basis – Constitution dated November 28, 2013 of the Socialist Republic of Vietnam – The State Budget Law No. 01/2002/QH 11 dated December 16, 2002 – Law on public debt management No 29/2009/QH 12 dated June 17, 2009 – Law on organization of the People’s Council and the People’s Committee 2003 (regarding authority of budgeting levels in deciding budgeting issues) – Decree No. 60/2003/ND-CP dated June 6, 2003 on detailing and guiding the implementation of the State budget Law – Circular 59/2003/TT-BTC dated June 23, 2003 on guiding the implementation of the Decree No 60/2003/ND-CP of the Government detailing and guiding the implementation of the State Budget Law – Other guiding legal documents (Decrees of the Government, Circulars of Ministry of Finance, …)
2. Overview of Vietnam’s recent fiscal performance 2. 1. Overview of Vietnam’s recent fiscal performance: Revenue • • • Tax reform in Vietnam has yielded remarkable successes in term of revenue collection: 22. 9% GDP in 2013 Vietnam relies heavily on consumption taxes: – In 2013, revenue from VAT and excise tax accounted for 33. 4% of total revenue As for revenue from income tax, CIT also plays an important role with a share of 15. 5% in 2013 while share of PIT is still relatively small (5. 7% of total). Share of revenue from oil and gas reached a peak of 29. 82% in 2006, but in 2013 reduced to 14. 7%. Similarly, share of revenue from trade tax decreased from 15. 5% in 2001 to 8. 2% in 2013. Government revenue as % of GDP has decreased since 2010 due to economic slowdown and tax cuts (CIT, PIT. . . ) Revenue % GDP Revenue structure in 2013 (% of total) Source: MOF data
2. Overview of Vietnam’s recent fiscal performance 2. 2. Overview of Vietnam’s recent fiscal performance: Expenditure § Size of government expenditure: 28. 4% GDP in 2013: § Recurrent expenditure takes the largest share: 68% of the budget in 2013. – Expenditure priorities have been are given to social security and poverty reduction and infrastructure development: • Moving toward promoting social and human development: – E. g. expenditure for education account for around 20% of the total budget; • Implementing 16 National Target Programs focusing on a wide range of objectives: poverty; education, health, rural development… Budget expenditure and revenue (%GDP) Structure of budget expenditure (%total)
2. Overview of Vietnam’s recent fiscal performance 2. 3. Overview of Vietnam’s recent fiscal performance: Issues – Fall in revenue collection as % GDP: in 2013, revenue collection reduced to 22. 9% GDP (average 2006 -10 was 26. 3% GDP) – Rapid expansion in the size of recurrent expenditure while there is a fall in that of capital expenditure: • Risk of violating the “Golden rule” on fiscal balance? – High and persistent budget deficit: 5. 3% GDP in 2013 and 2014 (in 2015 is expected at 5% GDP) – Rapid increase in the level of public debt in recent years: 54. 2% GDP in 2013 and expected to increase to 60. 3% GDP in 2014 (The limit is set at 65% GDP) Government expenditure by category (% GDP) Vietnam’s public debts (% GDP)
3. Local government system in Vietnam • It was established since 1945 as same time with the establishment of the Democratic Republic of Vietnam • Local government system is organized and operating under the principle of democratic centralism. This principle creates a hierarchical top-down administrative system, meaning that subordinates obey superiors, local governments obey central government. • Vietnam has 4 tiers of government: central; 63 provinces (cities); 710 districts (cities, towns) and 11. 145 communes (wards). Local government consis of province level, district level and comune level. • Local government system includes the People’s Council and the People’s Committee.
4. Local budgeting system - Vietnam’s budget system consist of central budget and local budget, in which local budget consists of budgets of local authorities having People’s Council and People’s Committee. - Local budgeting system is based on the consolidated nested-tier budget system (Matrioska). - Includes local budgets of 63 provinces and cities. - Local budget includes province and district level budgets - District level budget includes district and commune level budgets. -> budgeting becomes complicated due to the consolidated nested-tier system (bottom-up budgeting and top-down decision-making process); authority to decide on the State budget is duplicated (The State budget approved by the NA shall be allocated and assigned local governments; then the People’s Council shall decide local state budget). Budget system in Vietnam The State budget Local budget Central budget Local budgeting system
5. Decentralization of local state budget in Vietnam Expenditure responsibilities Intergovernmental fiscal transfers Decentralization of local budget Local government borrowing Revenue sharing
5. 1. Expenditure responsibilities Expenditure composition (% of total) • • • According to Article 33, the SBL 2002, the expenditure tasks of the local budgets shall include expenditures on development investment, recurrent expenditures, payments for the principal and interest that shall be mobilized for investment at lower-level budgets. According to Article 33 on decentralization of budget expenditures, the People’s Council shall decide spending tasks for its local budget. -> In some cases, expenditure responsibilities are not clear and unified. Specifically, it is necessary to simultaneously assign an expenditure task for budgeting levels; however, the decentralization is still unclear. In addition, there a variety of expenditure tasks that are specified for commune level in the SBL 2002 (Clause d, Article 34). Furthermore, over-detailed regulations may have a negative impact on the autonomy and flexibility of the local governments. Local share of expenditure (%)
5. 1. Expenditure responsibilities § § § • • High level of local expenditure does not necessarily means high degree of decentralization: q In Vietnam, standards and norms are set and monitored by the central authorities Most expenditure assignments in Vietnam are concurrent: Extent of overlap and loss of accountability: q Some functions should be assigned exclusively to one level of government: Law on local government organization is under discussion (under the 2013 Constitution) Local fiscal autonomy is impacted by central rules on minimum allocation to certain areas (e. g. , not less than 20% of total spending has to be allocated to education); – Should not be such rule to ensure the flexibility for the local governments and fund should be allocated in accordance with actual need and capacity to absorb. Rapid expansion in the share of local capital spending has also posed concerns over efficiency and consistency with the nation-wide objectives (local capacities in aborting large amount of resources): – Need to strengthen monitoring mechanism – Adopting medium- term fiscal framework Accountability of local authorities is reduced by the nested feature of the budget system: – Ensuring clarity on expenditure assignments is very important for ensuring the accountability of governments at all level in performing their functions
5. 2. Revenue sharing • According to Article 32, SBL 2002, the sources of local budget revenues shall include revenue types 100% retained by local authorities (i. e. land natural resource tax, revenue from construction lottery…); shared revenues are shared in percentage between central and local governments ( incl. VAT (excl. VAT on import goods), CIT (excl. CIT of entire-branch accounting unit), PIT, environmental protection tax, special consumption tax on domestic goods and services) • The authority to decide the local state budget has been improved. On the basis of decentralized revenues of local budget, the Provincial People’s Council shall decide revenue sources for each budgeting levels of the local governments.
5. 2. Revenue sharing Budget revenue composition (% of total revenue) Local budget revenues by composition (VND bil. ) Total 100% local taxes Shared taxes Transfers Source: Martinez-Vazquez & Nguyễn Văn Minh (2012)
5. 2. Revenue sharing Sharing rate of the shared taxes in selected q For shared revenue, Vietnam adopts the provinces in 3 stability period (%) “sharing rate” which is kept stable for 3 -5 years (known as Stability period): Provinces 2004 -06 2007 -10 2011 -15 – Key fiscal parameter is fixed in the HÀ GIANG 100 100 Stability period. PHÚ THỌ 100 100 q In the Stability period 2011 -15, among HÀ NỘI 32 31 42 63 provinces: HẢI PHÒNG 95 90 88 – 13 provinces only allow to keep a VĨNH PHÚC 86 67 60 portion of the shared taxes (the HẢI DƯƠNG 100 100 remaining is transferred to the BẮC NINH 100 93 NINH BÌNH 100 100 central budget) NGHỆ AN 100 100 – 50 provinces retain 100% of shared ĐÀ NẴNG 95 90 85 taxes collected in their jurisdictions. KHÁNH HÒA 52 53 77 QUẢNG NAM 100 100 QUẢNG NGÃI 100 61
5. 2. Revenue sharing • Autonomy of local authorities in revenue raising is limited: – Revenue types 100% retained by local authorities are small taxes or fees • Tax bases and tax rates are set by the central (National Assembly) – Local authorities have limited powers in setting fees and charges within the ceiling set by the central authorities • Law on fees and charges in under discussion and it is expected that more power will be given to local authorities • Shared revenues (especially VAT and CIT) are currently shared between central and local governments based on where the revenues are actually collected rather than where they are incurred: – CIT of enterprises adopted unified accounting regime are credited to the jurisdictions where their headquarters are located (mainly large cities, such as Hanoi or Hochiminh city): • Causing some equity concerns as being likely to favor more socio-economic developed localities (regions) – Revenue collected on enterprises produced goods subject to excise tax is also shared between central and local authorities where the enterprises are located: • Should be 100% assigned to the central budget?
5. 3. Local government borrowing • According to Clause 3, Article 8 of the SBL 2002, local governments are allowed to borrow (but regulations on local deficit are not mentioned) up to 30% of their capital budget (increased to 150% for HCMC and 100% for Hanoi). Regulations on local government borrowing would ensure the safety and security of local finance. At the same time, debt ceiling may be a basis for identifying estimated capital mobilization. • Local governments are allowed to mobilize capital through issuing local government bonds and from other legal borrowing. • In practice, not all local governments need to borrow to finance local infrastructure projects. In 2011, only 25 over 63 local governments borrowed. It is due to the borrowing limits and scope of borrowing (that do not cover the debt services of local governments); and difficulties in approaching the capital market, … • In general, the relationship of borrowing between central and local governments (e. g. local governments have difficulties in debt payment) remains unclear.
5. 4. Intergovernmental fiscal transfers • 2 types of intergovernmental fiscal transfers – Balancing transfers: currently, there are 50 local governments receiving balancing transfers from the central government – Targeted transfers: in order to implement the National Targeted Programs of the Government or each local government Total transfers as % of central revenue Transfers as % of total local spending Share of balance and targeted transfers in total transfers
• • Wide variation in the reliance on transfers across Transfers as % of total local spending regions and provinces by region 2012 A typical feature in Vietnam is that balancing transfers is kept constant in absolute amount during the Stability period (currently 5 years): – Negatively impacts local governments covering their expenditure needs mostly by the transfers (mainly poor regions) – Does not take account of raising costs of service delivery, except cost of new initiatives There is a lack of predictability in targeted transfers: • Lack of linkage with future funding requirements (e. g. for operation and maintenance) Targeted transfers must be linked with regional and nation-wide development priorities: • Linked with the medium-term fiscal framework.
6. Middle-term budgeting • Vietnam piloted MTEF for 4 provinces (Hanoi, Ha Tay, Binh Duong, Vinh Long) during 2003 -2008. However, the implementation of MTAP and MTEF showed the subsidiaries from the State budget. It could be seen in the handling of gap between expenditure needs and spending ceiling (mainly depend on the State budget through transfers from the central government and government bonds) • Law on public investment has been enacted and the draft Decree on middle-term and annual public investment plans has been established, in which scope, basis, principles, processes and priorities in public investment planning have been clearly specified for the period of 2016 – 2020.
7. Performance-based budgeting; Program performance budgeting • Currently, Vietnam does not apply and implement the performance-based budgeting. • Program performance budgeting (a type of performance-based budgeting) was applied in 1990 and Vietnam has been implementing 16 National Targeted Programs and approximately 40 Targeted Programs. • Local budgeting: Department of Finance (in terms of local budgets) and Ministry of Finance (in terms of central budget, the State budget) are consolidation units; However, there is a divergence between investment budget (managed by the Department of Planning and Investment) and recurrent budget (managed by the Department of Finance) in budgeting.
8. Local budget allocation • Allocation of investment budget is implemented according to Decision 60/QD-TTg; and allocation of recurrent budget is implemented according to Decision 59/QD-TTg by the Prime Minister. • According to Decision 59 and 60, the Provincial People’s Councils decide the allocation norms for local governments. The budget allocation is mainly based on criteria of population, geography, specific areas and points of each criterion.
9. Transparency and disclosure of local finance • A comprehensive legal system on transparency and disclosure of local finance: • SBL 2002 : ‘The estimation, allocation, the result of auditing of the State budget settlement of budgets of all levels, the budgetestimating units, and organizations enjoying the State budget supports must be publicized” • Decision 192/2004/QD-TTg by the Prime Minister dated November 16, 2004 on disclosure of finance of budgets of all levels, the budget -estimating units, organizations enjoying the State budget supports , investment infrastructure projects used state budget capital, SOEs, and funds with sources from the State budget or contributions of people. • Law on thrift practice and waste combat: “The elaboration, appraisal, approval and allocation of state budget estimates must comply with the law-prescribed competence, order, contents, subjects and time; the norms, criteria and regimes promulgated by competent state bodies; ensure fairness, publicity and transparency. ”
9. Transparency and disclosure of local finance § • Fiscal transparency is improved but still limited: creating difficulty in monitoring the outcomes of decentralization: – Only approved budget and final account are disclosed: Vietnam does not disclose the draft budget (limit the opportunities for people to effectively take part in budget process) – Disclosed information is mainly in aggregate format Enhancing transparency is a very important requirement for effective decentralization: • Improving public access to budget information • Reviewing budget classification to make it consistent with GFS and ensure functional and economic breakdowns of expenditure available • Linking budget transparency and accountability. Vietnam’s budget transparency index (2006 -2012) Source: Open Budget Survey 2012 (International Budget Partnership)
10. Reforming fiscal decentralization in Vietnam: The way forward • § Reform agenda: – The Financial Development Strategy towards 2020 approved by the Prime Minister has pointed out key directions for public financial management reform in Vietnam, including fiscal decentralization: • Revising related legal framework on public finance management, such as adopting a new Law on fees and charges (propose in 2015) • Modernizing public finance management (e. g. TABMIS; GFMIS. . . ) The revised State budget law is currently under discussion and is expected to be approved by the National Assembly in May 2015): – More fiscal autonomy are given to local government (focusing on 4 pillars of decentralization) – Enhancing budget institutional framework for policy making (e. g. adopting medium-term fiscal framework): • Link budget allocation with strategic development orientations • Budget is spent within resource availability and consistent with policy priorities. – Gradually shifting from input-based budget to performance -oriented budget – Improving budget transparency and accountability – Enhancing budget disciplines (fiscal rules).
Thank you!
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