FISCAL POLICY AND INCLUSIVE GROWTH

1. FISCAL POLICY AND INCLUSIVE GROWTH FISCAL POLICY AND POVERTY REDUCTION: THE CASE OF VIETNAM Nguyen ThiLeThu National Institute for Finance Ministry of Finance, Vietnam The information and view expressed herein does not necessarily represent the opinions of any organization Manila, October 2016

2. Table of Contents • Vietnam’s recent economic growth and poverty reduction • Fiscal policies towards poverty reduction • Taxation policy • Expenditure policy • 4. Policy options for period 2016-2020

3. Vietnam: Basic information • Area: 331,000 km2 • Population: 91,7 mil. with 54 ethnic minority groups • GDP (2015): $193 bil. • GDP per capita (2015): $2,320 • 63 cities and provinces • 13 self-financed • 50 receiving balancing transfer

4. Recent Economic Developments: An Overview • High economic growth together with improved per capita income • Vietnam is amongst the fastest growing economies in emerging Asia, achieving an average GDP growth rate of around 6,6% over the past two decades • GDP per capita increased 6 times after 20 years • However, being an open economy, Vietnam recently exposed to external shocks

5. Poverty reduction achievements • Poverty index decreased sharply from 37% in 1998 to 8% in 2014 • Poverty line lower than international standards and adjusted every 5 years • 3/8 MDGs achieved in advance including no.1 priority goal – poverty reduction • Reduced poverty gap between different areas and between rural and urban areas

6. Taxation policy and poverty reduction Vietnam tax system experienced intensive reforms towards a sustainable and equal tax system • Improved domestic taxes to reduce dependence on unstable revenue (import duties, oil revenue…) • Broadening tax base while reducing tax rates and giving tax exemptions and reductions to encourage investment and export

7. Taxation policy and poverty reduction • Direct taxes: • Personal income tax: • giving exemption for income of households individuals from agriculture production. • reducing tax obligations by increasing deductible amount and decreasing tax rates • Corporate income tax: reducing tax rates over time with many incentives and deductions to encourage investment • Standard rate reduced from 32% (1999) to 20% (2016). • A lot of incentives and deductions given to income incurred in disadvantageous areas; income of housing projects for low income people; income from agriculture production; income of companies employing female workers and ethnic minority workers; income of people credit funds and microfinance organizations, etc.

8. Taxation policy and poverty reduction • Indirect taxes: • VAT: Imposing incentive rate of 5% on necessity goods and some agriculture products while most of other agriculture products are not taxable. • Excise tax: only imposed on luxury goods and services • Other incentives and deductions to support farmers, workers, low income taxpayers and poor people: • Exemption of tax on agriculture land use from 2003 to 2020 and irrigation fees. • Exemption of VAT, personal income tax and corporate income tax for taxpayers having house for rent to workers, students; catering services to workers and baby sitting in fiscal year 2012 if they commit to keep their service charge unchanged. • Exemption and reduction of fees and charges for children, poor households, old people, handicapped, ethnic minority people, etc.

9. Expenditure policies for poverty reduction • Fiscal transfer to narrow gaps between different provinces • Balancing transfers (unconditional transfers): 50/63 provinces receive balancing transfer • Targeted transfers (conditional transfers): • National targeted programs: • Cash and in-kind transfer

10. Overview of expenditure policies for the poor

11. Specific expenditure policies for the poor • National targeted programs for poverty reduction • Coverage:64 poor districts, remote and disadvantageous communes, frontier areas • Specific policies: • Developing transport system • Building schools, vocational training centers, hospitals, markets, agriculture service centers, etc. • Providing support for production: • Cash and in-kind assistance • Incentive credit for households, enterprises and cooperatives • Vocational training support

12. Specific expenditure policies for the poor • Support to help the poor get access to basic services • Beneficiaries: Poor and “near-poor” people • Specific policies: • Education and training • Exemption and deduction of school fees • Financial aid for learning materials, meals, house rent, etc. • In-kind support (rice) • Financial aid for the poor attending vocational training courses • Healthcare • Free health insurance • Meal and transportation support • Pension contribution • Government support 25% or 30% of total contribution to voluntary pension fund • Housing • Financial aid to acquire land and build houses • Incentive credit with government subsidy • Legal services • Free consultation services • Access to legal information • Others • Energy subsidy (oil, electricity)

13. Specific expenditure policies for the poor • Support to help the poor develop production • Beneficiaries: Poor and “near-poor” people • Specific policies: • Land: Poor ethnic minority households are eligible for • Certain area of agriculture land • Incentive credit to acquire land for agriculture production • Vocational training • Financial aid or free vocational training • Support for learning materials • Meal and transportation support • Production tools • Cash support to improve agriculture land quality • Cash support for seedling, breeding stocks, vaccination, etc. • Credit policy: Low interest rate with government subsidy • Investment in agriculture production, processing and storage • Agriculture machinery, breeding stocks

14. Fiscal policy for poverty reduction: Shortcomings • Too many policies stipulated in various legal documents => overlapping • Many government bodies involved in designing and implementing poverty reduction policies => rising cost for administration, reducing efficiency • Too many policies vs. Budget constraint => Financial resource is split into small amount => less efficient • Unconditional cash transfer => the poor becoming dependent on government support and don’t have incentive to reduce poverty

15. Fiscal policy for poverty reduction: Challenges • Poverty rate increase due to changes in poverty line • 2011-2015: single dimensional poverty index • Monthly income: $20/person in rural area; $25/person in urban area • 2016-2020: Multidimensional poverty index • Monthly income: $30/person in rural area; $40/person in urban area • Lack of access to basic services (education, healthcare, housing, clean water, information and telecommunication, etc) • Budget constraint • High and persistent budget deficit • Rapid rise in the level of public debt to GDP

16. Policy options for period 2016-2020 • Taxation policy: Building a comprehensive, equal and efficient tax system • VAT: Reducing the number of non-VAT goods and goods under the VAT rate of 5% ; • 2020: Applying one VAT rate for most of goods and services • Excise tax: Broadening tax base • Corporate income tax: Reducing tax rate; reviewing incentive policies; applying CIT on some economic activities (e-commerce, thin capital, etc) • Personal income tax: Broadening tax base • Environmental tax: Applying environmental tax on goods having negative impacts on environment • Building property tax • Expenditure policy: Restructuring public expenditure to make it more efficient, contain budget deficit and public debt • Building medium term fiscal framework, setting expenditure ceilings for government bodies and local authorities • Giving priority for poverty reduction and social security based on reviewing current policies and eliminating inefficient and overlapping ones • Reducing universal subsidies for public services (education, healthcare, etc) while ensuring access for the poor • Supporting the poor develop their economic activities and production instead of giving unconditional transfer (cash and in-kind)

17. Thank you for your attention