Tax relief stimulus approach forecast to widen VN's fiscal deficit

Thursday, Jun 18, 2020 15:55

As of May 15, total revenue collection was reported at VND529.6 trillion. Photo baodauthau.vn

Viet Nam’s fiscal deficit (excluding debt principal repayments) would be 6.4 per cent of GDP in 2020, almost double the 3.4 per cent last year, Fitch Solutions forecast.

“This is mainly due to the Government’s COVID-19 fiscal stimulus having a strong focus on tax relief. Our deficit forecast is wider than the Ministry of Finance’s 5.0-5.1 per cent deficit estimate, which already reflects the authorities’ view for a wider deficit versus their initial 3.4 per cent target set for 2020 back in December 2019,” according to Fitch’s recent report.

Fitch explained the key difference between its assumptions versus the Government’s is that it forecast real GDP growth of 2.8 per cent in 2020, sharply below the Government’s 5.3 per cent, and this informs its downbeat fiscal revenue collection outlook.

According to data by the General Statistics Office, the State recorded a budget deficit of VND7.8 trillion (US$334.4 million) in the first five months of 2020, a sharp contrast against a VND77.9 trillion surplus over the same period of 2019.

As of May 15, total revenue collection was reported at VND529.6 trillion, 35 per cent of the year’s estimate, led by strong personal income tax revenues of VND52.4 trillion, 40.7 per cent of the target, and land use fees of VND48.5 trillion, 50.6 per cent of the target.

State expenditure over the same period was estimated at VND537.4 trillion, 30.8 per cent of the annual estimate, of which current expenditure was VND385 trillion, capital expenditure was VND103.8 trillion, and interest payments were VND45.6 trillion, accounting for 36.4, 22.1 and 38.6 per cent of their respective annual targets.

While 2020 spending patterns appear broadly in line with 2019 in spite of the COVID-19 crisis, the higher level of spending against the annual plan versus 2019 still suggests potential frontloading of Government spending to aid the economy out of the crisis, especially in the capital expenditure component.

“In light of the Government’s direction of implementing its fiscal stimulus, which is mainly focused on tax relief, we have revised down our forecast for expenditure growth to 8.3 per cent, from 9.0 per cent previously. We continue to believe that the Government will ramp up spending through a public infrastructure drive over the coming months to support Viet Nam’s economic recovery process," Fitch said.

According to Fitch, this will also enhance the country’s logistics infrastructure to handle more foreign direct investment amid the ongoing trend of supply chain diversification out of China, which Viet Nam continues to be a strong beneficiary of.

To date, Fitch estimated the COVID-19 relief fiscal stimulus to be about 3.6 per cent of GDP, comprising a VND180 trillion package in the form of delayed payments for value-added tax, corporate tax, and income tax, and a VND62 trillion social security package for vulnerable individuals and businesses impacted by the pandemic’s economic shock. A wider deficit due to the above stimulus measures will imply additional borrowing.

“As such, we believe that this will see Viet Nam’s public debt-to-GDP ratio nudge slightly higher over the near term, from the Government’s estimate of 56.1 per cent in 2019, although we highlight that we expect public debt to remain well below the Government's statutory limit (debt ceiling) of 65 per cent of GDP,” Fitch said. — VNS

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