Vietnam Needs to Boost Public Spending for Economic Recovery

10:44:04 AM | 5/26/2020

 In order to revive an economy left undermined by the fight against the coronavirus outbreak, what matters most to Vietnam is taking advantage of its current potential and seizing new opportunities to bolster growth.

New thinking, new actions

As head of the Central Institute of Economic Management (CIEM), Nguyen Dinh Cung has been directly involved in various research projects to propose appropriate economic management reform policies across many stages of the country’s development. Now retired, he is considering the question of how to revitalise the economy after Covid-19.

He noted that if Vietnam follows the old way of thinking, it can only recover to the pre-outbreak level, rather than translate risks into opportunities. Economic recovery must be predicated on the existing potential as well as newly opened opportunities, by restructuring the economy, changing the growth model and enhancing productivity.

According to the former CIEM director, aggregate demand has fallen sharply in 2020 as most of Vietnam’s key export markets have experienced a dramatic downturn and even negative growth. Vietnam is expecting the tourism industry to grow again but there are currently no international arrivals while domestic tourists opt to travel in small groups, mostly families, across short distances and often by private vehicle.

Only government demand, namely public spending and investment, is largely unaffected. As such, it can be said that the key to economic recovery is in the hands of the government. Measures are needed to raise demand in order to support a quick recovery. But as collected revenues are smaller, it is necessary to focus spending on the projects that will create a ripple effect.

Other important measures include boosting private investment, lowering interest rates and removing obstacles to businesses. It is now time to adopt non-conventional thinking on investment and business management so that all creative business models are promoted to facilitate growth.

Specifically, the government should create a mechanism for the people to seek growth opportunities by themselves and only impose restrictions on such areas as national security and public health as stipulated in the Constitution.

According to Dr To Trung Thanh at the National Economics University, public investment disbursement has been lagging behind for years due to inconsistencies in the law on public investment which must be resolved to open this flow of capital.

Nevertheless, the National Assembly’s strict supervision is still needed to ensure public investment is channelled to the right places and focused on approved infrastructure projects so as to avoid negative consequences to the economy.

Growth target of 5%

Amid the various growth scenarios published by research organisations, for the Vietnamese economy after Covid-19, the Prime Minister has set a growth target of 5% for 2020, with inflation kept below 4%, which is to be achieved by five key measures, namely attracting foreign investment, boosting exports, increasing public investment, attracting private investment and promoting domestic consumption, of which the first two are more dependent on external factors while Vietnam can retain control over the latter three.

According to Dr Nguyen Duc Kien, head of the Prime Minister’s economic advisory group, Vietnam needs to grow by at least 5% to create 0.9-1.1 million new jobs so as to ensure social security and maintain stability.

If growth is below 5%, only 0.7 million new jobs will be created and another 0.4 million people of working age will be unemployed, raising risks of social instability. As such, extraordinary measures, especially in public investment, are needed to achieve the 5% growth rate.

A scenario constructed by the economic advisory group suggests that if nearly VND700 trillion (US$30 billion) is disbursed, it could add one percentage point to growth. While international demand is far from recovering, focusing on the domestic market can help account for the consumption of about 15% of the economy’s output, guaranteeing jobs and avoiding pressures on the unemployment fund and job creation.

Dr To Trung Thanh noted that Vietnam’s room for fiscal policy adjustments had narrowed prior to Covid-19 and will become even narrower in the coming times. This is a chance for Vietnam to make bolder fiscal reforms towards sustainability as well as to support growth.

Specifically, reforming the tax system in order to reduce the tax burden, and create a stable and balanced stream of revenues should be considered a priority. At the same time, government spending should be restructured to enhance its efficiency, of which funds will be allocated only to really necessary projects and tight control applied to public investment to prevent wastefulness and corruption.

In addition, given that the state budget is limited as the government needs significant resources to deal with the outbreak, implement stimulus packages and maintain momentum for long-term growth, it will need to rely on the participation of all in society. Therefore contributions from businesses and the people should be encouraged.

Source: NDO