FISCAL POLICY AND INCLUSIVE GROWTH

Manila, October 2016

FISCAL POLICY AND POVERTY REDUCTION:

THE CASE OF VIETNAM

Nguyen Thi LeThu

National Institute for Finance
Ministry of Finance, Vietnam

The information and view expressed herein does not necessarily represent the opinions of any organization
 Table of Contents

1. Vietnam’s recent economic growth and poverty reduction

2. Fiscal policies towards poverty reduction

• Taxation policy
• Expenditure policy

4. Policy options for period 2016-2020

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 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

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 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

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 Poverty reduction achievements

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

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 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

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 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

Taxpayer Threshold Tax rate

Before 2009 high income earners (more No deduction 10%, 20%, 30%, 40%
than $270/month)
01/01/2009- Every income earner Taxpayer: $230 5%, 10%, 15%, 20%,
30/6/2013 Dependent: $90/person 25%, 30%, 35%
01/7/2013 Every income earner Taxpayer: $425 5%, 10%, 15%, 20%,
Dependent: $170/person 25%, 30%, 35%

• 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.
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 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.

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 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

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Overview of expenditure policies for the poor

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 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

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 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) 12
 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

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 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

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 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

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 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)
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Thank you for your attention