Taiwan’s national defense is an indispensable public service that secures its safety, as well as regional stability, and it can only be effectively provided by the central government. Ensuring that the central government has sufficient financial resources to support defense and deterrence aligns with the core interests of Taiwan, not to mention other countries in the region.
Recognizing the threat, the government has increased the defense budget since former president Tsai Ing-wen (蔡英文) took office in 2016.
The presidential candidates from the three main parties in January’s election all supported these policies and committed to increasing defense spending to 3 percent of GDP.
However, an amendment to budget allocation rules proposed by the Chinese Nationalist Party (KMT) — which would require the central government to allocate more revenue to local governments — could compromise the government’s ability to counter China’s aggression.
Under this proposal, the portion of income tax collected by the central government given to local governments would increase to 25 percent from 10 percent, while the share of business tax allocated to local governments would rise to 100 percent from 40 percent.
The KMT estimates that this would result in approximately NT$513.3 billion (US$15.8 billion) more being allocated to local governments. According to one estimate, the amount could reach NT$577.7 billion, resulting in a 141 percent increase in the central government’s budget allocation to local governments.
The central government’s total expenditure budgeted for the 2024 fiscal year was NT$2.882 trillion. Of that, the defense budget was NT$606.8 billion, or about 21.1 percent of the budget and 2.5 percent of GDP. It is almost certain that the policy will undermine the central government’s ability to respond to external threats.
Sufficient funding for Taiwan’s defense should be non-negotiable. When more is allocated to local governments, two possible ways exist to continue increasing defense expenditure:
The first option is to raise the average tax rate. Last year, Taiwan’s average tax rate was 14.6 percent. While this is the highest rate in the past 25 years, it is relatively lower than other developed countries. Facing an imminent threat from an aggressive, authoritarian neighbor with the world’s second-largest military budget of 1.7 trillion yuan (US$236.1 billion), Taiwan should consider increasing its defense spending by raising its tax rates.
The executive and legislative branches are unlikely to agree on tax increases, so Taiwan will need to consider transferring some of the central government’s public service responsibilities to local governments alongside the increased budget allocation. They could take over more public health and long-term care responsibilities.
However, restructuring budgets and public service responsibilities involves lengthy discussions and adjustment periods. Inevitably, the central government will need to re-examine its budget profile and potentially be forced to decrease defense expenses.
The KMT, with the support of the Taiwan People’s Party, has been passing controversial bills. If the local government funding allocation amendment is passed without a thorough review of the defense budget, the parties might find that they are unable to fulfill their defense commitments made before the election.
A shortsighted legislative approach, even with the intention of improving public services, will harm Taiwan’s democracy and security if essential dialogue is not held.
China will be the sole beneficiary.
Calvin Chu is a research associate at the Taiwan Democratic Progressive Party Mission in the US. Pai Chia-chia works at one of the Big 4 accounting firms in the United Kingdom and is a former commissioner at the Youth Department of the Democratic Progressive Party in Taiwan.
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