A Modern State Budget System for a Middle-Income Vietnam

November 20, 2014

Habib Rab, Senior Economist, World Bank Vietnam VietNamNet Online Newspaper (Vietnamese)

How do we know whether State Budget expenditures are efficient and affordable? Are public debt levels at 60 percent of GDP too high for Vietnam? How can the government improve transparency of the State Budget? These are important questions raised by the public and the media just as the National Assembly is debating revisions to the 2002 State Budget Law and reviewing the draft 2015 State Budget.

Recent research by the World Bank has highlighted a number of reforms that could help to further modernize the State Budget system and enable it to meet the development challenges of a Middle-Income Vietnam. The State Budget Law sets out important “rules of the game” that have enabled strong management of public finances in Vietnam over the past ten years.

State Budget spending has increased from 20 percent of GDP fifteen years ago to just under 30 percent in more recent years, making major contributions to Vietnam’s development by providing critical infrastructure and enabling greater spending to benefit the poor. For example, in poorer regions, where development needs and service delivery costs are high, State Budget policies have enabled up to seven times more public spending per person than in richer regions. Meanwhile, when the economy was overheating in 2011-2012, State Budget policies reduced government spending as a share of GDP but maintained critical spending on education, health and social protection.  

These developments have taken place in an environment with increased information available in the public domain on government revenue, spending and debt. This allows the public to participate in and raise questions on public finance decisions. There are clear accounting and reporting rules and regular independent auditing on the quality of government accounts. Fiscal decentralization policies have brought spending decisions closer to people providing more opportunity to reflect local choices and preferences in budget allocations.

Given these achievements, what would be our top five recommendations for improvements to the State Budget Law?

The first recommendation is to further strengthen State Budget transparency, to promote more public participation in the budget process at all levels of government and to improve accountability. For example, the State Budget submitted to the National Assembly and Local People’ Councils should be disclosed at the same time so that citizens can provide feedback. State Budget information should be communicated clearly and concisely to facilitate citizens’ understanding of and participation in budget discussions.

Secondly, there is a need for more discipline in implementing approved spending plans. Actual spending has in recent years significantly exceeded planned spending. Such big changes affect the credibility and integrity of spending plans. To address this, we recommend that major changes to budget appropriations be approved through a supplemental budget. This should help to ensure stronger accountability to the legislature and promote more efficient spending.
The third recommendation is to introduce medium-term budgeting, which is subject to annual updates, aligned with Socio-Economic Development Plans (SEDP), and linked with the Medium-Term Investment Plan (MTIP). At the moment SEDPs run for five years, whereas the State Budget is annual. A medium-term budget would provide projections of total revenue, spending and borrowing over the coming three to five years. This would enable the government and the public to estimate the cost and affordability of its development plans.

The fourth recommendation is to consolidate reporting on all activities of the public sector so that the government, the National Assembly and citizens have a fuller picture of fiscal policy. This could be done through consolidated government financial statements with full information on revenue, expenditure, financial and non-financial assets, and liabilities. Like in other countries, the State Budget is not the only channel through which public services are delivered. In Vietnam there are for example extra budgetary funds and state enterprises. It is important to monitor risks to the State Budget emanating from these. As previous global crises have shown the biggest risks to the State Budget often come from extra budgetary public sector activities.

The fifth recommendation, is to have a comprehensive framework for local borrowing. At the moment all local debt is treated outside the State Budget because local authorities are not allowed to run budget deficits. We recommend the comprehensive framework includes integration of local borrowing onto the State Budget, strengthening of local debt management capacity, and adoption of borrowing limits that are more closely related to borrowing capacity of local authorities. This can help provide much needed resources to meet infrastructure needs in selected provinces, whilst ensuring responsible and transparent local borrowing for high return public investments.

The revision of the State Budget Law is a very important milestone. The agreed reforms will have an impact on the government’s public finance policies and the economy for many years to come. Much has already been achieved in the last ten years. We hope the government and the National Assembly will seize the opportunity to build a better State Budget system to help Middle-Income Vietnam grow even stronger in the future.