California’s BankruptcyApocalypse

The State of California is on the verge of collapse under the tsunami wave of the current financial crisis. The state government is being forced to sell off natural resources. Electoral officials have taken an 18 percent salary cut. Furthermore, the government plans to make big cuts in education and social welfare funding. Governor Arnold, movie actor known for strength and daring, is unable to save California from this crisis.

Over the past year, the financial crisis has severely damaged Taiwan’s economy. The government has instituted large-scale tax cuts, and public finance is at a standstill. California’s bankruptcy crisis has become President Ma’s best mirror.

When the subprime mortgage crisis took place, California endured heavy losses because of the rapid decline of the real estate market. In response, California reduced taxes drastically, the unemployment rate rose, and the state had to ask repeatedly for emergency aid. Already once this year, the government has been unable to pay salaries, and government employees have begun to take unpaid vacations. In mid-May, California held a public auction to raise funds. Among the sites put up for sale were a large sports stadium and a large convention center.

In order to fill the large budget deficit gaps, California held six referenda last week, on topics that included raising taxes, obtaining large loans, decreasing expenses, and so forth. The one measure that angry voters approved was that California government not raise salaries. Because Arnold was unable to regain voter support, California has already obtained six million dollars in loans from the federal government. Nevertheless, the budget deficit will rise to 21.3 billion dollars at the beginning of next year.

California will have no choice but to make cuts in every educational program, medical service, and social welfare program, including laying off 5,000 government employees, releasing prison inmates, closing fire departments, canceling health insurance subsidies for poor children, reducing funding for community colleges and abused women and children, and more. The neediest people will be the most severely impacted by these cuts.

On the surface, California’s financial crisis differs greatly from that of Taiwan. However, in this financial crisis, Taiwan’s economy has suffered great losses, and inappropriate tax cuts were the igniter that set the financial crisis aflame.

The director-general of Budget, Counting and Statistics has reported that, in the first quarter of this year, Taiwan’s growth rate was -10.24 percent, and is predicted to reach -4.25 percent over the course of the whole year. This is a record low for economic growth in Taiwan. The Wall Street Journal recently reported that half of the 52 economists questioned in a recent survey maintain the economy will take three or four years to normalize.

However, our top financial officials optimistically claim that the worst has already past, and that things will gradually get better in the future. They even claim Taiwan’s economy could normalize before the American economy does. If everything is as the financial officials say, then the country will prosper, and there will be peace. On the other hand, if lawmakers continue to be overly optimistic, this will only cause the public to be concerned.

Since the beginning of the economic crisis, Standard & Poor sovereign credit ratings of Ireland, Greece, Portugal, Spain, Russia, England, and many other European countries, fell. In England, the main reason for the decline in credit rating was worsening financial policy. International credit rating companies were concerned, early on, about Taiwan’s public finances, and Taiwan lost its good reputation with Standard & Poor.

Standard & Poor recently issued a report arguing that if this economic depression becomes long-term, Taiwan could continue to experience negative growth. In the future, Taiwan’s sovereign credit rating will perhaps fall to the fifth level, trailing behind other Asian countries, even lower than China.

Standard & Poor uses standardized models to calculate its ratings. If Taiwan’s economy makes a strong comeback, how can the outlook be so pessimistic? According to the Standard & Poor analysis, the reason Taiwan will fall to the fifth rung is that the Taiwanese government has amassed huge debt, and Taiwan’s financial system is weak. If Taiwan’s economy remains weak, the government will have a very difficult time repaying its debt. In fact, the financial crisis has had heavy impact on Taiwan’s public finances already.

During April of this year, tax revenues fell more than 70 billion New Taiwan Dollars (NTD) short of the level obtained at the same time last year. The director-general of Budget, Accounting, and Statistics predicts that taxes will fall 190 billion NTD short for the whole year. In a time of immense tax shortages, the financial bureau continues to implement tax reduction programs, making the deficit worse.

If economic recovery takes a long time, the financial bureau can rely only on loans or tax hikes to balance the budget in the future. To speak honestly, in a time of economic depression, we need to raise taxes. However the government debt is already nearing five billion NTD. How much room does Taiwan have left to borrow money?

Looking at Taiwan’s future prospects, obviously Standard & Poor’s pessimistic predictions and the optimistic predictions of the economic officials are antithetical to each other. Of course, we hope the Standard & Poor prediction will not come to pass, but if lawmakers continue to implement large-scale tax cuts, then Taiwan’s finances are bound to get worse, and step by step, the Standard & Poor predictions will be realized.

Taiwan could even be in danger of falling into bankruptcy, as California has. If this happens, those responsible for managing Taiwan’s tax resources will be held responsible.