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Lecturer: Huynh Cong Minh

PRINCIPLES OF MACROECONOMICS

Vietnam’s government budget deficit


The impact on the economy and solutions

EASTERN INTERNATIONAL UNIVERSITY


Becamex Business School

Name IRN

Hồ Thanh Xuân 1332300212

Phan Thị Hiếu Thảo 1332300021

Nguyễn Thị Thu Thảo 1232300154

Nguyễn Hoàng Anh 1532300094 1

Lê Trần Hồng Quân 1342300010


An Investigation into
Vietnam’s government budget deficit: the impact on the economy and solutions

Prepared by Ho Thanh Xuan, Nguyen Hoang Anh,


Phan Thi Hieu Thao, Nguyen Thi Thu Thao, Le Tran Hong Quan.

Submitted in partial fulfillment of the requirement of the


ECO 205 course.

21th March 2016

Abstract
Government actions has direct influence on the country’s economy. On the one
hand, government budget deficit can promote the development of the economy. “In fact,
it can boost economic growth because government spending is a component of a nation's
total output, known as Gross Domestic Product (GDP)” Error: Reference source not
found. On the other hand, it has several negative effects on the country’s economic
growth. This report analyses the adverse impacts of Vietnamese’s government budget
deficit on its economic growth. The sample taken for the current situation of budget
deficit comprises of time-series data in the 10 most recent years (2006-2015). Secondly,
the report explores influence on Vietnam economy through investment, inflation, and
trade balance. Lastly, some policies are suggested for the government to prevent further
budget deficits.

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Table of Contents
I. Introduction....................................................................................................................5
1. An overall view about Vietnam economy.................................................................5
2. The government policy about budget deficit in Vietnam.......................................6
II. The impact of Vietnam's government budget deficit on the economy and
solutions..............................................................................................................................7
1. Government Budget Deficit......................................................................................7
1.1. Definitions of budget............................................................................................7
1.2. Different types of budget deficit...........................................................................8
1.3. Causes of the Vietnam government budget deficit...............................................9
1.3.1. Group of objective reasons..........................................................................10
1.3.2 Group of subjective reasons..........................................................................11
1.3.2.2 Unreasonable government budget operating.........................................12
1.3.2.2.1 Tax loss...........................................................................................12
1.3.2.2.2 Underdeveloped public investment.................................................13
1.3.2.2.3 Government mobilizes the capital for the stimulus package..........14
1.3.2.2.4 Less attention between Investment & Development expenditures
and current expenditures................................................................................14
1.3.2.2.5 The large-scale of government spending:.......................................14
2. Government budget deficit affects Vietnam’s economy.......................................15
2.1 Current situation of budget deficit in Vietnam in recent 10 years.......................15
2.2 The impact of budget deficit on the economy in Vietnam...................................16
3. How to solve the government budget deficit:........................................................23
3.1 The government policy solves government budget deficit..................................23
3.1.1 Reducing tax on foreign investment (attract investment).............................23
3.1.2 The government tries to control its spending (encourage saving)................24
3.1.3 Maintaining political stability.......................................................................25
3.2 The positive and restrictions of government policy.............................................28
3.2.1 Restriction on foreign business ownership and trade barriers are removed. 28
3.2.3 Foreign sellers do not receive payments under letters of credit issued in

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respect of exports to Vietnam.................................................................................30
3.2.4 Vietnam is allowed to restrict or close access to certain sectors by foreign
investors.................................................................................................................30
3.2.5 Certain types of investment now need a decision from the Prime Minister. 31
3.3 The suggestions....................................................................................................32
3.3.1 Money release...............................................................................................32
3.3.2 Debt...............................................................................................................33
3.3.2.1 Domestic debt........................................................................................33
3.3.2.2 Foreign debt:..........................................................................................34
3.3.2.3 Increase tax:...........................................................................................36
III. Conclusion..................................................................................................................36
1. The consequences of the Vietnam government budget deficits...........................36
2. The economic reform achievements Vietnam has made in recent years.............40
3. The suggested solution of Vietnam government budget deficit.................................42

Table 1: Vietnam Economy Data . ......................................................................................4


Table 2: Vietnam Government Budget was last updated on March of 2016. ...................15
Table 3: The growth of GDP and inflation (percentage) between 2000 and 2012. ...........17
Table 4: The level of issuing money for offsetting the budget deficit (1984 - 1990). ......31
Table 5: The amount of domestic money borrowed to offset the government budget
deficit (2002 - 2010). ........................................................................................................32
Table 6: The amount of foreign money borrowed to offset the government budget deficit
(2002 - 2010). ....................................................................................................................34
Table 7: Budget deficit of Vietnam in 2001- 2011 (% of GDP). ......................................36
Table 8: Structure of sources to offset the state budget deficit 2006 - 2011 according to
the International standard (including amortization) (billion VND). .................................37
Table 9: Structure of sources to offset the state budget deficit 2006 - 2011 according to
the Vietnam’s standard (excluding amortization) (billion VND). .....................................38

Figure 1: The business Cycle. .............................................................................................9


Figure 2: Structural Cyclical Components of Budget Balance. ........................................11

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Figure 3: Viet Nam Government Budget. .........................................................................14
Figure 4: National Government Spending of Six Southeast Asian Countries (Percentage
of GDP) between 1989 and 2011. .....................................................................................16
Figure 5: Fiscal balance of national government in six Southeast Asian countries. .........18
Figure 6: Vietnam's national government budget deficits from 1989 to 2011 in billion
dollar (in current $). ..........................................................................................................19
Figure 7: Vietnam's economic growth as measured by gross domestic product (GDP)
from 1989 to 2011 in billion US $ (in current US $). .......................................................20
Figure 8: Real interest rates in Vietnam from 1989 to 2011 (percentage). .......................21
Figure 9: Foreign Direct Investment (FDIs) in Vietnam from 1989 to 2011 (in current $).
............................................................................................................................................21
Figure 10: Vietnam Top Regional Foreign Direct Investment from January to
November 2009. ................................................................................................................25
Figure 11: Deficit in Vietnam and some Asian countries 2009 - 2011 (% of GDP). ........37
Figure 12: Density social investment by the sector 2006 - 2011 (%). ..............................39

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I. Introduction
1. An overall view about Vietnam economy.
Although other Asian markets are facing with weak domestic demand and low
exports, Vietnam’s economy might continue to increase at concrete rate. Additionally, the
government carries out the innovations in state-owned enterprises to enhance the business
environment. ‘Focus Economics panelists expect the economy to grow 6.7% in 2016,
which is up 0.1 percentage points from last month’s forecast. For 2017, the panel also
projects a 6.7% expansion.’Error: Reference source not found
Table 1: Vietnam Economy Data

2010 2011 2012 2013 2014

Population (million)ᄃ 86.9 87.8 88.8 89.7 90.6

GDP per capita (USD)ᄃ 1,169 1,373 1,754 1,894 2,032

GDP (USD bn)ᄃ 102 121 156 170 184

Economic Growth (GDP, annual variation in %) 6.4 6.2 5.2 5.4 6.0

Consumption (annual variation in %)ᄃ 8.2 4.1 4.9 5.2 -

Investment (annual variation in %)ᄃ 10.9 -7.8 1.9 5.3 -

Industrial Production (annual variation in %)ᄃ 15.3 13.5 4.8 5.9 7.6

Unemployment Rate ᄃ 4.3 3.6 3.2 3.6 -

Fiscal Balance (% of GDP)ᄃ -2.8 -1.1 -6.8 -5.9 -

Public Debt (% of GDP)ᄃ 48.4 46.7 48.5 52.1 -

Money (annual variation in %)ᄃ 33.3 12.1 18.5 18.8 16.0

Inflation Rate (CPI, annual variation in %, eop)ᄃ 11.8 18.1 6.8 6.0 1.8

Inflation Rate (CPI, annual variation in %)ᄃ 9.2 18.7 9.1 6.6 4.1

Inflation (PPI, annual variation in %)ᄃ 12.6 18.4 9.3 5.3 3.3

Policy Interest Rate (%)ᄃ 9.00 15.00 9.00 7.00 6.50

Exchange Rate (vs USD)ᄃ 19,498 21,034 20,840 21,095 21,388

Exchange Rate (vs USD, aop)ᄃ 19,128 20,663 20,874 21,029 21,198

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2010 2011 2012 2013 2014

Current Account (% of GDP)ᄃ -4.2 0.2 5.9 4.2 4.4

Current Account Balance (USD bn)ᄃ -4.3 0.2 9.3 9.5 -

Trade Balance (USD billion)ᄃ -12.1 -8.9 2.0 0.0 2.0

Exports (USD billion)ᄃ 71.7 95.4 114 132 150

Imports (USD billion)ᄃ 83.8 104 112 132 148

Exports (annual variation in %)ᄃ 26.7 33.1 20.0 15.4 13.6

Imports (annual variation in %)ᄃ 21.6 24.4 7.9 17.4 12.1

International Reserves (USD)ᄃ 12.5 13.5 25.6 25.9 34.1

External Debt (% of GDP)ᄃ 44.2 44.0 38.0 38.5 -


Source: Focus Economics - Economic Forecasts from the World’s leading economists.

2. The government policy about budget deficit in Vietnam.


Budget is considered as an effective planning of control used by organizations.
Budget can be in deficit or surplus. Budget deficit is is the result of government spending
exceeding its revenues gained from taxes or other sources.
According to the research, the budget revenue is expected at approximately 1,019.2
trillion VND (45.86 billion USD), while total spending will be around 1,273.2 trillion
VND (57.3 billion USD). Therefore, it leads to a deficit of 254 trillion VND, equal to
4.95 percent of GDP. Error: Reference source not found
Vietnam Government budget deficit has several adverse effects on its economic growth.
The first one is that when the government applies budget deficit, it leads to a decrease in
the number of investors. This not only reduces the economy’s growth rate but also
increases borrowing. The government may have to borrow from private sector. Secondly,
to reduce budget deficit, the government will need to raise taxes and decrease spending in
the future. Lastly, it may have extreme effects on the inflation. In this report, we will
demonstrate three principal objectives of this issue:
 Enumerate the causes of budget deficit.
 Investigate the impact of budget deficit on Vietnam's economic growth
 Propose some suitable policies to solve budget deficit

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II. The impact of Vietnam’s government budget deficit on the economy and solutions.
1. Government Budget Deficit.
1.1. Definitions of budget.
Budget is an estimation of the revenue and expenses throughout a specific future
period of time. A budget can be made for an individual, a family, a group, business,
government, country, multinational institutions or just about anything else that makes and
spends money. In the theory of macroeconomics, a budget is defined as a trade-off which
is made when one good is exchanged for another (Budget, n.d.).
Budget of the government is an ingredient in the financial system. The financial
system consists of groups of institutions in the economy that help match one person’s
saving with another person’s investment. The financial system moves the economy’s
scarce resources from savers to borrowers (Mankiw, 2011). Vietnam’s law of Government
Budget was adopted by the National Assembly of Vietnam on December 16th 2002. The
law defines that Government Budget is all of the government’s estimated revenues and
expenditures decided and finished in a year by the state’s agencies which have
jurisdiction to ensure the implementation of the government’s functions and duties (Thư
viện pháp luật, n.d.).
 Budget Surplus.
 If Tax - Government spending = positive saving ( Tax > Government
spending), the government runs a budget surplus ( an excess of tax revenue over
government spending) because it receives more money than it spends.
The surplus of Tax - Government spending represents Public Saving. Public
Saving is the amount of tax revenue that the government has left after paying
for its spending. (Mankiw, 2011)
 Budget Deficit.
 If Tax - Government spending = negative saving ( Tax < Government
spending), the government runs a budget deficit (a shortfall of tax revenue compared
to government spending) because it spends more money than it receives in tax
revenue. (Mankiw, 2011)
Budget Deficit is a status of financial health in which expenditures exceed revenues.
It occurs when an individual, business or government budgets more spending than

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there is revenue available to pay for the spending, over a specific period of time
(Grimsley, 2003). However, the term "budget deficit" is most commonly used to
refer to government spending rather than business or individual spending. Debt is
the aggregate value of deficits accumulated over time. When referring to accrual
government deficits, the term "national debt” is used (Budget Deficit, n.d.).

1.2. Different types of budget deficit.


Ministry of Finance (MOF) classifies budget deficit into 2 different types:
- Cyclical deficit.
A cyclical deficit is a deficit that is related to the business cycle. It means
that cyclical deficit is caused by the high or low level of productivity and national
income (Đặng, 2012).
- Structural deficit.
A structural deficit differs from a cyclical deficit in that it exists regardless
of the point in the business cycle due to an underlying imbalance in government
revenues and expenditures. Structural deficit is the deficit caused by the
customizable policy of the government such as tax law, social insurance benefits,
and the scale of government spending on education or national defence (Đặng,
2012).

1.3. Causes of the Vietnam government budget deficit.


According to Shawn Grimsley, the causes of government budget deficit are both
simple and complex. At its most rudimentary level of analysis, a budget deficit is caused
when a government spends more than it collects in taxes. Reducing tax rates may also
cause a deficit, if spending isn't reduced to account for the decrease in revenue. However,
the world is more complex, and much more than a mere rudimentary analysis is required.
Periods of economic growth and economic decline can have a tremendous effect on the
ability of a government to finance its spending. In fact, a budget deficit can occur even if
a government doesn't increase its spending one cent or lower its tax rate one percent. Let's
use a simple math problem to illustrate the point. Imagine that a small country has a flat
income tax rate of 20%, and the country's economy produced taxable income of $20

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billion. Since the island imposes a flat rate of 20% on taxable income, it was able to
generate $4 billion in revenue for the year. The island was hit with a hurricane and also
got swept up in a global recession. Both events decimated the primary industry - tourism.
These twin disasters caused the taxable income to fall from $20 billion to $14 billion.
This reduction in taxable income results in the government collecting only $2.8 billion in
revenue, which is a reduction of 1.2 billion or 30%. So, even if this tiny banana republic
didn't increase its spending one cent, or lower its tax rate, it will still suffer a budget
deficit. Deficits can increase even more during economic downturns, if the government
attempts to stimulate economic growth with spending as many economists recommend.
This is what happened in the Great Depression with the New Deal (Grimsley, 2003).
In Vietnam, there are also many causes of government budget deficit and budget
deficit has different impacts on the macroeconomic balance of the economy. Basically,
we can divide the causes of Vietnamese government budget deficit into two groups
(Nguyên nhân tác động, n.d).

1.3.1. Group of objective reasons.


1.3.1.1 The impact of the business cycle.
The business cycle is the period of time it takes for an economy to move
from expansion to contraction, until it begins to expand again. In the stage of the
contraction, government’s income (tax revenue) decreases but government spending
has to increase to solve many new difficulties of the economy and society. It causes
government budget deficit. In the stage of economic expansion, government’s
income increases while government spending is not increasing correspondingly with
government’s income. It reduces government budget deficit. Deficit spending which
is due to the impact of business cycle is called cyclical deficit.
The cyclical deficit is a passive budget deficit because it depends on the
movement of business cycle. We can determine the cyclical deficit after the total
budget deficit minus the structural deficit.

Figure 1: The business Cycle.

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Source: Principles of Economics.

1.3.1.2 The consequence of many agents.


Society always faces many risks such as natural disasters, epidemics, and
sometimes many risks are man-made like war, terrorism, population growth, etc.
Although the national budget has taken into account measures to prevent the risks,
sometimes they are beyond prediction. To handle emergency situations in order to
stabilize economic and social activities, government must increase its spending. It
causes unexpected budget deficit.

1.3.2 Group of subjective reasons.


1.3.2.1 The change of fiscal structure.
When government implements policy to promote investment and
encourage consumption, deficit spending will be increased. In contrast, when
government implements policy to reduce investment and consumption, deficit

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spending will be decreased. Deficit spending which is due to the impact of structural
policy is called structural deficit.
“Structural and cyclical deficits are two components of deficit spending.
These terms are especially applied to public sector spending which contributes to the
budget balance of the overall economy of a country. Deficit spending, or simply
deficit, is defined as: the amount by which spending exceeds revenue over a
particular period of time. The total budget deficit, or headline deficit, is equal to the
sum of the structural deficit and the cyclical deficit” (Wikipedia, n.d.).
Figure 2: Structural Cyclical Components of Budget Balance

Source: Wikipedia- The Free Encyclopedia

1.3.2.2 Unreasonable government budget operating.

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1.3.2.2.1 Tax loss.
Tax loss is a situation where the government collects less tax than it
would have normally collected in a particular period (Cambridge Dictionary, n.d.).
In comparison with other sources of revenue, tax is the main and most
sustainable source of revenue for government budget. Other sources of government
revenue include natural resources, state-owned enterprises, loans, foreign aid and so
on. “In the annual meeting of donors to Vietnam in December 2003, the amount of
Official Development Assistance (ODA; often referred to as foreign aid) committed
to Vietnam in 2004 will reach the record amount of US$2,839 billion ” (The
Fulbright Program, 2014).
Because our legal system is inadequate, the lax management has created
gaps for individuals and organizations to take advantage of tax evasion. Tax-dodgers
have caused government budget a considerable amount of tax loss. “Typically, in
2008, the amount of cigarettes smuggled into Vietnam caused tax loss. It deprived
government budget of 2,500 - 3,000 billion VND. Moreover, the amount of
smuggled cigarettes has caused Vietnam foreign currency bleeding which is about
$200 million /year” (VnEconomy, 2009). This factor increased unemployment rate
and strongly affected the economic growth. Besides, the extension of tax, tax cut,
and tax exemption help businesses have more money to invest, maintain, and expand
their production. However, the extension of tax, tax cut, and tax exemption affect
other government expenditures. Therefore, it caused government budget deficit.

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Source: VnEconomy News
1.3.2.2.2 Underdeveloped public investment.
Between 2007 and 2008,Vietnam received a huge amount of external
financing (Nguyễn, 2013). In order to serve the national benefit, Vietnam promoted
investment in the development of structural infrastructure and national main
projects. However, in fact, the poor master planning and project design, lack of
capability in management and supervision, and financial difficulties of owner and
contractor are most frequent and important causes of delay and cost overrun in large
projects. These failures causes a waste of government budget and prevent Vietnam
from achieving economic growth. They are also the main causes of Vietnam’s
government budget deficit (Nguyễn & Dapice, n.d.).
In addition, our public administration and public services are too
inefficient. This major inefficiency makes the situation of government budget deficit
become more serious.
1.3.2.2.3 Government mobilizes the capital for the stimulus package.
The government can stimulate the economic growth through three
sources of funding which include the issuance of government bonds, tax break, and

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the state reserve fund. Using the government’s stimulus package can stimulate
consumption and economic growth. However, it also causes budget deficit.
1.3.2.2.4 Less attention between Investment & Development expenditures
and current expenditures.
This cause puts pressure on government budget (particularly the local
budget) by increasing the government spending. We can see that the decentralized
revenue mechanism and the procedure of addition budget from the central budget to
the local budget in Vietnam are inadequate. Local budgets are decentralized
revenues corresponding to the specific expenditure in the annual estimated budget.
Hence, when the local governments borrow money to invest, they must ensure their
current expenditures to arrange for the operation after the projects are finished.
Concurrently, the maintenance expenses reduce the efficiency of investment. In
order to have enough capital, the local government must borrow money . This is one
of the causes of government budget deficit.

1.3.2.2.5 The large-scale of government spending:


Increasing government spending can help the economy create a
temporary growth in the short term, but it can cause many risks of instability in the
long term such as inflation and financial risks. Financial risks is caused by the
ineffectiveness of public expenditures and monitoring which cannot ensure the
healthy operation of the financial system. Most economists generally agree that
when government spending exceeds a certain threshold, it will impede the economic
growth because the limited resources is allocated ineffectively. For that reason, the
large-scale of government spending causes the government budget deficit.
1.3.2.2.6 In recent years, the government budget deficit has been used as a
tool of fiscal policy to stimulate the economic growth.
We can recognize this fact easily through the annual government budget
balance. In principle, after the total expenditure has been taken away from the total
revenue, we can determine the amount of surplus or deficit in a year. However, when
the policy-makers balance the government budget, they often determine the deficit
first, typically it is equivalent to the amount that the National Assembly of Vietnam

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allowed. Then, the remaining revenue is transferred from the current year to the
following year by the National Assembly. This is a prudent fiscal policy when the
policy-makers apply the theory of budget deficit subjectively. On the other hand, the
government must ensure that all of deficit spending has been used for the investment
and development expenditures to perform the national projects. As a result, the
government can create more job opportunities, promote the economic development,
and increase the government revenue in the future (Đặng, 2012).

2. Government budget deficit affects Vietnam’s


economy
2.1 Current situation of budget deficit in Vietnam in recent 10 years.

Figure 3: Viet Nam Government Budget.

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Source: ASIAN Development Bank

- From 2006 to 2014 GDP of Vietnam fluctuated. In 2014, the percentage of


Vietnamese government budget deficit was recorded equal to 4.4 percent of the
Vietnam GDP. Its peaked at 1.3 percent of GDP in 2006 and a dip of -9.3 percent
of GDP in 2009. Between 2010 and 2014, Vietnamese government budget deficit
increased but that number is negligible.
- During 1988 to 2014 Vietnamese government budget averaged -3.65 percent of
GDP.
Table 2: Vietnam Government Budget was last updated on March of 2016.
( Trading Economics)

Source: ASIAN Development Bank


2.2 The impact of budget deficit on the economy in Vietnam.
Government budget deficit in a high rate be able to increase inflation rate.
Because when government has budget deficit, it can compensate for the damage by the
issuance of money or debt, both of them are causing of inflation risks.

Figure 4: National Government Spending of Six Southeast Asian Countries


(Percentage of GDP) between 1989 and 2011.

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Source: Asian Affairs: An American Review - Volume 42, Issue 3.

- Looking at the chart, Vietnam is a country with the highest of percentage of


National Government Spending of six different nations in Asia from 1989 to
20011. Government Budget Deficit increase dramatically lead to the increase of
inflation. Moreover, in 2006 Vietnam became a member of The World Trade
Organization (WTO) created the liberalization of markets and a bond of foreign
investment in Vietnam, the foreign currency was invested directly and indirectly.
That made the foreign debt had peaked fold 13 times in 2000.

Table 3: The growth of GDP and inflation (percentage) between 2000 and 2012
Year 2000 2001 2002 2003 2004 2005 2006
Inflation -0.6 0.8 4.0 3.0 9.5 8.4 6.6
GDP 6.8 6.9 7.08 7.34 7.79 8.44 8.23

Year 2007 2008 2009 2010 2011 2012


Inflation 12.6 19.89 6.52 11.75 18.58 6.81
GDP 8.64 6.31 5.31 6.78 5.89 5.03

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Source: ASIAN Development Bank (ADB) 2012 and the General Statistics Office (GSO) 2012.

Firstly, the issuance of money directly increase the money supply in the market, it
is a cause of higher inflation, especially when financing deficits are large and ongoing,
the economy must be undergo prolonged high inflation rate. The raise in the money
supply can not go up inflation rate if the economy is growing, the increase demand for
money transaction in line wine with the increase of the money supply. However, in the
case of the private sector is satisfied with the amount of money that they are holding (the
relatively stable demand for money), then the increase of the money supply makes the
markets interest rates fall, demand for consumption of goods and services, demand for
investment will raise with the increase of aggregate demand of the economy, the price
index will go up inflationary pressure. They call the case when government funding
budget deficits by increasing the money supply as government is collecting phenomenon
“inflation tax” from people who are holding money.
Secondly, compensating budget deficit by borrowing in domestic or foreign,
domestic borrowing by issuing bonds in the capital market, if the release is continuous,
this will increase market interest rates. To make interest rates are lower, the Government
Bank need to buy bonds, it increase the amount of local currency and make pressure to
inflation.
Vietnamese government need to maintain the competition of exports, stable
exchange rates and restricting a increase of the foreign debts of the government and
enterprises in VND exchange, the Government Bank provided amount of VND to buy
foreign currency, pressuring inflation at 2 figure in 2007 (12.6%) and in 2008 (19.89%).
Figure 5: Fiscal balance of national government in six Southeast Asian countries

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Source: Asian Affairs: An American Review - Volume 42, Issue 3.

Comparing with other countries in Asia, Vietnamese national government budget


deficit measured as a share of GDP was the largest and its continued to grow.
Furthermore, the economic crisis in 2008 affected to the Vietnamese
macroeconomics, specific are budget deficit, a rising of public debt, current account
deficit, the growth was slow at 6.78% in 2010 and 5.9 in 2011. Besides that, inflation
raised in 2010 was 11.75% and in 2011 was 18.58%.
In 2012, GDP was 5.03%, its dropped by 0.87% compared with 2011. A main
cause of this situation is the decline in aggregate demand due to tight monetary policy to
curb inflation of the Government Bank in 2011. the increasing of inventory, especial is
property inventories. There were many companies were bankrupt ( there were more than
50000 companies were bankrupt from 2011 to 2012). Many government company such as
Vinalines, Vinashin, EVN had declared losses.
Figure 6: Vietnam's national government budget deficits from 1989 to 2011 in billion
dollar (in current $).

20
Source: Asian Affairs: An American Review - Volume 42, Issue 3.

From 2008 to 2011 Vietnam’s national government budget deficit rocketed with
under 0.5 billion dollars in 2008 to over 6 billion dollars in 2011. These number with the
information of inflation between 2008 and 2011 shows a relationship between inflation
and government budget deficit.
The increase of inflation is significantly will be negative effects for the growth
economic. Inflation leads to reduced aggregate demand, rising unemployment, it makes
instability for social economic environment, the information in economy will be
distorted, make investment decisions, consumption, saving become more difficult and
harder. Inflation is seen as a tax on the economy.
However, in some case the economy maintain a low rate of inflation has a positive
effect. For example, in Vietnam from 1992 to 2007 inflation help grow the economy.
Figure 7: Vietnam's economic growth as measured by gross domestic product (GDP)
from 1989 to 2011 in billion US $ (in current US $)

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Source: Asian Affairs: An American Review - Volume 42, Issue 3.

“ Some people say that to achieve growth targets, we need accept a higher
inflation rate. The economy has not reached the potential output yet, policies to boost
aggregate demand such as an increase consumption, boosting investment in the public
sector and the private sector, encouraging exports will contribute to achieving increasing
economic growth and must accept the price index of goods and services higher” (Nguyễn,
2013).
However, when the economy has reached the potential output, an increase in
aggregate demand will only rise prices without an increase economic output. The reason
is the high inflation rate cause of a stagnating production by investment, credit,
consumption, about savers do not dares to sent their money because negative interest
rates, the longer term deposit as holes. On the side of borrowers must be borrow with
high interest rates, with high capital expenditure loans make they afraid and they will not
be motivated to invest, or manufacturing business. The result is a shrinking credit
channel.
Figure 8: Real interest rates in Vietnam from 1989 to 2011 (percentage).

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Source: Asian Affairs: An American Review - Volume 42, Issue 3.

Figure 9: Foreign Direct Investment (FDIs) in Vietnam from 1989 to 2011 (in
current $)

Source: Asian Affairs: An American Review - Volume 42, Issue 3.

“The descriptive statistical analysis in this section have demonstrated the trends in
economic growth and national government budget deficits in post-Doi Moi Vietnam.

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Compared to Southeast Asia's five large economies, Vietnam registered the highest
economic growth rates and also amassed the highest budget deficits over the past two
decades. In addition, the findings have revealed the FDI growth pattern in Vietnam, as
well as fluctuations in the real interest rates. The next section will examine the effects of
government budget deficits on economic performance by using the fixed-effects
econometric model.” (Bui & Sudhipongpracha, 2015).
In addition, the relationship between economic growth and inflation from 2000 to
2012 in Vietnam show the economic growth is slow down, the inflation rise dramatically
in the first and the end of a period.

3. How to solve the government budget deficit:


3.1 The government policy solves government budget deficit.

3.1.1 Reducing
tax on foreign
investment
(attract
investment).
The Vietnamese government can choose to charge less tax on foreign
businesses in Vietnam for good companies such as Coca Cola, Pepsi and Nestle,
software companies like Microsoft and IBM, the electronics, technology and gadget
firms like Samsung, Nokia and Apple in order to attract and enhance these large
companies to invest in Vietnam in a long term and run their business will boost the
economy to grow faster and reduce the government’s debt. Besides that, Vietnamese
workers’ incomes are lower than other countries like China, Malaysia and the
Philippines because Vietnam is still a developing country. That will be an additional
appeal which makes Vietnam more attractive to foreign investors and even more
international companies like Apple and Sony which have their company branches in
China and other countries come to Vietnam and invest more in Vietnam than in
China or Thailand because the workers’ income of China and Thailand is increasing
recently. Therefore, run business in these countries will be more expensive than in

24
Vietnam.
3.1.2 The government tries to control its spending (encourage saving).

To solve budget deficit, the government has some options such as borrowing in
bond market to provide money for its budget deficit (N. Gregory, 2011). As a result,
it crowds out borrowers like households and companies who would borrow to invest
in their business which they can make profit after covering their cost or expenses
and paying back to the lenders. The Vietnamese government chooses to cover its
budget deficit (debt) is to reduce government’s spending of some sections like”
education and training” (The Ngo Centre, n.d.). However, this will set up a new
challenge for the Vietnamese government as mentioned in its policy education plays
an important part in the growth of Vietnam’s economy. If the Vietnamese politicians
decide to cut off spending on education, their future generations may not be
qualified enough to help the Vietnam’s economy compete with other growing
economy nations such as Myanmar, Cambodia or China. For instance, cut off budget
in education will cause Vietnam less engineers, scientists, doctors and professors in
the future. “Even though Vietnam’s debt remains well in the safe zone, there are
increasing risks in capital mobilization and repayment. Facing the problems of rising
public debt, the government has to reduce budget spending as well as have a
strategic plan to borrow and use loans efficiently” (Nguyen, 2014). The Vietnamese
government also encourages foreign direct investment (FDI) to improve the
economy and reduce part of the government’s budget deficit. “Vietnam officially

25
encourages foreign investment as part of its development strategy and the
government has stated its commitment to improving the business and investment
climate to move Vietnam closer to the ASEAN average by 2015” (U.S. Department
of State, 2014).
3.1.3 Maintaining political stability.
While many investor foreigners have found Vietnam as an attractive country to
make investment and cooperate with, there are still some parts of the country need to
be improved to make it a good and promising destination to invest on for many
investors such as “corruption and a weak legal infrastructure, inadequate training
and education systems combined with restrictive labor policies, conflicting and
detrimental bureaucratic decision-making, favoritism towards local firms, land use
limitations, and questions over future access to reliable and affordable energy” (U.S.
Department of State, 2014). “Economies that are afflicted by a high level
of corruption -- which involves the misuse of power, whether in the form of money
or authority, in order to achieve certain goals in illegal, dishonest or unfair ways --
are not capable of prospering as fully as those with a low level of corruption.
Corrupted economies are just not able to function properly because corruption
prevents the natural laws of the economy from functioning freely. As a result,
corruption in a nation's political and economic operations causes its entire society to
suffer. According to the World Bank, the average income in countries with a high
level of corruption is about a third of that of countries with a low level of corruption.
Also, the infant mortality rate in such countries is about 3 times higher and the
literacy rate is 25% lower. No country has been able to completely eliminate
corruption, but studies show that the level of corruption in countries with emerging
market economies is much higher than it is in developed countries” (Mirzayev, n.d.).
Mirzayev also states that Vietnam was ranked at 112 out of 175 in perceived
corruption, higher than nearby countries in Asia like China (was ranked at 83),
Thailand (was ranked at 76) and Philippines (was ranked at 95). “Corruption is one
of the disincentives for foreign investment. Investors who seek a transparent and
fair, competitive business environment will avoid investing in countries where there
is a high level of corruption. Studies show that there is a direct link between the

26
level of corruption in a country and measurements of the competitiveness of its
business environment. The following table features a small sample of countries and
shows the relationship between their ranks in competitiveness and their corruption
index” (Mirzayev, n.d.). “Investors have called for immediate reforms and the
development of sound economic policies in order for Vietnam to continue to attract
high-quality, foreign investment” (U.S. Department of State, 2014).
The Vietnamese government not only opens and encourages foreign direct
investment but also maintains a stable political stability. The Vietnamese court has a
wide power on its courts (cases of judgment. Due to that, corruption in this country
has reduced over the past decade, criminals also have decreased and there is no
terrorism case in this country. As a consequence, foreign investment into Vietnam
has risen significantly in recent years. Especially, Vietnam receives many
investments from Japan, Korea, Thailand and the US; therefore, FDI has created
many jobs in Vietnam and reduces unemployment in the country. Vietnam has low
rate of unemployment in the world despite the distance between Vietnamese’s’
income. “Thanks to the special feature of the national economy, most Vietnamese
have works to do. Vietnam’s economy creates many jobs, including jobs with
starvation wages” (Vietnam’s unemployment rate, 2014).
Figure 10: Vietnam Top Regional Foreign Direct Investment from January to
November 2009. (Vietnam Briefing, 2010)

27
Source: Foreign Investment Agency (2009)
According to Vuong (2014), Vietnam has four characteristic sub-periods of
post-Doi Moi transition: The period of “entrepreneurial policy-makers” (1986-
1994), economic integration and adaption of market economy (1995-1999),
economic boom and emerging cultural values (2000-2006), and globalization
and attitudes toward global geopolitics and geoeconomics (2007-present). In
“The period of “entrepreneurial policy-makers” (1986-1994) The new Law on
Foreign Investment initiated in 1987 enabled a surge of the first wave of foreign
direct investments (FDI) flowing into Vietnam, which then reached 10% of GDP in
1994. Vietnam was the largest FDI recipient among developing countries and
economies in transition in proportion to the size of its economy (World Bank, 1999)
thanks to its “macroeconomic stabilization resulting from Doi Moi and investor
expectations of continuing reforms and improvements in the general investment
climate” (Kokko, 1998). Corporate Law and Private Enterprise Law in 1990 ‘broke
ground’ the national private growth engine. From the old Confucian view imposed

28
by the feudalist elites, which favors “educated scholars serving the government”
(Vuong and Tran, 2009), by 1994 over 17,400 entrepreneurial firms started up. The
1992 Constitution extended human rights and recognized the multi-sectoral
economy. Land Law in 1987 (revised in 1993) granted farmers land use rights. The
milestones of Doi Moi from 1987 to 1994 can be summarized in the following table.
Vietnam quickly grew to become the world’s third largest rice exporter in 1989
(approx. 1.2 million tons exported), after China and the United States. The
entrepreneurial policy-makers had been the core element to bring about change in
macroeconomic management in 1990s although the CPV reserved status quo as the
unique ruler” (Vuong, 2014). “Viet Nam's political stability, administrative reform
and its efforts in upgrading infrastructure facilities are the advantages which help
attract foreign investors to the country, said George E. Kobrossy, General Director of
Zamil Steel Viet Nam (ZSV). In a recent interview with Ha Noi Moi newspaper, the
ZSV General Director said Viet Nam has its own advantages, namely an abundant
supply of labor and clever, industrious workers. Relevant Vietnamese agencies
always maintain contact with businesses to listen to their demands and help resolve
difficulties and obstacles for them, Kobrossy said. He noted that by the end of this
year ZSV will put its second factory in Viet Nam into operation in southern Dong
Nai province. With the two factories, the first already operational in Ha Noi, ZSV
will increase its total capacity from 50,000 tonnes to 90,000 tonnes of pre-
engineered steel buildings a year, he said, adding that his company plans to open
some more sales offices in a number of provinces and cities in Viet Nam. "After
being in Viet Nam for more than 10 years, we can surely say that we were right to
decide to invest into Viet Nam," Kobrossy affirmed./.(VNA)” (Vietnamembassy-
poland, 2016).
3.2 The positive and restrictions of government policy.
3.2.1 Restriction on foreign business ownership and trade barriers are removed.

29
Restriction on foreign business ownership and trade barriers are removed by the
Vietnamese government. “Just recently, Vietnam announced in a landmark decree it
is lifting the 49 percent foreign equity limit in public companies, subject to certain
exceptions such as in banking, beginning September. Decree 60 is intended to boost
Vietnam’s stock markets and provide an extra boost to the equitization of State
enterprises” (Reyes, 2015). The Vietnamese government has decreased foreign
equity restrictions is considered as a smart move to boost the economy to develop
and is expected to attract foreign investment to the country. “In 1986, Vietnam's
central government launched a national renovation process (Doi Moi) with the
official goal of establishing a “socialist-oriented market economy”. Since then, a
wide range of policies and programs have been adopted to promote economic
development and integration with the international community. The Vietnamese
Communist Party (VCP) abandoned its communist principle of centrally planned
economy in favor of a liberalized market system, particularly in the agrarian sector.
Price controls on agricultural products were removed and farmers permitted to
engage in trade of agricultural goods.
Not only did economic liberalization in Vietnam trigger rapid growth of

30
agricultural production, it also encouraged international trade and foreign
investment. Trade barriers, as well as restriction on foreign enterprise ownership,
were lifted. Through a more open environment for trade and investment, Vietnam
has become increasingly engaged in the Association of Southeast Asian Nations
(ASEAN), leading to closer diplomatic ties with other countries in Southeast Asia
and other world regions” (Bui & Sudhipongpracha, 2015).
According to Bui and Sudhipongpracha (2015), Doi Moi also set goals
macroeconomic steadiness. The stabilization areas contain inflation decrease,
government expenditure cap, and tax change. Still the Vietnamese government
confront a significant challenge of controlling its spending on education, health and
social service sectors. From 1989 to1993, government increases spending on
education is around 153% and more than 61% on health of GDP. In addition, they
stated that after Doi Moi the budget deficits of the Vietnamese government resulted
from funded to state-owned enterprises (SOEs) (Bui & Sudhipongpracha, 2015).
3.2.2 Skipping its communist principle in order to liberalize market system.

31
“Rapid increase in the Vietnamese government’s budget deficits has generated
debate on the public sector’s role in a country’s economic development trajectory.
On the one hand, government spending, particularly on education and public
infrastructure, can help crowd in both private consumption and investment.
Vietnam’s accelerated development after Doi Moi appears to bolster this argument.
On the other, after the two global economic crises in 1997 and 2008, concerns arise
over the effects of government budget deficits on Vietnam’s future economic
growth. As Vietnam joins other ASEAN member states in pursuit of economic
integration, unproductive government spending, such as subsidies for the financially
insolvent SOEs, is likely to hamper the country’s attractiveness as a new business
and investment hub for Southeast Asia” (Bui & Sudhipongpracha, 2015). The
Vietnamese government has opened to foreign investors and encouraged foreign
investment as well as reduces some communist principles to make foreign investors
confident to make investment to the country. As a result, Vietnam’s economic system
has transferred from communism to socialism. Recently, the Vietnamese government
has allowed foreign investors to buy lands, buildings and some Vietnam companies
that want to sell their firms for buyers like foreign investors.
3.2.3 Foreign sellers do not receive payments under letters of credit issued in
respect of exports to Vietnam.
“Sellers not receiving payments under letters of credit issued in respect of
exports to Vietnam. Vietnamese courts have a wide degree of discretion in their
enforcement and injunctions have been issued to stop payments under these letters
when there is a dispute between the buyer and seller” Error: Reference source not
found.
3.2.4 Vietnam is allowed to restrict or close access to certain sectors by foreign
investors.
‘As part of its agreement with the WTO, Vietnam is allowed to restrict or close
access to certain sectors by foreign investors’.Error: Reference source not found
‘Equity restrictions apply in the following sectors:
 Advertising
 Courier services

32
 Equipment repair and maintenance (excluding ships)
 Travel agencies and tour operators
 Film production, distribution and screening
 Services incidental to mining and manufacturing
 Telecommunications services
 Distribution
 Education
 Electronic games
 Maritime transport, container handling and related services
 Road and rail transport
 Aircraft maintenance and repair’Error: Reference source not found
‘As the 51% threshold relates to the total charter capital (as opposed to voting
shares), it provides foreign investors with the opportunity to structure their
investment in a Vietnamese company so that they can invest in sectors that would
otherwise be restricted to foreign investors, while at the same time be able to control
that company. This can be achieved, for example, through companies in Vietnam
having both ordinary voting shares and non-voting shares, with the foreign investor
owning the majority of voting shares, but which represents less than 51% of the total
charter capital’.Error: Reference source not found
3.2.5 Certain types of investment now need a decision from the Prime Minister.
‘Certain types of investment now need a decision from the Prime Minister.
These include:
 Investments of over 5 trillion Vietnamese dong
 Projects that require the relocation of over 10,000 people in the highlands, or
20,000 in other areas
 Construction and operation of air and sea ports
 Air transport
 Gambling
 Petroleum exploration, extraction and refinery
 Cigarette production
 Development of infrastructure in economic zones

33
 Construction and operation of golf courses
 Foreign investment into sea transport, provision of telecommunication services,
afforestation, journalism, publishing and the establishment wholly foreign-owned
science and technology companies’Error: Reference source not found
3.3 The suggestions.
To avoid government budget deficit, the government can apply three major
solutions depends on each country’s economic circumstance (Biện pháp xử lý thâm hụt
ngân sách , n.d.).
3.3.1 Money release
The government can finance its deficit by issuing more monetary base,
especially in the case of the country's economic recession. When real output is lower
than potential output, the financing of government deficits by issuing additional
monetary base will contribute to the realization of the goals of the policy of
economic stabilization through put the economy approached potential output level
without causing inflation. Conversely, when the needs of the economy is too strong
(real output is higher than potential output), then the government should not be
funding its deficit by increasing the monetary base. Therefore, this will increase
aggregate demand and pushed up real output beyond the level of potential output,
resulting in increased inflation.

Table 4: The level of issuing money for offsetting the budget deficit (1984 - 1990)
Unit: billion VND
Year The level of issuing money for offsetting the budget deficit

1984 0,4

1985 9,3

1986 22,9

1987 89,1

1988 450

1989 1.655

34
1990 1.200
Source: the Ministry of Planning and Investment (MPI)

 Advantage: The advantage of this method is the need to make money to


offset government budget is met quickly, without interest, not incurring the debt
burden.
 Disadvantage: This measure may make the money supply exceed money
demand. It makes inflation becomes uncontrollable. In the 80s of the 20th century,
our country has offset the government budget deficit by printing more money put
into circulation. This has pushed the inflation rate up to over 600%, the economy is
stagnant. Because of the consequences that this measure is rarely used. And since
1992, our country has completely terminated the printing of money to cover the
government budget deficit.
3.3.2 Debt.
Debt is mainly measure to finance the budget deficit in almost all countries in
the world. There are three principle way to reduce the public debt which included:
3.3.2.1 Domestic debt.
the Government implemented in the form of the issuance of shares and
bonds. Government bond are certificates recognized the government debt, it is also a
certificate issued by the government to borrow from residents, social-economic
organizations and banks. In Vietnam, the government is often delegated the
Government Treasury to issue bond in many form namely treasury bills, treasury
bonds, project bonds.

Table 5: The amount of domestic money borrowed to offset the government


budget deficit (2002 - 2010)
Unit: billion VND

The amount of domestic money borrowed to offset the


Year Deficit
government budget deficit

2010 98.700 119.700

2009 88.520 115.900

2008 51.200 66.200

35
2007 43.000 56.500

2006 36.000 48.500

2005 32.420 40.746

2004 27.450 34.703

2003 22.895 29.936

2002 18.382 25.597


Source: the Ministry of Planning and Investment (MPI)
Error: Reference source not found
 Advantage: This method could allow the government to maintain the
budget deficit without having to increase the monetary base or reducing international
reserves. Therefore, this measure is considered an effective way to dominate
inflation.
 Disadvantage: Financing government budget deficit caused by inflation
debts ahead but it may increase inflation in the future if the debt ratio to GDP
continued to increase. In addition, borrowing from resident will reduce the ability of
the private sector in accessing credit and increasing pressure domestic interest rates.
In particular, in countries experiencing high inflation, the real value of
government bonds fell rapidly and making them become less attractive. The
government can use his power to force the other entity must hold the bond.
However, in the long-tern, it can seriously affect the government's credibility and led
to the mobilization of funds through this channel will become more difficult in the
next year.
3.3.2.2 Foreign debt:
The government can finance the budget deficit as funds abroad through the
receipt of foreign aid and foreign loan from governments abroad and financial
institutions world as the WB - World Bank, IMF - International Monetary Fund,
ADB- Asian Development Bank, intergovernmental organizations and international
organizations.
Foreign aid is a source of capital growth of governments,
intergovernmental organization and international organizations give the government
of a country to implement development cooperation programs and sources of social

36
and ODA (Official Development Assistance)
Foreign borrowing can be done in the forms of bond issuance with foreign
currency abroad, state forms of credit loan.

Table 6: The amount of foreign money borrowed to offset the government


budget deficit (2002 - 2010)
Unit: billion VND

The amount of foreign money borrowed to offset the


Year Deficit
government budget deficit

2010 21.000 119.700

2009 27.380 115.900

2008 15.000 66.200

2007 13.500 56.500

2006 12.500 48.500

2005 8.326 40.746

2004 7.253 34.703

2003 7.041 29.936

2002 7.125 25.597


Source: the Ministry of Planning and Investment (MPI)

 Advantage: It is an effective measure to finance government budget. It


can make up these deficits but does not cause inflationary pressures to the economy.
It is also an important source for capital supplement domestic shortage, contributing
to the social-economic development.
 Disadvantage: It will make the debt burden and debt repayment
obligation increase while it reduces the ability of the government's expenditure. At
the same time, it also makes for the economy had become dependent on foreign
countries. In fact, some loans and aids also require accompanied many terms with
political, military, economic, causes the borrowing country are dependent.
3.3.2.3 Increase tax:

37
 Advantage: Increasing income tax rates would increase state budget
revenues, while also stimulating the object expanding economic activities, increase
profitability, partly state budget, and the remaining surplus. In this case, income tax
increases stimulate economic growth.
 Disadvantage: When it pass an endurance limit of the economy,
increased direct tax rates will reduce tax revenues of the government budget and
promote tax evasion and contraband.
In fact, raising taxes is not the easy solution to apply and very costly.
Raising taxes is feasible or not depends on the endurance of the economy, depending
on the work efficiency of the collection system and the performance of each tax.
During the economic recession, increasing tax is not only feasible but also hinder
production and business activities, directly increase the amount of tax debts of
enterprises, promote the business now on the financial situation of unfair and reduce
budget revenues.

III. Conclusion.
1. The consequences of the Vietnam's government budget deficits.
The prolonged budget deficit and debt will increase the debt burden. Once a country
falls into a debt crisis, budget deficit will stretch and go out of control. The consequences
include interest payments increase, more debt taking, leading to debt rise, in turn
increasing the budget deficit and continuing debt. Specifically, the debt rises until the
total debt passes affordability of budget revenues and lead to insolvency (Nguyen, 2014).
In addition, when a country suffers from budget deficit, this country will need to borrow
money from abroad, especially from developed countries. This will make the debtor more
dependent on external factors under unfavorable conditions. Sometimes, this will
indirectly affect the domestic economy. Furthermore, foreign debts might reduce the
political power in bilateral and multilateral relations with creditors. The risk of
insolvency could reduce the political sovereignty when the country is enduring from
pressure from creditors and international financial institutions. As a result, the debtor will
need to cut spending, boost taxes, reduce social welfare, change economic trends, modify
institution, or change management machine (Nguyen, 2014). Increasing the taxes and
tightening spending, specifically cutting social benefits and allowances have a negative

38
impact on people's lives, especially the poor, who usually have to endure the most from
changing government policies. Cutting too much of national budget even can lead to
opposition expressed through strikes or demonstrations (Nguyen, 2014). Vietnam, despite
of being a country with relatively low income, could not avoid frequent budget deficits
during the past decade. Balance sheet figures and budget estimates of the Ministry of
Finance discerned two notions of budget deficit, which are deficits according to
international standards (excluding amortization) and Vietnam’s standards (including
amortization). Based on the calculation of international standard, the deficit or
overspending of Vietnam was much lower, and also quite close to the statistics of the IMF
and ADB (Table 7). However, in Vietnam standard, the deficit was around 5% of GDP,
only in 2009 the deficit in Vietnam was significantly higher, which was 6.9% of GDP
because the impact of the global financial crisis. (IMF 2012; ADB 2012.)
Table 7: Budget deficit of Vietnam in 2001- 2011 (% of GDP)

Source: International Monetary Fund (IMF) 2012; ASIAN Development Bank 2012.
Vietnam deficit level was high compared to other countries in the regions. In the
period since the crisis of 2009 (Figure 11), the deficit rate of Vietnam was only lower
than Malaysia and India. In 2010, when other countries have started to improve their
situation, Vietnam is the only country continuously increasing the budget deficit.
However in 2011, according to the general trend, Vietnam reduced a half of the budget

39
deficit. The reason is that the economy tended to recover and return to stability after the
global financial crisis. (ADB 2012.).

Figure 11: Deficit in Vietnam and some Asian countries 2009 - 2011 (% of GDP)

Source: ASIAN Development Bank 2012

According to the data from the Ministry of Finance, sources to finance Vietnam's
state budget deficit included domestic borrowing and foreign loans (Table 8 and Table 9).
Accordingly, Vietnam depended on foreign loans less than domestic loans. Except for
2009, Vietnam borrowed more on foreign debt to offset the deficit. (Ministry of Finance
2014)
Table 8: Structure of sources to offset the state budget deficit 2006 - 2011 according
to the International standard (including amortization) (billion VND)

Source: Ministry of Finance 2014

40
Table 9: Structure of sources to offset the state budget deficit 2006 - 2011 according
to the Vietnam’s standard (excluding amortization) (billion VND)

Source: Ministry of Finance 2014

When Vietnam started to focus on the disbursement of their loans, trying to sell
bonds to collect money, while the effectiveness of capital investments were rarely
considered to be successful. This “chronic disease” in Vietnam came from bureaucracy
and corruption with the unreasonable use of public funds, spreading nature, delays, losses
and large waste together with weak management. As a result, the used funds did not
brings the expected results. The are some typical cases of large state owned corporations
such as Vinashin, Vinalines or Petro Vietnam. Losses from these corporations accounted
up to tens of trillions VND. Therefore, fiscal risks and Vietnam's public debt became
more severe when these groups did not survive and repay their own debts (Nguyen,
2014). Based on the ICOR( Incremental Capital Output Ratio), the investment efficiency
showing a decline of effectiveness of Vietnam’s investment not only in the public sector
but also in the entire economy. From Figure 12, the efficiency of investment in Vietnam
significantly fell. In terms of the entire economy, the ICOR increased from 4.89 up to
7.43 from 2000-2005 to 2006-2010. (General Statistics Office 2012.)

Figure 12: Density social investment by the sector 2006 - 2011 (%)

41
Source: General Statistics Office (GSO) 2012.

2. The economic reform achievements Vietnam has made in recent years.


Besides some main reasons leading to the consequences of the Vietnamese
government's budget deficits. There are some other reasons making the inflation rate in
Vietnam increase rapidly. In addition, the investment and the administration of our public
services are too inefficient. This is why the inflation rate in Vietnam keeps increasing and
makes the budget deficit become more severe. However, in recent years Vietnam’s
economy has made some amazing achievements. That is the first step of the changes of
Vietnam’s economy (Vietnam’s inflation rate, 2011).
The face of Vietnam’s economy has changed significantly since the introduction of
market-oriented reform and opening of the economy in 1989. Vietnam escaped from the
crisis in the mid-1980s and its annual GDP growth rate averaged 7.2% during the 1990s.
Vietnam remains one of the poorest countries in the world, but poverty has increased
significantly, from 58% in 1993 to 37% in 1998. The 1993-1998 period recorded only a
modest increase in income inequality with the Gini coefficient rising from 0.33 to about
0.35. It is widely recognized that the vast majority of Vietnamese people have gained
from the reform process (Que Tran & Thanh Vo, n.d.)
Growth in the past 30 years was much higher than the pre-Doi Moi level.

42
 After posting average growth of 4.4% in the early years of reform from 1986 to
1990,
 Growth averaged 8.2% during the 1991-1995, followed by 7.6% in the next five
years despite negative impacts from the regional financial crisis.
 Growth slowed down to 7.34% during the first five years of the 21st century
 Fall to 6.32% during the 2006-2010 period as a result of a global economic
downturn.
 Due to the global financial crisis and the European sovereign debt crisis,
Vietnam’s economic growth fell to an average of 5.9% during the 2011-2015
period but was still among the best performers in the region and the world at
large.
The GDP has also risen sharply from $471 in 2003 to nearly $2,300 in 2015.
Vietnam’s economic output is now estimated at $204 billion. Vietnam’s working force
has also seen improvements in both number and quality. The contribution of total-
factor productivity (TFP) to growth increased to 28.94% during the 2011-2015 period
from 21.4% during the 2001-2005 period. The macro-economy has been kept stable
and inflation in check (Vietnam’s notable economic achievements, 2016).
Over the past 30 years or Doi Moi, Vietnam’ achievement:
 Vietnam has gradually formed the complete market factors and market types
with smooth operations in line with the regional and international market.
 The goods and service market has also seen strides with the improvements in
scale and structure.
 The financial and monetary market has developed strongly and vibrantly.
 The stock market was formed, contributing to diversifying investment capital
sources in the banking system. In the meantime, the operation of the insurance
market has contributed positively to stabilizing production and people's lives
as well as mobilizing capital for the national cause of industrialization and
modernization.
 The real estate market has developed rapidly whereas the labor market has
been formed on a national scale. (Vietnam’s notable economic achievements,
2016)
2015 is an important year with the implementation of the ASEAN Community, so
Vietnam has opportunity to become developed in the future.

43
3. The suggested solution of Vietnam's government budget deficit.
Finally, there are more ways for the government to compensate the state budget
deficit such as: Increase the income, reduce expenses, loans measure in our country, loans
measures in other countries or money printing measures.
Increase the income:
Increase the income tax rate would increase state budget revenues, stimulate people's
expanding economic activities, increase profitability. In this case, the tax increases will
stimulate economic growth. Contribute to increasing revenues for state budget such as:
the economy of our country is increasingly developing, helping to control state budget,
ensuring the trade balance more balance.
Reduce Expenses:
Total investment from the state budget always occupied around 50% of total
investment of the whole society. Therefore, if Vietnam’s government cuts some
inefficient investments and lower investment order, the inflationary pressure will
certainly eases; inflation has been curbed down if the state agency can regularly cut
spending.
Loan measures:
- Loans in the country:
This measure allows the government to maintain the budget deficit without the
need to increase the monetary base or reducing international reserves. So this is an
effective way to curb inflation, while gathering the funds temporarily from the people, to
avoid the risk of external debt crises, easy to deploy
- Loans in other countries:
This is an effective measure to finance state budget, can offset the expenses
without causing inflationary pressures to the economy. In addition, this is also an
important source of capital to supplement domestic capital shortages, contributing to
economic and social development
- Money printing measures:
This measure helps governments have more money to offset state budget which is
met quickly, without interest, not incurring the debt burden.
In conclusion, the government should use the way, the source depending on

44
economic conditions, financial and economic policies in each period of each nation.
Therefore, Vietnam government needs to calculate carefully to offer solutions suitable to
the current situation, when the economy of Vietnam has been operating under the market
mechanism when the management of state, national financial background has been
renovated.

45
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http://www.investopedia.com/terms/b/budget-deficit.asp

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http://www.investopedia.com/terms/b/budget.asp

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