Earlier this month, Parliament approved amendments to the 2016 state budget, proposed by the Cabinet on August 24. The amendment sets the 2016 state revenue projection at 5.3 trillion MNT and expenditure at 9.7 trillion MNT, with a deficit amounting to 4.3 trillion MNT. 

Deputy Minister of Finance Kh.Bulgantuya spoke in depth about changes made to the state budget in the following interview.

The public attention has shifted towards state budget amendments, discussed at the irregular parliamentary meeting. How has the 2016 state budget changed?

State budget amendment was necessary as the state revenue of 2016 plunged by 1.7 trillion MNT, expenditure escalated by 2.4 trillion MNT and the budget was expected to be short by four to five trillion MNT by the end of the year. Mongolia has had four or five state budgets since 2012. In 2015, the state deficit reached 1.2 trillion MNT, and in 2016, this amount increased by nearly four folds. Outside the state budget, we had to spend a total of 1.4 trillion MNT for some legislations, concession, and promissory notes. This impacted the most on the increased deficit. Fiscal deficit is limited to four percent of the GDP according to the Fiscal Stability  Law so we cut the deficit amount, estimated at 20.6 percent of the GDP, through the state budget amendment. The fiscal revenue was approved at 5.3 trillion MNT and expenditure at 9.7 trillion MNT with a deficit of 4.3 trillion MNT, which is equal to 18 percent of GDP.

Why has the fiscal revenue decreased? Which sectors had lower than expected income?

Everyone expected to have continued positive revenue in 2016. Several large projects were planned to launch, including Gatsuurt Project.

The navigation income was set 30 percent higher than 2015’s and major government joint stock companies were supposed to be privatized according to the original state budget. Unfortunately, these specifications weren’t carried out due to various reasons. The government and Parliament had no choice but to lower state budget revenue projections to a more reasonable level because some highly anticipated projects didn’t work out.

What kind of state expenses were cut? In particular, which departments and agencies had to reduce their spending? Were these cuts related to investment or operating costs?

We (the Ministry of Finance) submitted quite a few proposals on ways to cut state spending. State employee wages form a very large part in the Mongolian state budget right now. One of the proposals suggested the reduction wages of high-level state officials. Both the Cabinet and Parliament disapproved, saying cutting wages was wrong especially when facing economic difficulties because it directly impacts the people’s livelihoods. Another proposal asked to lessen one-time retirement bonuses of civil servants from 36 months’ worth of salary to one to 12 months’ sum,and reduce military officials’ one-time retirement bonuses to 24 months’ worth of salary. Parliament decided it was best to resume this type of one-time grant while the economy is facing difficulties. All expenses that can be spared have been cut. Fuel and postal costs have been reduced by nearly 50 percent. The budget for organizing meetings and conferences has also been cut considerably.

We didn’t randomly initiate suspension of some types of social welfare services and only allowed target groups in dire need of it to receive it. The 2016 state budget specified to distribute children’s monthly cash allowances of 20,000 MNT to only targeted groups of children, but now, every child will receive it under the 2016 budget amendments. 144 billion MNT was spent within the first six months of this year to issue monthly allowances to children who didn’t receive it in December 2015. We had run out of funds for July’s allowances so Parliament specified a budget for it in the state budget amendment.

Is it true that only 60 percent of children’s allowance will be issued?

Children’s allowance will continue until the end of 2016. Children’s allowance will be distributed in cash to targeted groups of children, which is around 60 percent of the total children in Mongolia. The remaining 40 percent will be able to receive state welfare again in cash from 2019 along with outstanding welfare allowances.

The implementation of the Law on Joint Pensions has been postponed. Over 50 billion MNT has to be distributed for joint pensions but the social welfare fund doesn’t have that kind of money at the moment.

Will students’ monthly stipend of 70,200 MNT be issued until December 2016? 

Yes, it will be issued until the end of 2016. However, students must meet certain requirements.

It seems that everything will continue the way it was. How exactly was the state spending decreased besides cutting fuel and postal costs? Shouldn’t the state revenue increase since the Economic Transparency Law unearthed an underground economy by improving transparency? How effective is the new VAT Law?

Some hidden incomes and profits were exposed but the state revenue continues to decrease because the entire economy is suffering. Import income alone declined by some 30 percent compared to last year. Of course, the new VAT Law is helping to expose the underground economy but it doesn’t mean that tax collection will increase drastically since the whole economy is in a bad shape.

We tried taking steps to recover the Mongolian economy and approve an accurate budget. We need to start taking action before it’s too late. The Social Insurance Fund alone requires subsidies of 400 to 500 billion MNT. The situation worsened so much because nearly a trillion MNT was given away as subsidies within the last four years. Taking all of this into account, Mongolia must make daring changes to some management structures and systems so that we can create a healthier economy.

At a meeting with private and public sectors’ representatives, the Prime Minister firmly stated that the Cabinet will not go back on their statement to increase taxes in the future. In your opinion, will taxes increase in the future?

We have a couple of options at the moment. Tax increasing proposals, submitted by the Ministry of Finance and government, don’t affect ordinary people that much. It impacts about one to two percent of taxpayers. Most Mongolians don’t own gold deposits, live in an apartment larger than 150 cubic meters, receive over 2.5 million MNT as monthly wage, or engage in a business related to alcohol and tobacco. We must take measures consistent with international standards and establish a tax environment aimed to narrow the gap between the rich and poor. It might be better to make some changes and specifications for calculations such as increasing taxable income brackets from 2.5 million MNT monthly income to four million MNT. In countries with similar GDP per capita as Mongolia, five to 35 percent income tax is imposed through five tax brackets.

Most countries reduce taxes rather than increasing them when the economy isn’t doing well. Many people are concerned that increasing taxes, regardless of to whom it may apply, would bring bad consequences. Wouldn’t increasing duty rate for importing cars cause burdens on not only importers but also purchasers?  

There are several countries that overcame economic difficulties by reducing taxes. For example, the USA alleviated some taxes when Ronald Reagan served as president, causing the US economy to grow from -0.3 percent in 1980 to 4.1 percent in 1988. However, these countries imposed extremely high tax rates, which were almost incomprehensible, according to research.

At the time, former President Reagan reduced the maximum income tax rate from 50 percent to 28 percent and increased the minimum income tax rate from 11 percent to 15 percent. The USA had 15 tax brackets before Reagan made it five.

In the early 1990s, Mongolia had multi-tiered tax system. The current taxation system was established in 2007 and most taxes were set at 10 percent. The Mongolian economy was much smaller back then. The tax collection and control system was very poor. Mongolians started creating savings at the end of 2000 and local businesses had just started to grow so lowering taxes was a correct policy at the time.

What was your reaction to complaints about the re-appointing of deputy ministers? If the economy is doing as badly as the Cabinet says it is, was it necessary to reestablish the deputy ministers’ position?

The Mongolia People’s Party executed a policy to lessen the number of ministries, cut all expenses that can be spared, and improve management organizations. As every sector is in a crisis right now, we need to quickly process and identify issues and address complaints, as well as establish a good management organization that will have close cooperation with foreign and local investor and international organizations. This is more important than cutting wages of 13 people. There are times when one minister is just not enough for resolving every problem. In particular, ministers who also function as a Member of Parliament are very busy and are overloaded with things to do. Other countries appoint many deputy ministers for various roles. But of course, this is impossible in Mongolia, considering its current financial difficulties.

When will large projects be advanced?

The Cabinet will discuss which projects to advance at the fall session. There were instanceswhen projects that had already been approved by Parliament had to be withdrawn. This alarmed many investors and lowered the credibility of the Mongolian state. To earn back their confidence, the second phase of Oyu Tolgoi Project, Tavan Tolgoi Project, Gatsuurt Project, and Tavan Tolgoi sub-projects for constructing a power plant and railway will be launched.