The following is an interview with Member of Parliament Ya.Sodbaatar about issues related to the draft amendment to the state budget and the International Monetary Fund’s extended fund facility program (IMF extended program).
Amendments to the 2017 state budget are the first issue up for discussion at the parliamentary spring session. The amendment is essential for the IMF extended program, but the public is displeased with initiatives to increase taxes through the amendment. Have you seen the draft amendment?
Since its formation, the government and Parliament have been taking progressive measures to correct the monetary policy, improve budgeting and budget discipline, and alleviate state debt burden. The majority of issues that have been discussed at regular and irregular sessions were related to the state budget and other financial problems. For some time, Mongolia used to have several budgets. We used to have a hectic financial system, which included the Mongol Bank’s Price Stabilizing Program, Development Bank’s bonds, concessional loan funds, and the state budget. Now, they’ve been merged into the state budget, which increases budget discipline and allows us to switch to saving mode. [The 2017 state budget] was probably the first budget to have such a low deficit. MPs used to increase deficit amount in draft state budgets, submitted by the government, but now, it’s different. We believe that the state budget is more reasonable and realistic now.
In the past four years, the 2016 state budget was the only one with a surplus of 500 billion MNT. At this rate, we might be able to exceed forecasted state revenue targets by the end of the year. The government estimated that the state budget deficit would decrease to 10.3 percent in the draft amendment. I’ve noticed a few things in the draft amendment.
What did you notice?
First of all, the government proposed to heighten tax through the draft amendment to the state budget in relation to the IMF’s extended program. The second thing I noticed is that some items in the state budget will be made consistent with newly approved legislations. For example, it was reflected in the draft amendment that the Development Bank would become consistent with international standards of independent banks and financial organizations since the Law on Development Bank has been approved. Within this framework, the Ministry of Finance has been put in charge of managing funds for several projects to be funded by the Development Bank. This ultimately means that financing will come from the state budget. The draft amendment to the state budget will most likely be approved at the beginning of spring session.
What’s your opinion on increasing taxes?
MPs are discussing whether to increase taxes through the amendment. We’re following two principles for increasing taxes. The first principle is to ensure that the shadows of economic difficulties will not impact on the living standards of ordinary people and finances of entrepreneurs. We must overcome economic challenges with as little damage and difficulty as possible. Hence, no changes will be made to taxes directly linked to people’s living standards. We plan to increase only taxes on alcohol and tobacco.
Secondly, a base will be opened for tax reform. When the Mongolian People’s Party was the ruling party in 2005, it made the tax rate four percent. We plan to make some tax-related changes starting from personal income tax so that those who earn high salary will pay high taxes and those who earn less pay less. In other words, we’re trying to make affluent and wealthy individuals shoulder slightly more weight from the nation’s economic burdens. This system could become the main strategy for overcoming economic difficulties.
The gap between the rich and the poor is the most frustrating issue right now. The guarantee for people’s satisfaction with their life has disappeared due to increased gap in people’s living conditions.
…We might not be able to provide pensions even with the help from the state budget. Hence, we must settle this matter in advance rather than when we’re pressed on time…
We will carry out tax policies to support the affluent middle class. A major plan in the draft amendment is to reform the pension system. Governments of all times have considered this. The state budget has to take the burden of not being able to provide pensions through the social insurance fund. Loss from the social insurance fund will take up a considerable percentage of the state budget from 2021. We might not be able to provide pensions even with the help from the state budget. Hence, we must settle this matter in advance rather than when we’re pressed on time.
We will take progressive measure in the next 20 years to gradually increase pension age. We will not suddenly increase the pension age to 65. This matter will be determined in a more flexible manner. People’s pension age will be dependent on their profession and living standards. This matter will be regulated through the Law on Labor, which will be discussed soon.
Foreign economists advised correcting policy errors which they deem to be the main cause of the current internal economic crisis.
How will policy errors be corrected?
We must fill the gaps in our treasure boxes to bring in more money and stabilize investment. For that reason, the government and Parliament are trying to correct monetary and budgeting policies, tighten the state budget, increase taxes on some luxury consumption such as tobacco, and designate more taxes on people that have higher living standards in the initial step. I’d like to underline that we will not put an additional burden on people who work day and night but are barely able to make ends meet. Ordinary civilians are burdened by social insurance contributions.
The average life expectancy has increased in the past 25 years and is expected to reach 70 in the next 20 years. People’s living standards and conditions will improve as well. In this sense, pension age will be steadily increased.
People are complaining that the state is trying to raise taxes when the state spending hasn’t been cut. Is it impossible to cut expenditures?
The state expenditure has been cut countless times since 2004. In the last three years, budget cuts of up to 30 percent have been made two to three times a year. It’s not possible to make further cuts from the cost of state services. If we do actually cut down, organizations and agencies will face financial insolvency. We’ve cut down on every possible spending, starting from stationary, and domestic and international business trips. The only way we can reduce expenditure is by improving loan management for lending services and cutting budgets for welfare services. Other solutions will include reduction of wages and pensions.
Quite a lot of projects are underway for lending services. I completely agree that the state needs to tighten its belt and enforce a better management first. To do this, amending the state budget is essential. Unfortunately, we’re getting complaints like “the state is trying to increase taxes even though they’re not cutting down the budget” because we’re not pressing on this matter as much as we need to.
MPs have been going on so many international business trips since the fall session ended. Observers say that former MPs never went on this many trips in the past. Shouldn’t the frequency of international business trips and their costs be reduced?
I doubt that MPs are going on business trips with state funds. Expenses of only a few of them, scheduled for state visits, are probably covered by the state budget. If we take a closer look at MPs’ overseas travels, 90 percent of them are for international negotiations. This tendency isn’t unusual for a new Parliament. Overseas travels are necessary for broadening international partnership and reviewing ongoing projects. MPs aren’t traveling abroad with funds from the state budget or ministerial budgets for leisure.
Parliament, alone, reduced its budget by 20 percent this year. If you look at international travel expenses of MPs, 90 percent of travels are covered through a different source of finance. In any case, the budget for business travels has been cut down.
According to experts, the IMF has never put such high requirements and terms for a country before. What’s your opinion on the terms laid out by the IMF on Mongolia?
The IMF’s high lending terms indicate that the Mongolian economy is in a very difficult situation. The IMF is only helping us overcome economic challenges. There’s nothing more to it. Hence, we must cooperate with this organization, review their terms and properly relay our own terms. The fact that the IMF set strict terms and requirements on Mongolia means that our policy error is that much degraded.
Cabinet expects to reach an economic growth of three percent in 2017 by moving forward with mining megaprojects. Will a megaproject be launched this year?
It was specified in the monetary policy and state budget that mega projects would be moved forward in 2017. The revenue from megaprojects is relatively low though. This year, the state plans to start major works such as comprehensively resolve Tavan Tolgoi (TT) project related issues, finalize Gatsuurt mine agreement, kick off large railway development projects, and announce tenders for large power plants.
A working group is working on settling TT project related issues.
How well is TT project progressing?
It is going very well, although we need to find solutions to some problems. The price of coal has risen. There’s nothing urging us to resolve these problems. We must find new financial opportunities and raise the value of TT. For starters, the CHALCO debt should be repaid. Various things need to be organized, but it’s wrong to make decisions every now and then without considering national interests. TT project is generating the amount of revenue it needs to for the state budget.