Fiscal transfer between different levels of governments in Vietnam

Fiscal transfer between different levels of governments in Vietnam (Paper for the Symposium in Tokyo, Japan - February 9-10, 2001) Content I. The administrative and State budget structure of the socialist republic of vietnam... 2 II. distribution of state budget revenues and Expenditure responsibilities between central and local goverments... 3 Iii. The size of state budget in vietnam... 7 IV. Local budget deficit and borrowings... 8 V. Grants from higher to lower levels of governments... 9 VI. Conclussion... 9 Chart 1: The administrative structure of Vietnam... 11 Chart 2: The State budget structure of vietnam... 12 Appendix: Responsibilities and authorities of governments at different levels in budget formulation and execution process 1

I. Administrative and State Budget structures of the socialist republic of vietnam 1. Administrative structure At the central level are the National Assembly, the President, the Government, the People s Supreme Inspectorate and the People s Supreme Court. - National Assembly is the highest legislative body. - Government is the top State executive power. It comprises the Government Office, Ministries and other Government bodies, such as Committees, General Departments... - The People s Supreme Court and the People s Supreme Inspectorate of the country. At each level of local administration, there are the People s Council and the People s Committee. - People s Councils are the State power at local levels. The members of the People's Councils are elected by local people. They are responsible to the local people and higher administrative levels. - People s committees are the executive body of the People s Councils. They take responsibilities to keep to the Constitution, to execute Laws and legal documents issued by higher State administrations organs and the Resolutions of the People s Council. In terms of territory, the administrative structure of the Socialist Republic of Vietnam is divided as follows: - The Country is structured into provinces and cities under central authority (hereinafter referred to as province); - Provinces are organized into districts or provincial township; city under central authority is divided into districts and towns (hereinafter referred to as districts); - Districts are structured into communes; provincial towns are divided into communes; Urban districts are divided into precinct (hereinafter referred to as communes). Chart 1 - Administrative structure of the Socialist Republic of Vietnam 2

2. Structure of the State budget in Vietnam The State Budget of Vietnam comprises of the budgets of Central and local governments (hereinafter referred to as Local State Budget). It is uniformly managed with the principle of centralised democracy and publicity. The State Budget system is structured into 4 levels: Central State Budget, Provincial State Budget, District State Budget and Communal State Budget. The responsibilities of each budget level are earmarked according to its authorities decentralized among administrative levels. The relationship among those levels is governed by the following principles: 1. Each level of the State budget: State budget of central and local authorities are arranged their own revenues and assigned expenditure responsibilities ; 2. The grants (in Vietnam, we call it supplement allocation) given by the higher to lower levels of governments must keep to the principle of equity and balanced development of regions and localities. The grants are considered as the revenues of the lower State Budget levels; 3. In case the governments of higher levels authorize the lower levels to perform certain expenditure assignments within the former s responsibility, resources must be transferred from the former to the latter for the performance of the tasks concerned; 4. Apart from revenues from grants and the expenditure responsibilities authorized, it is forbidden to use the budget of one level to perform spending tasks of other levels, except for some special cases provided by the Government. Chart 2 - State Budget Structure of the Socialist Republic of Vietnam II. Distribution of revenue arrangements and expenditure assignments between central and local governments This is an essential and important terms in regulating Central - Local fiscal relationship in the budget system. In Vietnam, the decentralization is based on the following two principles: - First, the Central State budget, which is made up of major sources, plays the leading role in performing important spending tasks nationwild. 3

- Second, each local state budget is arranged some stable, specific sources of revenues so that it could carry out the expenditure responsibilities assigned in the region. According to State budget law, sources of revenues and expenditure responsibilities assigned to each state budget level are stable for the period of 3 to 5 years (this period can only be changed when it is revised by the National Assembly). The assignment and supplement allocation proportions are also stabilized from 3 to 5 years. 1. Central Budget 100% collection: Central budget revenues are raised from major sources, which account for a large proportion in the State Budget, so that the central government can perform its large spending tasks in macro economic regulation. The sources of Central budget 100% collection include: Value-added tax imposed on imports, import - export duties, excise tax (excluding excise tax imposed on some goods and services, such as discotheque, massage, karaoke; golf club member cards, golf billets; casino, jackpots; horse-race betting, car/motorbike race betting. The revenues from this source is used for proportional distribution between province, district and commune budgets), enterprise income tax from entities applying consolidated accounting system (such as: Vietnam Electricity Corporation, Bank for Industry and Commerce, Bank for Foreign Trade, Bank for agriculture, Vietnam Airline, Vietnam Post and Telecommunication Corporation...), revenues from oil and gas, income from State-owned shares in public enterprises, Government borrowings, non-refundable aids provided by other Governments and international organizations, Central Budget surplus forwarded from previous fiscal year, some kinds of fees and other sources of revenues as provided by laws. 2. Provincial Budget 100% collection The sources include: land rent, rent and sales of State-owned houses, registration fees (excluding the fees on land and houses), revenues from lottery, foreign non-refundable grants provided directly to provincial governments, some kinds of fees, spontaneous contribution of domestic and foreign organizations and individuals to provincial budgets, provincial budget surplus forwarded from previous fiscal year, grants from central budget, other sources of revenues stipulated by the law. 3. District and commune 100% collections District and commune budgets are also arranged some revenues of 100% collection in order to give each level of government the sense of initiative 4

and flexibility in exploiting and spending revenues according to its functions and duties assigned. 4. Proportional distribution of revenues among budget levels 4.1. Between central and provincial budgets: - Value-added tax, excluding that on imported goods; - Enterprise income tax, excluding that from entities applying the consolidated accounting system; - Income tax for high-income earners; - Remittance tax; - Charge on the use of State Budget capital. The distribution proportions are decided by the Government 4.2. Between provincial and district/commune budgets: - Tax on land - use right transfer; - Tax on land and houses; - Tax on agricultural land use; - Tax on natural resources; - Registration fee of land and houses; - Excise tax on domestic goods and services such as discotheque, massage, karaoke; golf club member cards, golf billets; casino, jackpots; horse-race betting, car/motorbike race betting. The distribution proportions are decided by Provincial People's Committee. 5. Distribution of expenditure responsibilities With the arranged revenues, expenditures responsibilities of each level of government are assigned clearly and concretely. We can summarize them as follows: 5.1. Responsibilities of Central Government budget: 1- Current expenditures, including interest payment; 2- Capital expenditures: This category includes expenditures on centrallymanaged socio-economic infrastructure projects without self-recovery possibilities; investments and capital support for state-owned enterprises; State equities and capital contribution to joint-ventures in sectors where the 5

State participation is necessary as provided by laws; allocation for National Investment and Development Support Funds; payment in State reserves. 3- Amortization of Government borrowings. 4- Additional allocation for finance reserve fund. 5- Transfers to lower-level governments. 5.2. Responsibilities of Provincial government budget: 1- Current expenditures include spendings on defense, security and social safety, which have been assigned to provincial governments; national programs managed by provincial authorities under Government decision; payment of interest on borrowings for capital investment (if any). 2- Capital expenditures include expenditures on construction of socioeconomic infrastructure projects managed by provincial level; investments and capital support for state-owned enterprises as provided by laws. 3- Amortization of borrowings for capital investment (if any). 4- Additional allocation for financial reserve fund. 5- Transfers for lower-level budgets. 5.3. Responsibilities of District government budget: 1- Current expenditures include spendings on defence, security and social safety, which have been assigned to district level. 2- Capital expenditure, including payment to construction of socio-economic infrastructure projects assigned by provincial level. The assignment to cities and towns under provincial management must include capital expenditure for public schools of all stages, public utility projects, lighting, water supply and sewerage, urban transport, transport safety, urban sanitation. 3- Transfers to lower-level budget. 5.4. Responsibilities of Commune budget 1- Current expenditure (Spendings on social affairs, culture and information, sport activities under ward management; spending for civil defense, social safety in the locality; spending for operation of ward-level State agencies, Party s and other political and social organizations... and other expenditures as provided by laws. 2- Capital expenditure for construction of socio-economic infrastructure projects assigned by provincial government. 6

III. Size of state budget in vietnam 1. State budget revenues In recent years, budget revenues have not only made up for current expenditures of the State but also been used in part for capital expenditures. In the absolute terms, if calculated on the basis of current prices, state budget revenues have continuously increased. For the period 1991-2000, it has expanded by 7.7 times, in which, revenues from taxes and fees accounted for a major proportion, averaging from 95%-98% of the state budget revenues. In terms of revenues growth rates, in the years 1990, 1991 and 1992, the rate of revenues growth was very high, reaching the highest in 1992-98,1% as compared with that of 1991. The state budget revenues in these years were the mirror image of the economic boom. However, since 1993, though the revenues was still growing, the speed has slowed down. In fact, it has decreased form 98,1% in 1992 to 3.1% in 1997. In terms of size, state budget revenues as a share in GDP increased from 13,8% in 1991 to the top 23,3% in 1995. For the first 5 years of the decade, on average, state budget revenues accounted for 20,5%GDP. Then, this proportion has gradually gone down to about 20%GDP in 1997, 1998. In 1999 and 2000, the share of budget revenues in GDP was about 17.5% to 18.5%. Generally, state budget revenues were 20.2% for the decade. 2. Budget expenditures In the early years of the decade, the size of expenditures changed very irregularly. In 1990, the state budget expenditure accounted for 20,5%GDP. In 1991, it accounted for only 15.9%GDP. Then, it unexpectedly increased to approximately 30% in 1993. From 1994, especially from 1995, state budget expenditure as a percentage of GDP has continuously gone down. Within the 5 years from 1993 to 1998, the proportion of expenditures in GDP was greatly reduced, from 29.4% to 22.7%. This reduction was equivalent to 20% of total budget expenditures. On average, for the period 1991-1995, total expenditures made up 24.5%GDP. In 1999, 2000 the size of budget expenditures fluctuated in the range of 22.5% - 23.5%GDP. For the whole decade, budget expenditures reached 24.1%GDP, showing an considerable increase as compared with the figure of 19.7%GDP of the period 1986-1990. As for the rate of growth: in 1992, 1993, the rates of growth in expenditures were very high (100% and 69% respectively). But from 1994-1998, it was slowed down remarkably. In 1997, 1998, the rate was only 9%. In terms of expenditure structure: for the first time, state budget expenditures in the period 1991-2000 were reserved to both current, capital 7

and debt payment expenditures. Although current expenditures still accounted for a big proportion (63,5% of total expenditures on average), capital expenditures has gone up to around 25%, and debt payment expenditures - more than 11% of total expenditures. In budget management process, many expenditures of subsidiary nature, beyond functions and responsibilities of the state have been cut down considerably. Attention has been paid more closely to key projects without self recovery possibilities. Priorities have been given to such items as education, science and technology. However, it must be said that the expenditure structure of Vietnam is still irrational. The proportion of the expenditures on such items as science and technology, environment protection, education, training..., which can ensure the stable economic development is still low. In the period 1991-1997, from the total budget expenditures, spending on education and training accounted for 9,5%, while spendings on science, technology and environment - only1.1%. Meanwhile, the spendings on the economic cause, which consist mainly of the subsidy to inefficient state-owned enterprises, are 6 times greater, reaching 6.3% of total state budget expenditures. 3. The size of Central and local budgets With the arranged major sources of revenues, it recent years, the revenues of Central government budget accounted for about 70% of total state budget revenues. The sizes of Central and local budgets are as follows: The size of central and local government budgets, 1991-2000 (%) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Local budgets 38.8 36.0 43.1 39.4 28.3 29.5 33.0 33.3 33.5 33.2 * Central budget Source: Ministry of Finance 61.2 64.0 56.9 60.6 71.7 70.5 67.0 66.7 66.5 66.8 IV. Local budget deficit and borrowings In Vietnam the budget of Central government is balanced on the principle saying that total revenues form taxes and fees must be greater than total current expenditure. Domestic and external borrowings to compensate budget deficit can only be used for capital expenditures, not for consumption spendings. 8

For local governments, balanced budgets are required. In other words, budgets of local governments are prohibited from running a deficit. Regarding local government borrowings, it is stated in the law that only provincial governments can raise revenues from borrowings for constructions of infrastructures, while the levels of governments cannot. Moreover, provincial governments are allowed to borrow only from domestic entities and individuals. Total amount borrowed at a time annot exceed 30% of capital construction expenditures assigned each year. The borrowing operations made by provincial governments must be approved by the Prime Minister. Once approved, the provincial governments must arrange their own budget to pay the debts. V. Grants from higher to lower levels of governments Besides the arranged revenues of each level of government, in some cases, the higher level of governments also give grants to lower levels of governments. There are two types of grants: - Grants for balancing local budgets. The amounts granted are held stable for a period of 3 to 5 years, but changeable every year in accordance with the inflation and economic growth rate. These grants are given to those poor localities whose arranged revenues cannot meet the expenditure assignments. Recently, there are only 6 provinces having balanced budgets on their own, the remaining 55 provinces have to count on grants to balance their budgets. - Targeted grants. This kind of grants is arranged each year according to the budget capabilities of higher levels of governments and specific purpose or project in the regions. It is forbidden for local governments to use the amount granted for other purposes that have been targeted. The criteria for grants are stipulated in the law. However, these criteria are too general and qualitative, not quantitative (e.g: population, socio-economic and natural conditions; priorities given to mountaineous and remote areas...). This gives rise to the concession in the budget preparation process. 9

VI. Conclusions 1. Prominent successes: 1. Institutionalization of the preparation, approval, execution and final account reporting processes of the State Budget. 2. A consolidation period (for 3 years) for revenue and expenditure of the State Budget at all level has been maintained; discretionary negotiations have been generally eliminated. 3. Autonomy of local governments and other related functional bodies have been created and much improved as compared to pre-reform period. 4. The efficiency of revenue mobilization and expenditure by governments at all levels has been gradually improved by removing wastes. 5. The problem of request for too many revenue resources and negotiation of the division of expenditure responsibilities between the central government and local governments in the preparation process has generally been tackled. 6. The burden on central State Budget has now been relieved as the responsibilities of the local governments would not be borne by Central Government as before. The Government now does not intervene in the operations of localities through detailed instructions. 2. Issues need further improving: 1. The overlapping nature of the budget system. 2. Limited role of local governments in preparing estimations and approving final accounts for their own budgets. 3. Problems in the autonomy and the stability of local state budget 4. Unqualified staff, especially at the commune level. 5. Open question of whether making district also a state budget level or make it a budget-spending unit. 10

Chart 1: Administrative structure of Vietnam 11

Chart 2: State budget structure of Vietnam 12

Appendix Responsibilities and authorities of governments at different levels in budget formulation and execution process 1. National Assembly The National Assembly is authorised and responsible for the following areas: 1- Decision on the national financial and monetary policies for economic development, state budget balances; 2- Approval, amendment and issuance of legal documents on State Budget management. 3- Decision on the State Budget plan on the total revenues, total expenditure, overall deficit and financing; 4- Decision on State budget allocations for each revenue resources, each expenditure item and debt service. On the basis of the decision by the National Assembly on the annual State Budget, the Standing Committee of the National Assembly is authorised to decide on the allocation of State Budget to each Ministry and Branches and the additional allocations from the Central State Budget to each province and city under central authorities at the request of the Government. The allocation plan shall be reported to the coming session of the National Assembly; 5- Decision on the List of programs and national projects, key capital investment works to be financed by State Budget; 6- Approval of amendment to State Budget plan (if necessary); 7- Approval of the final account report of the State Budget. 8- Supervision of the execution of the State Budget. 9- Supervision on the implementation by the Government, Ministries and branches of the State Budget and fiscal and monetary policies; as well as the implementation of Resolutions of the National Assembly on the annual State Budget, programs and national projects, key capital investment works; The Annual State Budget plan of next year must be sent to National Assembly deputies at least 10 days before the opening of the year-end session of the National Assembly. The National Assembly shall decide on the next-year State Budget plan by 30 th November of the current year. The allocation of the Central State Budget and Local State Budget for the next year to budget spending units must be completed by 31 st December. In case the State Budget Plan is yet to be approved by the National Assembly, the 13

Government shall prepare the State budget plan which is to be submitted to the National Assembly at time required by the latter. 2. The Government The Government is authorised to and responsible for: 1. Submitting to the National Assembly, the Standing Committee of the National Assembly of draft Laws, Ordinances and other legal documents on State Budget; Issuance of legal documents on the State Budget management within its authority; 2. Preparing and submitting to the National Assembly the State Budget plan and State budget allocation plan, the amended State Budget plan (if necessary); preparing and submitting to the Standing Committee of the National Assembly on the detail allocation plan of the Central State Budget; 3. Assigning the revenue and expenditure resposibilities to each Ministry and Branches as well as deciding the grants from Central Budget to each province, city under central authority, on the basis of the Resolution by the National Assembly and Resolution by the Standing Committee- National Assembly. 4. Uniform management of the State Budget to ensure the coordination among line Ministries and local authorities in the execution of the State Budget; 5. Organisation and supervision of the execution of the State Budget; reports to the National Assembly, the Standing Committee-National Assembly on the execution of the State Budget and implementation of the programs, national projects and other key capital investment works; 6. Examining the Resolutions of the People s Councils on the State Budget estimations and final accounts; 7. Provision on principles and computational methods for the addition of revenue resources from the State Budget at higher level to lower level.; 8. Provision on the use of State budget reserves and management of financial reserves; 9. Issuing regulations on State Budget spending norms for uniform application nationwide; 10. Preparing and submitting to the National Assembly the Final Account reports of State Budget (The Prime Minister shall decide on the audit of the final account of the State Budget prior to the submission to relevant State authorities for approval; Each year, the Prime Minister shall decide on the guidelines on the preparation of the socio-economic plan and the State Budget plan the following year). 14

2.1. Ministry of Finance On the basis of the decision by the Prime Minister, the Ministry of Finance shall provides guidelines on the requirements, content and the timing for preparation of the State budget plan and the indicative figures for state budget plan formulation. The Ministry is also responsible for checking the budget plan prepared by central authorities; consolidation and preparation of the overall State Budget plan for submission to the Government. The specific tasks and competence of the Ministry are as follows: 1. Preparation of draft laws, ordinances and other legal documents on State budget for submission to the Government; issuance of legal documents on State Budget management with its authority; 2. Being responsible to the Government on the uniform management of State Budget: management and supervision of the collection of taxes, fees and charges and other revenues to the State Budget; Unified management of borrowings and debt services of the Government and financial management of international assistance.; 3. Provision of guidelines and supervision of the execution of State Budget; organization of the collection of State Budget and allocation of funds for expenditures by State Budget; extending soft loans or financial assistance to target State programs and projects in compliance with relevant Government regulations. 4. Provision of guidelines and supervision of implementation by Ministries and other central authorities in the preparation of the annual State Budget plans; coordination with relevant authorities at central level in the preparation of the State budget plan, allocation plan and the allocations of Central State Budget for submission to the Government; recommendation of measures to raise more revenues and savings of State Budget resources; 5. Formulating, in collaboration with other Ministries and agencies, regulations, spending norms for State budget expenditures, then submitting them to the Government for approval for uniform application nationwide; 6. Inspection, supervision of the financial management of all economic and administrative bodies and other units which are liable for State budget obligations or are entitled to State budget allocations; 7. Management of State Budget funds and other State funds; 8. Formulation of the final account report of the Central Budget; consolidation of the final account report of State budget for submission to the Government and further submission to the National Assembly for final approval; 15

9. Approving of final account reports of the budgets of central authorities; examining the local state budget final accounts. 2.2. Ministry of Planning and Investment The Ministry of Planning and Investment is responsible for and has competence in the following areas: - Submission to the Government of the socio-economic plan for the whole country and major balances in the national economy, which include fiscal and monetary balances, capital investment plan. These elements form the basis for the preparation of the financial and fiscal plans; - Collaboration with the Ministry of Finance on the preparation of the State budget and state budget allocation plan within its authority; - Collaboration with the Ministry of Finance and other relevant Ministries and branches in the assessment of efficiency of capital investment projects. 2.3. State Bank of Vietnam The State Bank of Vietnam is responsible for and has competence in the following areas: - Collaboration with the Ministry of Finance in the formulation of the State Budget plan with regards to the plan and options for financing State budget deficit; - Making advances to the State budget to cover the temporary deficits in the State budget at the decision of the Prime Minister. 2.4. Other Ministries and branches Ministries and other branches at central level are responsible and have competence in the following areas: - Collaboration with the Ministry of Finance and the Provincial People s Committees in the preparation of the State budget plan, allocation of the State budget and finalization of the State budget within their areas of authority; - Collaboration with the Ministry of Finance to inspect and supervise the implementation of the budget plan in the areas of authority; - Provision of reports on the implementation of State budget plan and its results in areas of authority and in compliance with current reporting requirement; - Collaboration with the Ministry of Finance in the formulation of regulations, spending norms and levels of State budget expenditures in areas of authority. 16

3. People s Councils and Committees 3.1. People's Councils at different levels are responsible and have competence in the following areas: The People s Councils, on the basis of the budget plan assigned by higher levels, the revenue sources and expenditure responsibilities decentralized and current laws and regulations, decide on the Local State budget estimation within the timeframe provided for by the Government. The specific tasks and competence of the People's Councils are as follows: - Decision on the State budget plan and allocation plan; approval of the local State Budget finalisation report; - Decision on the options and measures to implement the Local State budget plans; - Decision on the amendment of the local State budget plan in cases necessary; - Supervision of the implementation of the budget plan as approved by6 the People s Councils; - Review and approval of the Local State budget finalisation reports. The Standing organ of the People's Council or Chairman or Vice-Chairman of the People's Council can review the budget plan submitted by the People's Committee of the same level before reporting to higher administrative bodies for consolidation into the overall plan for submission to the National Assembly. 3.2. People's Committees at different level are responsible as well as competent for the followings: On the basis of the State Budget plan approved by the National Assembly and on the basis of revenue and expenditure responsibilities assigned by the governments of higher levels, People s Committees are responsible for preparing the local state budget plan and allocation plan for submission to the People s Councils of the same level for approval. To be more specific, these areas of responsibilities and competence are as follows: - Preparation of the budget plan and allocation plan for Local State budget, amendment plan in cases necessary for submission to same - level People s Council for approval. The same plan is also reported to line administrative agencies and financial bodies; - Preparation of the Local budget finalization report for submission to same - level People s Council for approval. The same plan is also reported to line administrative agencies and financial bodies; 17

- Review of the Resolution by People s Councils at lower levels on the budget plan and budget final accounts; - On the basis of the Resolution of same-level People s Council, making decision on the revenue and expenditure responsibilities to be assigned to each units and agencies under its authority; deciding the revenue and expenditure responsibilities as well as the grants to the budget of lower levels; Executing local State Budgets; - Collaborating with administrative agencies at higher levels in the management of the State budget in the locality; making reports on state budget operations in accordance with current reporting requirements; Finance agency at the same level in the locality shall review the final account reports of line agencies, examine the final accounts of lower level budgets and consolidation thereof into the final account report of Local State budget for submission to the People's Committee at same level for consideration and further submission to People's Council for approval. 18

Chart 1: Administrative structure of Vietnam The socialist republic of vietnam Central Authorities National Assembly government Ministries, Committee s, Government s General Departments and Departments Supreme court Supreme inspectorate Provincial People s council (61) Provincial People s committees Provincial People s Court Provincial People s Inspectorate Provincial Functional Departments Local Authorities District People s council (604) District People s committees District Functional Divisions District People s Court District People s Inspectorate Communal People s council (10.387) Communal people s committees Functional Divisions Legislative Executive judicial 11

Chart 2: State budget structure of Vietnam Vietnam state budget structure Central state budget Local state budget Provincial State Budget District State Budget Communal State Budget 12