PART 6.

PUBLIC FINANCE
Unit 6.1. Introduction to Public Finance
Introduction: Public finance is the study of the role of the government in the
economy. It is about the revenue, expenditure and debt management of the
government and the impact of these measures to the society. Public Finance is,
therefore, about fiscal institutions, the tax systems, expenditure programs, and budget
procedures, stabilization instruments, and public debt. In detail, public finance mainly
analyzes the role of the government in distribution of resources, allocation of income,
and macroeconomic stability.
This unit provides an overview of public finance system. The aim of this unit is to
introduce some general ideas such as public deficit/surplus or the roles of public
finance. Besides, exercises and translation parts will inform students the technical
terms related to government revenue and expenditure as well as public finance
management.
1. READING
Read the text and use your words to answer the following questions:
Public Finance
Public finance is the study of the role of the government in the economy. It is the
branch of economics, which assesses the government revenue and government
expenditure of the public authorities and the adjustment of one or the other to achieve
desirable effects and avoid undesirable ones. The purview of public finance is
threefold: governmental effects on (1) efficient allocation of resources, (2) distribution
of income, and (3) macroeconomics stabilization.
Why public finance is needed?
Governments provide public goods, which are government - financed items and
services such as roads, military forces and streetlights. Private citizens would not
voluntarily pay for these services, and therefore businesses have no incentive to
produce them.
Public finance also enables governments to correct or offset undesirable effects of a
market economy. These effects are called spillovers or externalities. For example,
households and industries may generate pollution and release it. Polluting is a
spillover because it affects people who are not responsible for it. To correct a
spillover, governments can encourage or restrict certain activities. For example,
governments can sponsor recycling programs to encourage less pollution, impose laws
that restrict pollution, or impose charges or taxes on activities that cause greenhouse
gasses.

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 Public finance provides government programs that moderate the income of the
affluent and the poor. These programs include social security, welfare, and other
social programs. For instance, some elderly people or people with disabilities require
financial assistance because they cannot work. Governments redistribute income by
collecting taxes from their wealthier citizens to provide resources for their needy ones.
Public spending
Each year, national, state, and local governments plan a budget to determine how
much money they will spend during the upcoming year. Economists classify
government expenditures into three main types. Government purchases of goods and
services for current use are classed as government consumption. Government
purchases of goods and services intended to create future benefits – such as
infrastructure investment or research spending – are classed as government
investment. Government expenditures that are not purchases of goods and services,
and instead just represent transfers of money – such as social security payments – are
called transfer payment.
Public revenue
Governments must have funds, or revenue, to pay for their activities. Governments
generate some revenue by charging fees for the services they provide, such as entrance
fees at national parks or tolls for using a highway. However, most government
revenue comes from taxes, such as personal income tax, corporate income tax, sales
tax, excise tax, value-added tax, etc.
Source: http://hocday.com/english-for-finance-and-accounting.html?page=6
QUESTIONS
1.1. What are public goods?
1.2. Why do governments have to provide public goods?
1.3. What is a spillover effect?
1.4. In what way does a government correct a spillover effect?
1.5. Do governments spend their entire budget on the purchases of goods and
services?
1.6. Where does public revenue come from?
1.7. What is the difference between personal income tax, corporate income tax, sales
tax and excise tax?

2. EXERCISES
2.1 Find the best answer

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1. Foreigners who reside in Vietnam for 183 days or more in a tax year are
considered tax residents in Vietnam and subject to ________________.
a. personal income tax b. corporate income tax c. value-added tax
2. State Budget is an itemized accounting of the payments received by
________________ (taxes and other fees) and the payments made by
________________ (purchases and transfer payments).
a. corporates b. government c. individuals
3. A ________________ occurs when a government spends more money than it
takes in.
a. budget balance b. budget surplus c. budget deficit
4. The National Assembly shall decide on the State budget in aggregate, structure
and level of ________________ for important sectors, such as training and
education, science and technology.
a. expenditures b. revenues c. gap budget
5. ________________ is a form of tax that applies to the production or import of
certain goods including cigarettes, cigars, spirits, beer, certain automobiles,
assorted types of petrol, air conditioners and the provision of certain services
including massage parlours, casinos, golf clubs and lotteries.
a. Value-added tax b. Excise tax c. Direct tax
6. Several countries provide ________________ no requirement for contributions to
vulnerable people such as veterans of armed forces, people with disabilities and
very old people.
a. wages b. credit c. income support
2.2 Read the paragraph below and find the right word from the box to fill
each of the gaps
commission money liabilities tax
properties citizens contributions functions
companies service resources financial
Public revenues are the revenues which are collected by the state from the (1)
__________________ and the economy and they serve to cover the public needs i.e.
for the needs of the state and citizens. Public expenditures are understood as the usage
of the (2) __________________ collected from public revenues for covering the
public needs and for functioning the government. To be able to perform its (3)
__________________, the state should dispose with financial recourses. In many
countries, there are state (4) __________________ and the state collects revenues

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from its own properties. Those revenues are not often sufficient to cover the
expenditures made by the state in performing its functions, and are of interest to
citizens and the government. For that reason, in all countries, the government, besides
the revenues from its own properties, collects also other revenues collected from
citizens and (5) __________________. The most accepted principle is that every
citizen is obliged to pay (6) __________________ and other public (7)
__________________ fees and to participate in the settlement of the public
expenditures in a way prescribed by law. The government may collect public revenues
from different sources, including revenues from the state and public enterprises and
institutions, taxes, (8) __________________, customs duties, public loans and gifts
and aid.
2.3 Put these words/phrases in order to make sentences.
1. in which/ financial health/ is/ revenues/ expenditures/ an indicator/ exceed/ of/
public deficit/
2. issuance of debt/ a means/ raise/ through/ money/ to/ the/ is/ bond/
3. collecting taxes/ redistribute/ their/ wealthier citizens/ provide/ governments/
income/ by/ from/ to/ resources/ for/ their needy ones/
4. non-tax revenues/ compulsory/ tax levies/ collected/ sources/ other than/ are/
from/ revenues/
5. impose/ charges/ taxes/ activities/ greenhouse/ gasses/ Governments/ can/ or/
on/ that/ cause/
2.4 Match the words/phrases 1-9 to the phrases a-i to make word
partnerships
1- subsidies a- tax paid on the sale of specific items for personal use
2- public sector b- taxpayer expenditures on specific items that can be
credited directly against their tax liability
3- tax credit c- individuals and businesses that interact in the economy
4- private sector d- those federal, state, and local governments that interact in
the economy
5- excise tax
e- government payment made to encourage a certain
6- sales tax economic activity
7- corporate f- a tax that can not be shifted to other
income tax g- total expenditures are greater than total revenues
h- a tax that applies to total expenditures on a broad range of
8- direct tax
goods
9- budget deficit i- a tax on the accounting profits of corporations

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 2.5 Decide whether following statements are true or false. If false, correct
them.
1. A budget deficit is an indicator of financial health in which revenue exceeds
expenditures.
2. Being poor means that a country lacks sufficient resources to respond to rising
demands and expectations for public services. In most cases, it also means that the
country lacks financial resources to pay for all ongoing programs.
3. The main revenues of the government come from fees and grants.
4. A value added tax (VAT) is a consumption tax added to a product's sales price. It
represents a tax on the "value added" to the product throughout its production
process. Each seller in the product chain includes a VAT charge on the buyer's
income.
5. Externality in economics, an externality is the cost or benefit that affects a party
who did not choose to incur that cost or benefit.
6. A redistributive policy is one where everyone must pay out of their own pocket,
usually though taxes; money spent on programs which benefit everyone equally.
7. A distributive policy is one where money is taken from one group and given to
another, usually from wealthier individuals in the form of higher taxes, to
subsidize social welfare programs which benefit those in need.
8. Taxpayer is an individual or entity that is obligated to make payments to
municipal or government taxation agencies. The term taxpayer generally describes
one who pays taxes.
9. Public goods are non-excludable but rivalrous in that individuals cannot be
effectively excluded from use and where use by one individual does not reduce
availability to others.
10. The term "public debt" is used interchangeably with the term sovereign debt.

3. TRANSLATION
Translate the following texts into Vietnamese paying special attention to the
standard use of terms and clarification of expressions.
Text 1
Decentralization in State Budget Management
Decentralization in State budget management is among matters of great importance
in macro-economic and financial management, which is very sophisticated issue and

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related to a series of relations among levels of management in the formation,
distribution and use of State budget fund.
The aim of decentralization is to encourage local government to proactively
manage and execute the budget while preserving the lead of the central budget in
macro-regulation to ensure an even development between regions and areas.
In recent years, the decentralization of state budget management has contributed to
the stabilization and rationalization of national finance, paving the ways for the stable
and rapid growth of the economy; social development and bringing into full play
domestic resources for the modernization and industrialization of the country.
However, the current system of decentralization has started revealing shortcomings
and limitations such as the delegation of authority and responsibility to different levels
of Government, agencies and individuals seems unclear or even duplicated falling
short of promoting local agencies and Government to take full use of available
resources for socio-economic development and poverty reduction and at the same
time, tightening fiscal discipline and putting to most effective use of financial
resources.
Source: World Bank and Ministry of Planning and Budget of Korea (2003), Report to
the Public Expenditure Management Seminar jointly organised by the Vietnam
Ministry of Finance, Republic of Korea.
Text 2
Public Revenue Budgeting
Accurate revenue forecasts are a key input to the preparation of a credible budget.
Revenues allow the government to finance expenditures and deliver services to its
citizens. Optimistic revenue forecasts can lead to unjustifiably large expenditure
allocations that will eventually require either an in-year and potentially disruptive
reduction in spending or an unplanned increase in borrowing to sustain the spending
level. On the other hand, pessimism in the forecast can result in the proceeds of an
over-realization of revenue being used for spending that has not been subjected to the
scrutiny of the budget process. As the consequences of revenue under-realization may
be more severe, especially in the short term, there shoud be more attention given to
the over-estimation of revenues than the possibility of over-realization.
Revenues earned by the government are received from sources such as taxes levied
on the incomes and wealth accumulation of individuals and corporations and on the
goods and services produced, exported and imported from the country, non-taxable
sources such as government-owned corporations’ ' incomes, central bank revenue and
capital receipts in the form of external loans and debts from international financial
institutions.

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 It is recognized that the revenue out-turn can deviate from the originally approved
budget for reasons unrelated to the underlying quality of the forecast, such as a major
macroeconomic shock. For this reason, the calibration allows for one unusual year to
be excluded by focusing on significant deviations from the forecast occuring in a
significant number of years covered by the assessment.
Source:
http://siteresources.worldbank.org/PEFA/Resources/FinalTextofTheThreeRevisedIndi
cators.pdf

4. TERMINOLOGY
Custom duties - Thuế hải quan: Tariffs or taxes payable on merchandise imported or
exported from one country to another.
Excise tax - Thuế tiêu thụ đặc biệt: An excise or excise tax (sometimes called a
duty of excise special tax) is an inland tax on the sale, or production for sale, of
specific goods or a tax on a good produced for sale, or sold, within a country or
licenses for specific activities. Excises are distinguished from customs duties, which
are taxes on importation. Excises are inland taxes, whereas customs duties are border
taxes. Typical examples of excise duties are taxes on gasoline and other fuels, and
taxes on tobacco and alcohol.
Externality - Ngoại ứng: in economics, an externality is the cost or benefit that
affects a party who did not choose to incur that cost or benefit
Income tax - Thuế thu nhập: a government levy (tax) imposed on individuals or
entities (taxpayers) that varies with the income or profits (taxable income) of the
taxpayer. Income tax may include personal income tax and corporate income tax.
Public goods - Hàng hóa công cộng: goods that are both non-excludable and non-
rivalvous in that individuals cannot be effectively excluded from use and where use by
one individual does not reduce availability to others.
Revenue out-turn - Kết quả thu thực tế: The actual amount of revenue collected at
the end of a budget period, rather than the figure that was expected or calculated
earlier.
Sales tax - Thuế doanh thu: A sales tax is a tax paid to a governing body for the
sales of certain goods and services. Usually laws allow (or require) the seller to collect
funds for the tax from the consumer at the point of purchase. When a tax on goods or
services is paid to a governing body directly by a consumer, it is usually called a use
tax. Often laws provide for the exemption of certain goods or services from sales and
use tax.

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Social security - An sinh xã hội: These are programs of government intended to
promote the welfare of the population through assistance measures guaranteeing
access to sufficient resources for food and shelter and to promote health and well-
being for the population at large and potentially vulnerable segments such as children,
the elderly, the sick and the unemployed.
Social security may refer to:
Social insurance, where people receive benefits or services in recognition of -
contributions to an insurance program. These services typically include provision
for retirement pensions, disability insurance, survivor benefits and unemployment
insurance.
Services provided by government or designated agencies responsible for social
security provision. In different countries, that may include medical care, financial
support during unemployment, sickness, or retirement, health and safety at work,
aspects of social work and even industrial relations.
Basic security irrespective of participation in specific insurance programs where
eligibility may otherwise be an issue. For instance, assistance given to newly
arrived refugees for basic necessities such as food, clothing, housing, education,
money and medical care.
Spillover effects -Tác động lan toả: A secondary effect that follows from a primary
effect, and may be far removed in time or place from the event that caused the primary
effect.
Tariff - Thuế quan: The list of items upon which a duty is imposed when they are
imported into a country, together with the rates at which such articles are taxed. The
term tariff is also used in reference to the actual custom or duty payable on such items.
Taxpayer - Người nộp thuế: An individual or entity that is obligated to make
payments to municipal or government taxation agencies. The term taxpayer generally
describes one who pays taxes.
Tax resident - Cá nhân cư trú phải chịu thuế: is a person who maintains a
residency in a given place and is liable for tax(es).
Value-added tax - Thuế giá trị gia tăng: A type of tax that is assessed incrementally.
It is levied on the price of a product or service at each stage of production,
distribution, or sale to the end consumer. If the ultimate consumer is a business that
collects and pays to the government VAT on its products or services, it can reclaim
the tax paid. It is similar to, and is often compared with, a sales tax. VAT is an indirect
tax because the person who ultimately bears the burden of the tax is not necessarily
the same person as the one who pays the tax to the tax authorities.

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 Unit 6.2. Taxation
Introduction: Tax is a compulsory contribution to state revenue or other levy
imposed upon a taxpayer (an individual or legal entity) by a state or the public
authorities to fund various public expenditures. A failure to pay, or evasion of or
resistance to taxation, is usually punished by law. The tax systems are different
countries by countries. Thus, studying about tax is important especially in the context
of integration.
This unit provides the general knowledge about taxation, which is the first simple
steps for students having basic terms before they want to go deeper in researching
about taxation. Particularly, this lesson provides some definitions and several popular
types of taxes as well as introduces taxation system in some countries.
1. READING
Read the text and use your words to answer the following questions:
Taxation - The Most Important Source of Budget Revenue
What is taxation?
Taxation refers to compulsory or coercive money collection by a levying authority,
usually a government. The term "taxation" applies to all types of involuntary levies,
from income to capital gains to estate taxes. Governments use tax revenues to pay
soldiers and police, to build dams and roads, to operate schools and hospitals, to
provide food to the poor and medical care to the elderly, and for hundreds of other
purposes. Without taxes to fund its activities, government could not exist.
Throughout history, people have debated the amount and kinds of taxes that a
government should impose, as well as how it should distribute the burden of those
taxes across society. Unpopular taxes have caused public protests, riots, and even
revolutions. In political campaigns, candidates’ views on taxation may partly
determine their popularity with voters.
Taxation is the most important source of revenues for modern governments,
typically accounting for 90 percent or more of their income. The remainder of
government revenue comes from borrowing and from charging fees for services.
Countries differ considerably in the amount of taxes they collect. In the United States,
about 30 percent of the gross domestic product (GDP), a measure of economic output,
went for tax payments in 2000. The 30 percent figure is relatively low from a
historical standpoint. Because of a new round of tax cuts in 2003, the tax percentage
share of GDP was expected to be lower than at any time since 1959 when many major
government programs, such as Medicare and Medicaid, did not exist. In Canada about
35 percent of the country’s gross domestic product goes for taxes. In France, the
figure is 45 percent, and in Sweden it is 51 percent.

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 In addition to using taxation to raise money, governments may raise or lower taxes
to achieve social and economic objectives, or to achieve political popularity with
certain groups. Taxation can redistribute a society’s wealth by imposing a heavier tax
burden on one group to fund services for another. Also, some economists consider
taxation as an important tool for maintaining the stability of an economy.
Types of taxes
Governments impose many types of taxes. In most developed countries, individuals
pay income taxes when they earn money, consumption taxes when they spend it,
property taxes when they own a home or land, and in some cases estate taxes when
they die. In the United States, federal, state, and local governments all collect taxes.
There are several types of taxes, such as:
- Individual income tax: An individual income tax, also called a personal income
tax, is a tax on a person’s income.
- Corporate income tax: An assessment levied by a government on the profits of
a company.
- Payroll tax: a tax that an employer withholds and pays on behalf of his
employees, and it is based on the wage or salary of the employee.
- Consumption tax: A consumption tax is a tax levied on sales of goods or
services. The most important kinds of consumption taxes are general sales
taxes, excise taxes, value-added taxes, and tariffs.
- Property tax: a property tax is a tax on an individual’s wealth—the value of all
the person’s assets, both financial (such as stocks and bonds) and real (such as
houses, cars, and artwork).
Source: http://taxation5.blogspot.com/2008/11/i-introduction-to-taxation.html
QUESTIONS
1.1. What is taxation?
1.2. Which purposes do governments use taxes for?
1.3. Where do government funds come from?
1.4. How can taxation redistribute a society’s wealth?
1.5. What is the different between individual income tax and corporate income
tax?
1.6. Why do people say that taxation is the most important source of budget
revenues?

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2. EXCERCISES
2.1. Match the words/phrases 1-6 to the phrases a-f to make word
partnerships
1. Income tax a. Tax on profits made by selling assets such as
2. Capital gains tax businesses, rented houses and shares.

3. Value Added Tax (VAT) b. Tax on the assets of a person who has died. Used to be
called "death duties".
4. Corporation tax
c. Tax on earnings, profits from investments and any
5. Wealth tax other sources of personal income.
6. Inheritance tax d. Tax on goods and services. In Vietnam, it is usually
charged at 10%.
e. This is the name for the tax paid by companies.
f. Tax on assets (such as houses) payable in some
countries.

2.2. Find the best answer

1. Last year I paid too much tax, so this year I received a tax ________________.
a) refund b) rebate c) reduction
2. "Profit before tax" can also be called ________________.
a) pre-tax profit b) without-tax profit c) non-tax profit
3. A country with very low taxes is known as a ________________.
a) tax heaven b) tax haven c) tax paradise
4. The principal aim of offshore banking in tax havens is to reduce the customer's
tax ________________.
a) liabilities b) expenses c) costs
5. Many Americans use tax software to complete their tax _________________.
a) returns b) retainers c) resources
6. I had to pay _________________ taxes. (= taxes from previous years)
a) ancient c) back c) previous
7. That income will be taxed at a higher _________________.
a) rating b) ration c) rate
8. You children can be considered your _________________.
a) deductions b) exemptions c) dependents

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 9. Here are some examples of filing __________________: single, married filing
jointly, married filing separately, etc.
a) statuses b) states c) statements
10. For tax __________________, you may be considered "single", even though
you are married.
a) goals b) purposes c) aims
11. On tax forms, the most common way to refer to one's husband or wife is
"__________________".
a) mate b) spouse c) ball-and-chain
12. If you have any _________________ (= more, extra) income, you should fill
out this form.
a) extraneous b) added c) additional
2.3. Read the paragraph below and find the right word from the box to fill
each of the gaps
unavoidable rate non-inventory asset sales tax
corporation tax value-added tax short or long-term consumption tax
Certain taxes are (1) ________________ though. As a registered business entity,
you must pay a(n) (2) ________________, which would either be sales tax in the US
or value added tax in the rest of the world. (3) ________________ is levied against
the consumer, which means that the company has no liability other than the act of
collecting the tax which is calculated on the sale price of a product. This tax is held by
the company until a determined time when it is paid to the appropriate governmental
department. As there is no tax due from the production of the goods, sales tax does not
affect the profit of an organization, unlike (4) ________________ which is levied on
both the consumer and the producer.
Capital gains tax, which is basically a tax on the sale of a(n) (5)
________________ that has increased in value since purchase. The difference in value
is then treated as a taxable source of income and thus has tax levied against it. The (6)
________________ of taxation varies depending on the income tax bracket of the
individual or corporation selling the asset and whether it is a(n) (7)
________________ gain. Short term gains are anything up to one year. As any
accountant dealing with capital gains tax knows, it is advisable to wait for over 12
months after the point of purchase before selling the asset so that long-term capital
gains tax is due at a lower rate. Tax due on both short and long-term gains can be
deferred by a variety of methods.
(8) ________________ is the taxation method for taxing the income of a business
entity classified as a corporation; the tax rate is dependent on the taxable earnings of

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that corporation. As with income tax, the tax due may be reduced with the aid of tax
credits.
Source: https://www.english4accounting.com/unit/9/reading
2.4. Read the sentences below and find the right word from the box to fill
each of the gaps
ability-to-pay benefit contractionary direct expansionary income
indirect marginal progressive proportional regressive
1. ________________ policy would probably be appropriate for an economy with a
high level of inflation and high aggregate demand.
2. The money that a woman pays to the government from any money that she earns
is ________________ tax.
3. The ________________ principle says that poor people should pay less tax than
people who have more money than them.
4. Many people feel that ________________ taxation is a fair system because the
more money a person earns, the larger the percentage that is paid in taxes.
5. In terms of fiscal policy, an economy with a high level of cyclical unemployment
and low production would be likely to follow a(n) ________________ policy.
6. Excise taxes are an example of ________________ taxation because they place a
relatively larger burden on low-income families than on high-income families.
7. A person who earns 16,000 euros a year and pays 25 cents of the last euro in
income tax has a(n) ________________ income tax rate of 25%.
8. According to the ________________ principle, a person who does not use a
certain public good should not pay any part of the taxes which are collected in
order to provide it.
9. Under ________________ taxation the same percentage of taxes is paid by
everyone regardless of level of income earned.
10. A(n) ________________ tax increases the price of a good so that consumers are
actually paying the tax by paying more for the products. On the other hand, a(n)
________________ tax is an income or wealth tax, which burdens only the person
upon whom is levied.

2.5. Determine whether below statements are true or false? Correct which are
false.
1. The amount of tax that you have to pay is tax shelter

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2. Money that you make from stocks, bonds, real estate, etc. is capital gains
3. In tax terms, the cost of maintaining property or generating income is the profit.
4. Money that the government gives back to you when you pay too much in taxes, or
have withheld too much from your salary is a deduction.
5. An expense that you can subtract from your gross income is a deduction.
6. A tax that has to be paid by owners of houses, etc. is export tax.

3. TRANSLATION
Translate the following texts into Vietnamese paying special attention to the
standard use of terms and clarification of expressions.
Text 1
Tax system in Vietnam
Since the commencement of the “Doi Moi” policy in 1986, Vietnam’s economy has
shifted from being centrally based to a market-based economy. The tax system of
Vietnam has therefore undergone crucial reforms since that time. Since Vietnam
obtained memberships to several international organizations such as ASEAN (1995)
and WTO (2007), tax policy and tax reform has become aligned with international
rules and practices, and at the same time tax collection and administration processes
have been improved. In 2007, the Law on Tax Administration was first implemented.
The Law provides rules on tax administration, management of information, tax
collection and enforcement, and has provided guidance in areas previously open to
wide interpretation. Later in 2007, the National Assembly also passed the first Law on
Personal Income Tax, covering taxation of all income of individuals in Vietnam for
the first time. This Law introduced the concept of personal and family deductions in
determining taxable income of individuals. In 2008, three further major tax laws were
amended: Corporate Income Tax, Value Added Tax and Special Sales Tax. All four of
these laws were implemented since 2009 and were amended in 2013 with various
changes for implementation in 2014.
Tax administration is controlled by the General Department of Taxation, which
operates under the Ministry of Finance. Tax affairs may also be handled by provincial
Tax Departments.
Source: https://globalconnections.hsbc.com/singapore/en/tools-data/country-
guides/vn/tax-system
Text 2
Impact of Brexit on Tax

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 On 23 June 2016, the UK voted to leave the European Union (“EU”). Whilst the
decision has been made for Britain to exit the EU (“Brexit”), Britain will likely remain
part of the EU for up to two years following the time it notifies the European Council
of its intention to leave the EU by triggering Article 50 of the Lisbon Treaty. This
two-year period may be further extended if the European Council unanimously agrees
with the UK to extend the notice period.
Although it is difficult at this stage to provide specific details of how the UK
taxation system will be impacted by Brexit, the likelihood is that there will not be any
immediate change to direct and indirect taxes. The actual tax impact of Brexit will be
better understood once terms of any post-Brexit agreement have been concluded with
the EU.
For example direct taxes are imposed by UK law and as such, most the UK’s direct
tax law will remain unchanged following Brexit. The UK’s direct tax rules must
however comply with EU laws such as the four freedoms (the free movement of
goods, services, people and capital). Post-Brexit, some UK tax law may no longer be
required to comply with some EU laws and some EU directives should no longer
apply to UK companies.
Source: https://home.kpmg.com/uk/en/home/insights/2016/09/impact-of-brexit-on-
tax.html
4. TERMINOLOGY
Corporate income tax - Thuế thu nhập doanh nghiệp: a tax on the accounting
profits of corporations.
Government revenues - Thu ngân sách nhà nước: money collected by governments
to provide goods and services to the public.
Personal income tax - Thuế thu nhập cá nhân: a tax on all forms of income an
individual or household receives.
Progressive tax - Thuế lũy tiến: tax where the rate increases as income increases.
Proportional tax - Thuế tỷ lệ: tax where the rate remains constant as income
increases.
Regressive tax - Thuế lũy thoái: tax where the rate decreases as income increases.
Tax liability - Nghĩa vụ thuế: the amount of tax that you owe.
Taxes - Thuế: required payments of money to governments used to provide public
goods and services.

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 Unit 6.3. Public Debt Management

Introduction: The history has witnessed many public debt crises in the world
occurring due to many different reasons. Those public debt crises show that public
debt management must become a central issue, a necessary requirement for all
countries. Public debt management is not only important in ensuring the safety of the
position of governments, but also for the safety and stability of the national financial
system as well as the economy.
Through reading passages, translation exercises and other tasks in this lesson, students
will be familiar with the basic terms of public debt management, understand the
objectives and important roles of public debt management in each country. This will
lay a solid foundation for learners to have an in-depth insight into this topic.
1. READING
Read the text and use your words to answer the following questions:
What is Public Debt Management? And Why is it important?
Public debt management is the process of establishing and executing a strategy for
managing the government’s debt in order to raise the required amount of funding at
the lowest possible cost over the medium to long run, consistent with a prudent degree
of risk. It should also meet any other public debt management goals the government
may have set, such as developing and maintaining an efficient market for government
securities.
In a broader macroeconomic context for public policy, governments should seek to
ensure that both the level and rate of growth in their public debt are on a sustainable
path and that the debt can be serviced under a wide range of circumstances, including
economic and financial market stress, while meeting cost and risk objectives. While
the responsibility for compliance with debt ceilings and for conducting debt
sustainability analysis (DSA) lies with the fiscal authorities, public debt managers
should share fiscal and monetary policy authorities’ concerns that public sector
indebtedness remains on a sustainable path. Debt managers should ensure that the
fiscal authorities are aware of the impact of government’s financing requirements and
debt levels on borrowing costs. Examples of indicators that address the issue of debt
sustainability include the public sector debt service ratio, and ratios of public debt to
GDP, exports, and tax revenue. Such indicators should be evaluated considering a
wide range of scenarios.
Every government faces policy choices concerning debt management objectives, in
particular its preferred risk tolerance, the parts of the government balance sheet that
debt managers should be responsible for, the management of contingent liabilities, and

16
the establishment of sound governance for public debt management. On many of these
issues, there is increasing convergence on what are considered prudent public debt
management practices that can also reduce vulnerability to contagion and financial
shocks. These include recognition of the benefits of clear objectives for debt
management; weighing risks against cost considerations; the separation of debt and
monetary management objectives and accountabilities (where appropriate, combined
with consultation and information sharing between the debt manager and the central
bank); the need to carefully manage refinancing and market risks and the interest costs
of debt burdens; and the necessity of developing a sound institutional structure and
policies for reducing operational risk, including clear delegation of responsibilities
and associated accountabilities among government agencies involved in debt
management.
Poorly structured debt portfolios, in terms of maturity, currency, or interest rate
composition and large contingent liabilities, have been important factors in inducing
or propagating economic crises in many countries throughout history. For example,
irrespective of the exchange rate regime, or whether domestic or foreign currency debt
is involved, crises have often arisen because of an excessive focus by governments on
possible cost savings associated with short-term or floating rate debt. Issuance of large
volumes of such debt instruments has left government budgets seriously exposed to
changing growth and financial market conditions, including changes in the country’s
creditworthiness, when this debt has to be refinanced. Excessive reliance on foreign
currency debt poses particular risks as it can lead to exchange rate and/or monetary
pressures if investors become reluctant to refinance the government’s debt. By
reducing the risk that the government’s own debt portfolio will become a source of
instability for the private sector, prudent government debt management, along with
sound policies for managing contingent liabilities, can make countries less susceptible
to contagion and financial risk. Further, a debt portfolio that is robust to shocks places
the government in a better position to effectively manage financial crises.
Sound risk management practices are essential given that a government’s debt
portfolio is usually the largest financial portfolio in the country and can contain
complex and risky financial structures, which have the potential to generate
substantial risk to the government’s balance sheet and overall financial stability.
Sound risk management by the public sector is also essential for risk management by
the private sector. Sound debt structures help governments reduce their exposure to
interest rate, currency, refinancing, and other risks. Many governments seek to support
these structures by establishing targets and ranges for key risk indicators or, where
feasible, target portfolios related to the desired currency composition, duration, and
maturity structure of the debt to guide borrowing activities and other debt transactions.
When made public, such targets help to increase the predictability and transparency of
debt management operations, and in turn reduce uncertainty for investors.

17
 Debt crises have highlighted the importance of sound debt management practices
and the need for an efficient and liquid domestic capital market. Although government
debt management policies may not have been the sole or even the main cause of such
crises, the maturity structure, and interest rate and currency composition of the
government’s debt portfolio, together with substantial obligations in respect of explicit
and implicit contingent liabilities - not least in relation to the financial sector - have
contributed to the severity of the crises. Even in situations where there are sound
macroeconomic policy settings, risky debt management practices increase the
vulnerability of the economy to economic and financial shocks. Sometimes these risks
can be readily addressed by relatively straightforward measures, such as by
lengthening the maturities of borrowings and paying any associated debt servicing
costs, or by adjusting the amount, maturity, and composition of foreign exchange
reserves. It is also important for governments to review criteria and governance
arrangements in respect of contingent liabilities to ensure that these are consistent with
transparent and sound fiscal and budget management principles.
Source: IMF (2014), Revised Guidelines for Public Debt Management.
QUESTIONS
1.1. What is the purpose of public debt management?
1.2. What are some examples of indicators that address the issue of debt
sustainability?
1.3. What are important factors in inducing or propagating economic crises in many
countries throughout history?
1.4. Why does excessive reliance on foreign currency debt pose risks?
1.5. What are the solutions to immediately address the problems caused by risky
debt management practices?

2. EXERCISES
2.1. Read the text below and find the right word or phrase from the box to fill
each of the gaps.
cost and risk strategy debt managers debt management
feasible macroeconomic governance public debts
instruments implications fiscal and monetary Inflation
policy

18
 The process of developing a debt management (1) ________________ involves
establishing (2) ________________ objectives, understanding the
(3)________________ implications of different strategies, and having in place a
strong (4) ________________ framework, including ensuring that
(5)________________ are accountable for implementing the strategy efficiently.
Equally important is recognizing that a strategy cannot be developed in isolation: the
(6) ________________ framework and the level of development of the domestic
market have (7) ________________ for which strategies are (8) ________________
and can be implemented in practice.
Government debt management has developed substantially in recent decades, and
it is increasingly recognized that debt management, while having close links to (9)
________________, has separate objectives and (10) ________________.
2.2. Read the text above carefully and choose the best answer.
1. What is NOT involved in the process of developing a debt management strategy?
A. establishing debt management objectives
B. paying the debt as soon as possible
C. having in place a strong governance framework
2. Which factors are equally important to guarantee the efficiency of a debt
management strategy?
A. the macroeconomic framework and the foreign market
B. the macroeconomic framework and the domestic market
C. the microeconomic framework and the domestic market
3. What best describes the relationship between government debt management and
fiscal and monetary policy?
A. well-linked
B. separate
C. both well-linked and separate
2.3. Match the words 1-5 to the phrases a-e to make word partnerships
1. Market risk a. refers to the risk of non-performance on on-lent
loans or other financial assets, or by counterparty on
financial contracts
2. Refinancing risk b. refers to a range of risks, stemming from
transaction errors, failures in internal controls and
systems, legal shortcomings, security lapses, or

19
 natural disasters
3. Credit risk c. refers to the exposure of the debt portfolio to
unusually high interest rates at the point of
refinancing
maturing debt
4. Liquidity risk d. relates to movements in interest rates (interest rate
risk) and exchange rates (exchange rate risk)
5. Operational risk e. refers to a situation where the volume of liquid
assets diminishes quickly as a result of unanticipated
cash flow obligations and/or a possible difficulty in
raising cash through borrowing in a short period of
time

2.4 Mark the following statements as true (T) or false (F)

1. Poor debt structures can jeopardize the central bank’s ability to tighten interest rates
or to depreciate/devalue. (T)
2. High government expenditure levels may decrease debt levels if sustainability is in
doubt. (F)
3. The objective of public debt management is to achieve the least distorting
budgetary policy. (F)
4. The composition and level of taxes and spending are instruments to achieve
objective of public debt management. (F)
5. The executive i.e., cabinet or the minister of finance should be responsible for the
debt management strategy approval and for ensuring its implementation. (T)
2.5 Find the best answer to fill each of the gaps:
1. Government borrowing should be shaped by implicit strategies that are based on a
general understanding of the cost-risk….
A. objective B. plan
C. trade off D. constraint
2. ________________ determines the borrowing requirement and is the main
influence on the stock of debt over time
A. Political policy B. Monetary policy
C. Institutional policy D. Fiscal policy

20
3. ________________ focuses on aggregate government spending and taxation, the
microeconomic impact
of individual tax and spending policies.
A. Debt management B. Fiscal policy
C. Monetary policy D. Economic policy
4. An increase in ________________ and/or a weakening of the ________________
will have potential impact on the government’s budget and increase the size of the
outstanding debt.
A. interest rates, domestic currency B. domestic currency, interest rates
C. interest rates, foreign currency D. foreign currency, interest rates
5. _______________determines the composition of the debt. It focuses on the
structure of the debt, cost and risk of the debt portfolio within acceptable tolerances.
A. Debt management B. Fiscal policy
C. Budget management D. Risk management

3. TRANSLATION
Translate the following texts into Vietnamese, paying a special attention to the
standard use of terms and clarification of expression.
Text 1
Operational Issues in International Bond Issuance
Debt managers face several risks before the issuance of international bonds, so a
number of preconditions must be met, and initial actions should be taken well in
advance. These considerations can substantially reduce the resulting risks stemming
from the issuance, as well as contribute to a lower cost for the new bond. A debt
sustainability analysis is helpful in identifying potential risk of sovereign debt distress.
This exercise should evaluate the future payment capacity under different
macroeconomic scenarios, its budgetary constraints, and the use of the proceeds.
A comprehensive medium-term debt strategy exercise is important to assess the
impacts of the external bond on the cost-risk tradeoffs of the debt composition. This
exercise should assess whether, among different alternative funding strategies, a bond
issuance provides an attractive cost-risk tradeoff. It should evaluate more precisely
some issues that a debt sustainability exercise does not cover, such as the exchange
rate risk and the refinancing risk of an international bond.

21
 Operational steps before issuance can improve the probability of success. These
include solid preparation of the legal aspects involved, proper marketing of the
country and of the transaction (which includes securing the best possible credit rating
by at least two of the three major international credit rating agencies), an investor
relations program to deepen communication channels with investors and other
stakeholders, and hiring financial advisors who can provide independent advice (from
the lead managers) at the issuance. Depending on the economic stage of the country in
the process, these steps can take several months to be accomplished.
Source: Jonasson, T. and Papaioannou, M.M.G. (2018). A primer on managing
sovereign debt-portfolio risks. IMF Working Paper
Text 2
What are the benefits of increased transparency in government debt
management?
Enhanced transparency of strategies, operations and policies for public debt
management reduces investor uncertainty, thereby increasing the attractiveness of
government bond markets. This in turns broadens the investor base, lowers risk
premiums and decreases borrowing costs.
Other, more specific, reasons for Debt Management Offices (DMOs) to re-assess
the need for greater transparency include the following: i) the need for DMOs to pay
greater attention to roll-over risk; ii) a more challenging issuance climate; iii) the
necessity to stay informed about the (potential) impact of new financial regulations on
the behaviour of primary dealers in primary markets and pressures on liquidity in
secondary government bond markets; iv) DMOs are obliged to stay abreast about the
influence of new, usually more complex, electronic trading systems on the functioning
of bond markets; v) DMOs also need to pay more attention to investor relations and
communication strategies; and vi) the strong increase in the issuance of latent
government debt (mostly in the form of state guarantees).
Transparency and predictability are linked to openness about policies, strategies, as
well as debt management operations. This in turn reflects the need for greater
accountability as more transparency echoes greater demand in society for openness
often expressed via a more critical attitude (by markets, regulators, rating agencies and
the general public). As noted, greater transparency may lead to lower borrowing costs.
For example, when investors understand better how and why decisions about changes
in funding and debt management are made, uncertainty may be reduced, leading, in
turn, to lower borrowing costs.
Greater accountability and transparency may contribute to (de facto or de jure)
increased operational autonomy for debt management operations. In addition, more
transparency about risk guidelines contributes to a better assessment of the

22
performance of DMOs. Disclosure of risk-adjusted performance indicators, in turn,
has enhanced the credibility of debt managers.
Source: OECD (2016), OECD Sovereign Borrowing Outlook, OECD Publishing,
Paris.
4. TERMINOLOGY
Debt crisis - Khủng hoảng nợ công: Debt crisis is a situation in which a government
(nation, state/province, county, or city etc.) loses the ability of paying back its
governmental debt.
Debt management office - Cơ quan quản lý nợ công: is a government agency
established to centrally coordinate the management of the country's debt.
Debt portfolio - Danh mục nợ: Debt portfolio means spreadsheets, databases, tables,
lists, or any other compilation of information describing debts or purported debts
owed by individuals to a business.
Debt structure - Cấu trúc nợ: refers to a mix of different financial debt products
which are designed to sit alongside one another to cover the total amount of funds
needed.
Debt sustainability analysis - Phân tích tính bền vững của nợ: assessing how a
country's current level of debt and prospective borrowing affect its present and future
ability to meet debt service obligations.
Government bond - Trái phiếu chính phủ: A government bond is issued by a
government at the federal, state, or local level to raise debt capital.
Government debt - Nợ chính phủ: A country's gross government debt is the
financial liabilities of the government sector.
Public debt - Nợ công: Public debt is the total amount, including total liabilities,
borrowed by the government to meet its development budget.
Public debt management - Quản lý nợ công: the process of establishing and
executing a strategy for managing. the government's debt in order to raise the required
amount of funding at the lowest possible cost over the medium to long run, consistent
with a prudent degree of risk.

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 READING CASE OF PART 6

Vietnam Public Expenditure Review

1. This Public Expenditure Review (PER), prepared jointly by the Government of

Vietnam and donors, examines Vietnam’s public expenditure policy and management
and proposes ways of improving the results of its public spending program. The report
examines cross-cutting issues—fiscal sustainability and transparency, expenditure
management processes, fiscal decentralization—and analyzes public spending on
agriculture, health, education, and transport from the perspective of growth, poverty
reduction, and gender equity.
2. The report identifies six important areas requiring action:
• Reversing the Government's declining revenue share in GDP and
developing a medium-term fiscal outlook,
• Improving budgetary data and increasing the transparency of data and
information flows,
• Ensuring an effective process for prioritizing public expenditures.
• Enhancing “pro-poor” bias of public expenditures.
• Reallocating spending within sectors to improve sector outcomes
• Assessing where services can be provided by private sector to reduce
budgetary burden.
The report’s findings reflect a situation which applies in many countries, including
those at much higher levels of economic development and income than Vietnam. For a
country at Vietnam’s stage of development, its system of public expenditure
management appears to operate well.

3. This PER represents another step in the Government’s ongoing efforts to

increase fiscal transparency and improve public expenditure management and policy.
Time did not permit all relevant issues to be examined or policy suggestions to be
made on all the issues that were analyzed. The report should therefore be seen as an
important part of an ongoing process, with discussions and work continuing in the
coming months.
4. The report was prepared in a participatory and consultative manner, with
stakeholders participating throughout the process. Participants included not only the
Ministries of Finance (MOF), Planning and Investment (MPI), Education and
Training, Health, Transport, and Agriculture and Rural Development but also
provincial authorities; donors, such as DFID, DANIDA, the Government of the
Netherlands, the UNDP, and the IMF; and NGOs, such as Action Aid. Consultative

24
sessions with sector ministries and donors were held at various stages of the process,
and workshops were held in Hanoi and Ho Chi Minh City.
5. The report’s findings and recommendations should help the Government and
donors better understand how well Vietnam’s public expenditure management system
encourages the effective use of public resources and ensures that inter and intra-
sectoral spending is consistent with the Government’s stated development objectives.
The findings and recommendations should help policymakers assess whether Vietnam
can move from a project approach to a programmatic approach to foreign assistance in
any of the four sectors examined, and if so how it could do so. The report could also
help the Government prepare the future state budgets, develop the new five-year plan
(including the Public Investment Program [PIP]), and revise the Budget Law.
6. For the Government, the next steps will be to adopt measures that have been
well specified in the PER, initiate additional follow-up work to develop specific
measures where findings warrant such work, and analyze issues not examined in this
PER. For donors the next steps will be to assess the report’s implications for their
assistance to Vietnam and coordinate technical assistance for implementing its
recommendation.
CONSTRAINTS TO GROWTH AND THE CHALLENGES FACING
VIETNAM

7. High growth has helped reduce poverty... In recent years Vietnam has been
one of the 10 fastest-growing economies in the world, with annual growth averaging
an exceptional 8.5 percent between 1992 and 1997. This high rate of growth—the
result of the introduction of the economic reform process (“doi moi”) in the late
1980s—helped dramatically reduce poverty, which fell from 58 percent in 1992 to 37
percent in 1997.
8. ...but annual growth has slowed since 1998, falling to about 5 percent in
1999. Growth in nonagricultural production and investment, especially foreign
investment, has slumped, and unemployment has risen. While the downturn in growth
partly reflects the effect of the regional economic crisis, insufficient competitiveness
and efficiency in the Vietnamese economy has hindered the resumption of higher
growth. The decline in growth makes increasing the effectiveness of public
expenditure policies and management all the more important.
9. In November 1999 the Prime Minister identified several constraints on faster
economic growth and poverty reduction: the poor performance by and need for fiscal
support to state-owned enterprises, inadequate sectoral policies and inappropriate
investment choices, the gap between policy and implementation, and the need for
better targeting of public spending on the poor. This PER confirms that these
problems are hampering efforts to move to sustained economic growth and poverty

25
reduction.
REVERSING DECLINING REVENUE AND DEVELOPING A MEDIUM-
TERM FISCAL OUTLOOK

10. Revenues have declined... Revenue as a share of GDP has fallen by 3-4
percent of GDP. Most of the decline occurred in 1998 and 1999 and was caused by the
decline in corporate income tax collections—the result of a slowing economy,
flagging enterprise performance and weakness in tax administration. Given current
policies the decline is projected to continue in 2000 and beyond.
11. ...and total expenditures have fallen. Public spending as a share of GDP has
fallen by about 4 percent of GDP since 1998. While this fiscal restraint is
commendable, further cuts in public spending may undermine the Government’s
efforts to reduce poverty. Most of the decline in spending has been in nonwage
spending in economic services, general administration, and social transfers (facilitated
by the gradual reduction in the number of pensioners paid from the budget and the
shifting of pension payments to the social insurance fund).
12. But spending pressures are likely to grow. Two types of spending are likely
to grow in the medium term. First, implementation of planned reforms of state-owned
enterprises and banks would require additional spending of as much as 1-2 percent of
GDP a year for three to four years, according to IMF estimates. This spending would
comprise creating a social safety net for displaced workers and paying the interest on
government bonds used to fund the restructuring of state-owned enterprise debt and
the phased recapitalization of the banks. Second, the Government has increased the
base wage of civil servants by 25 percent (with further real increases envisaged), to be
paid in part by the downsizing of the civil service. Given unsustainably low civil
service wages, these increases are clearly needed, but if civil service employment is
not reduced, they may crowd out other spending.
13. Reversing the continuing decline in revenues as a share of GDP is critical for
sustaining real levels of public spending in the medium term. In the past, Vietnam has
maintained a prudent fiscal stance, maintaining relatively small budget deficits
(typically about 1 percent of GDP, excluding on-lending) and a low level of
debt/GDP. But the current fiscal situation is under pressure from the declining ratio of
revenue to GDP and the growing spending pressures. Without actions to address the
revenue problem and accurately assess the medium-term fiscal outlook and emerging
fiscal risks, acceptable levels of public spending in key sectors may be difficult to
maintain in the medium term.
14. Several actions are needed to address these problems over the medium term:
• Revenues need to be increased to about 19-20 percent of GDP. Doing so
will require broadening the revenue base, removing discretionary

26
 exemptions and multiple rates in the VAT, and further strengthening tax
administration.
• Definitive estimates of the fiscal costs of state-owned enterprise and
banking reform are needed, linked to annual implementation of the reform
programs.
• Full cost estimates of recent and future wage increases are needed, linked to
planned changes in civil service employment.
15. A medium-term fiscal outlook is needed. A medium-term fiscal outlook
would assess the impact of new revenue-raising policies and project total spending. It
would reflect the pace of sectoral and economy-wide reforms, which determine the
volume of donor support in the medium term and thus the size of public investment
expenditure. The resulting forecasts of likely deficits and their financing as well as an
analysis of the implications of such financing, could trigger timely action and improve
the stability of budgetary resources. The medium-term fiscal outlook could also play a
key role in informing the annual budget formulation process and in building a
medium-term sector expenditure program.
16. All types of fiscal risk need to be regularly assessed and reported to the
Ministry of Finance. Identifying and assessing fiscal risks on a regular basis would
reduce unanticipated shocks to public spending. Tight monitoring and control over
approved expenditures can be undermined if fiscal risks are not also monitored. For
example, in many countries, Government guarantees of loans to state enterprises and
sectors or directives to state-owned banks to provide credit to state enterprises on
noncommercial terms have threatened the fiscal balance. It is thus essential that
contingent liabilities and other fiscal risks be reported to the MOF and assessed
regularly.
17. A medium-term fiscal outlook would thus incorporate revenue policies and
projections; projections of donor disbursement; analysis of all fiscal risks, and in due
course a detailed medium-term public expenditure plan, broken down by sectoral
programs. Given the tradition of planning in Vietnam, it should be relatively easy to
begin developing such programs. The medium-term fiscal outlook should be
published with the annual budget, and used to inform budget formulation.
IMPROVING THE RECORDING AND REPORTING OF DATA AND
INCREASING BUDGET TRANSPARENCY

18. Reliable and timely information on spending—and adequate access to such

information—is needed to get the best results from public expenditure. Public
expenditure needs to be accurately recorded and reported by different spending units,
timely and reliable reports need to be generated and be accessible across spending
agencies and ministries, and sufficient budgetary information needs to be published to

27
enable businesses and citizens to understand how public resources are being deployed.
Vietnam has made considerable progress in these areas in recent years. Enactment of
the budget law, regular fiscal reporting and the adoption of international economic
classifications, the removal of budgetary information from the secrecy law, and the
publication of some of that information reflect such progress. Preparation of this joint
PER in a participatory manner and its publication also reflects significant progress.
Nevertheless, further improvements in reporting budgetary data and in making data
accessible by government agencies and the public are required if Vietnam is to be on a
par with other countries in the region.
19. The detailed data used for this PER was available in much greater details than
the General Statistical Office publication of budgetary information for the first time in
June 1999. The sectoral breakdown of total budget spending, which covers three-
quarters of total expenditures, details spending by type (capital or recurrent, wage and
wage-related, operations and maintenance) and by level of government
20. The lack of a consolidated budget makes it difficult to determine total
revenues and expenditures. The PER covers recurrent and capital spending funded
from the Government’s own revenues, Official Development Assistance (ODA) grants
not on-lent, and borrowing (domestic and external concessional ODA loans that are
not on-lent). It does not cover recurrent and capital expenditures from off-budget
funds or on-lent ODA funds or capital spending by state-owned enterprises, nor all
spending by communes.
21. Data recording and reporting are inconsistent across ministries, and many
gaps exist. The data used in this report were developed from data provided by the
MOF, MPI, and individual sector ministries. Reconciling their different figures
revealed several gaps in reporting and recording of budgetary data. First, where sector
ministries record expenditures from ODA, they are not classified according to budget
codes. Differences in estimates of capital spending by the MOF, MPI and sectoral
ministries stem partly from this, and partly from differences in classifying capital and
recurrent expenditures. Second, there are also classification anomalies, for example, in
recurrent versus capital expenditures in the transport sector, curative versus preventive
expenditures in the health sector, salary versus non-salary expenditures in the
education sector. Third, comparison of budgeted and actual spending at a
disaggregated level is not possible, because budget allocations and Treasury releases
are made using 11 categories, while spending agencies and the MOF report
expenditure using full budget classification. Fourth, reporting by state-owned
enterprises is uneven. Not all large state-owned enterprises submit audited financial
statements, and many smaller state-owned enterprises do not regularly report to the
MOF. Fifth, a detailed classification of spending on social transfers is not available in
a form that permits analysis of its impact.

28
22. More and better information is needed on the impact of public
expenditures. Linking expenditures and outcomes to assess the effectiveness or
efficiency of public spending is difficult even in advanced economies. Vietnam may
thus need to proceed gradually in this respect. Nevertheless, many sectors have
information bases that could be used to develop key performance indicators. Data will
gradually need to be improved and linked with budgetary decision-making and with
the development of medium-term sectoral plans.
23. Over time, a consolidated budget statement will be needed to accurately
reflect the country’s fiscal situation. Such a statement would include the activities of
all off-budget funds, improve budgetary reporting by communes, obtain regular
reports from state-owned enterprises, and ensure better coverage of expenditures
funded by ODA.
24. Adopting the following actions would help the Government improve its
budgetary reporting:
• Designate the Treasury as the department responsible for maintaining
comprehensive central public accounts, and consider developing a fully
integrated management information system within the Treasury.
• Channel agency payments from ODA through the Treasury so that all
transactions are recorded using the same budgetary classifications.
• Adopt functional classifications in line with international practice.
• Ensure that all ministries adopt a uniform classification for capital and
recurrent expenditures.
• Develop a detailed classification of spending on social transfers.
• Require large state-owned enterprises to submit audited financial
statements, to be reviewed by the Ministry of Finance and the appropriate
sectoral ministry.
• Develop key output and outcome measures in one or a few sectors, as a first
step towards developing a comprehensive set of performance measures.
25. MOF has expressed a strong interest in implementing an integrated financial
management system in the Treasury and will seek technical assistance from the World
Bank to do so. Such assistance will be most productive if the Ministry also considers
significantly reorganizing its functions to ensure greater coherence and focus in its
policy formulation and policy implementation roles.
26. More systematic and frequent sharing of budgetary information across
spending agencies is needed. The process of interagency consultations for this PER
revealed that sectoral ministries lack adequate information on expenditures by

29
provinces to exercise their policy role. Ministries also lack information on related
expenditures by other ministries.
27. The system of local fees and “voluntary” contributions is nontransparent,
and insufficiently accountable. The bases of these charges, which generate between
23 and 61 percent of revenues in four of the six communes studied, are so complex
that households often do not understand how their payment is calculated. None of the
six communes publishes a budget indicating what charges have been collected from
households and how those funds have been spent, leading to dissatisfaction among
commune residents.
28. To increase transparency and improve budgeting and decision-making, the
Government should consider taking the following steps:
• Enhance the flow of budgetary information across all government
ministries, agencies and provinces. MOF should ensure appropriate
involvement of sectoral ministries in reviewing provincial government
expenditures in each sector, while preserving existing provincial autonomy.
• Provide donors and international organization with more comprehensive
information on budgetary outcomes and processes in order to increase
donor understanding of Vietnam’s public finances. Better information could
also strengthen partnerships between the Government and donors, and
could lead to programmatic funding by donors in different sectors.
• Consider regularly publishing the sectoral breakdown for the more than 75
percent of total spending as contained in this PER, based on data on all four
levels of government. MOF should also publish the annual budget and final
accounts figures for each sector, including relevant intra-sectoral detail.
Each province, district, and commune should publish its own annual budget
and final accounts.
• Ensure that existing requirements for transparency in imposing commune
fees and “voluntary” contributions are observed. Implementing decrees on
“grassroots democracy” and annually publishing commune budgets would
be one way of addressing this.
CREATING EFFECTIVE PROCESSES FOR PRIORITIZING
EXPENDITURES

29. The Government has succeeded in promoting economic growth and reducing
poverty, including improving the equity of health and education spending. But there is
considerable scope for further improving the effectiveness of public spending. Better
processes are needed for prioritizing recurrent and capital spending; recurrent
spending needs to account for a larger share of total spending, so that more efficient

30
use is made of the capital stock; sectoral ministries need to play a larger role in
prioritizing spending in their sectors; the system of recurrent expenditure norms needs
to be simplified; local authorities need more flexibility to allocate funding to their
priorities; and a formal budget process that better integrates capital and recurrent
budgets is needed.
30. Prioritizing recurrent and capital spending has been difficult, for several
reasons. Prioritization is carried out separately for capital spending by the MPI and
for recurrent spending by the MOF. Coordination is insufficient to ensure that the
recurrent budget implications of planned capital spending are fully analyzed or that
appropriate balance between recurrent and capital spending is attained. The current
processes in MPI for evaluating and prioritizing PIP projects need significant
strengthening. There is a need to improve the evaluation criteria for projects, develop
the skills of MPI staff and streamline PIP approval process. A fixed five-year PIP does
not permit the prioritization of capital spending to be responsive to changes in the
economic situation or the availability of resources. These problems are recognized by
MPI and efforts are underway to address them.
31. There is an imbalance between capital and recurrent expenditures. It is
Government policy that recurrent expenditures should not increase faster than
investment expenditures. As a result, recurrent spending is too low, implying
inefficient allocation and inadequate use of the public capital stock. For example, a
significant proportion of irrigation capacity is not used because of inadequate
operations and maintenance (O&M) expenditures. Routine maintenance of roads (and
inland waterways) is insufficient even though it is much more expensive to
rehabilitate roads once they become unusable.
32. Sector ministries play too small a role in prioritizing spending in their
sectors. Sector ministries prepare five-year targets and goals, but these are not linked
to an affordable expenditure plan. Each sector submits an annual plan for capital
spending to the MPI and an annual plan for recurrent spending to the MOF. Because
coordination among the three ministries in the finalization of these plans is
inadequate, the process for prioritizing all expenditures within a sector remains
fragmented. There also appears to be limited scope for evaluating expenditures and
reviewing policies, because sector ministries do not receive detailed reports on actual
expenditures in their sectors, especially by the provinces.
33. Given that O&M spending is insufficient to make adequate use of the
capital stock in several sectors, further work is needed to determine what
reallocation of recurrent spending between wage and wage-related expenses and
O&M expenses may be needed. Wage and wage-related expenses do not appear to
be crowding out O&M expenditures, as they do in many other countries. However,
anecdotal evidence suggests that wage and wage-related expenses may be

31
underreported, due to misclassification. Moreover, civil service wages in Vietnam are
unsustainably low, and pressures for wage increases are substantial.
34. The system of recurrent expenditure norms, which guides the allocation of
resources to and within sectors is complex and some norms are mutually
contradictory. Actual spending and service delivery standards in provinces and
communes are sometimes inconsistent with stated Government priorities. The use of
population-based norms for allocating resources to schools, for example, does not take
into account varying enrollment rates or adjust fully for different geographical
conditions or cost disadvantages. As a result, poorer provinces and remote areas are
often inadequately funded.
35. Local authorities, especially the communes, have insufficient flexibility to
prioritize their own spending. Poorer provinces depend on cash transfers to meet
minimum service delivery standards, but the existing transfer system is unable to meet
their requirements. Districts and communes receive a share of those transfers, but they
are often inadequate to meet the nonwage costs of service delivery. This limits their
flexibility in responding to local needs, except to the extent that their revenues exceed
budget estimates or they are able to resort to fees and voluntary contributions for a
significant share of their revenue, which they allocate in line with local preferences.
Consideration could be given to providing local governments with additional revenue
sources
36. A formal budget process needs to be established that better integrates
capital and recurrent budgets and promotes prioritization that maximizes the
impact on growth and poverty reduction. Several actions would help achieve this:
• MPI and the MOF should improve existing mechanisms for coordinating
capital and recurrent expenditure. This should involve ministries and
provinces submitting integrated capital and recurrent budget requests to
both the MOF and the MPI, and all parties should participate in future
discussions on these budget requests.
• Develop medium-term sector expenditure programs as the basis for
developing annual sectoral budget requests.
• Strengthen the MPI’s processes for evaluating investment projects.
Developing capacity, adopting more rigorous evaluation criteria, and
turning the PIP into a rolling five-year expenditure plan that is adjusted
each year would improve the MPIs capacity to assess the appropriateness of
investment priorities.
• MOF, together with the provinces and sector ministries, should review the
current expenditure norms—both the budget allocation norms used to guide
expenditure to sectors and the budget transfer norms governing cash

32
 transfers to the provinces. In reviewing the latter consider adopting a new,
more equitable formula-based system; and consider assigning some
revenue-raising powers to lower levels of government. (The Government
believes that assigning such powers would not be appropriate at this time
but will undertake work to assess the pros and cons of such an action.)
ENHANCING THE PRO-POOR BIAS OF PUBLIC SPENDING

37. There is considerable evidence that the Government’s public expenditure

program plays an important redistributive role and helps the poor. Although
national safety net programs are not particularly effective, cash transfers to poorer
provinces and the distribution of health and education sector spending are
redistributing income. But considerable scope remains for improving the impact of
public spending on the poor, particularly by better targeting social expenditures and
developing alternative mechanisms for increasing income transfers to the poorest.
38. Targeting of spending on public health and education, especially on
education, has improved over time, and public social expenditures are now more
equally distributed than household expenditures. For example, the poorest quintile
received 18 percent of total spending on public education in 1997/98 (a 2 percentage
point increase over 1992/93) and 26 percent of spending on primary education (a 6
percentage point increase).
39. Cash transfers to poorer provinces are performing a useful redistributive
role, and allowing these provinces to support a higher level of service delivery. In
1998 at least 41 provinces received cash transfers. Although richer provinces still
spend more than poorer provinces, provincial per capita expenditures are more equally
distributed across provinces than are per capita revenue collections, and they have
become more equally distributed over time. Nevertheless, the fact that the size of
these cash transfers is only weakly related to the depth and incidence of poverty in the
provinces suggest that there is room for improving targeting.
40. To enhance the pro-poor bias of public spending, four types of actions are
recommended:
• Target social spending more effectively at the poor. In primary health care,
for example, spending could be reallocated from certain types of curative
care to preventive care. Reallocating expenditure to rural roads will also
assist the poor.
• Improve the operation of the existing system of user fee exemption for
primary schools and certain types of hospital care. The existing system does
not work in a particularly pro-poor way and forces schools and clinics to
fund exemptions from their own resources. The goal would be to reduce the
level of out-of-pocket payments made by poor households, which appears to

33
 be very high relative to their incomes. One option would be to provide
direct funding to some institutions to cover the cost of these exemptions
• Examine other mechanisms for increasing income transfers to the poorest.
One option might be to target income transfers to poor parents of primary
school children, many of whom are funding nearly half the cost of primary
schooling from their own meager resources. A program (such as that
successfully adopted in Indonesia) which provides scholarships to children
from poor families, could be an effective targeting mechanism.
• Adopt a formula-based system for determining the amount of cash transfers
to poorer provinces, in order to ensure that transfers are more closely related
to their needs. Further work should be undertaken to explore the
implications of alternative formulas, develop consensus around a particular
formula, and then adopt it in the revised budget law.
REALLOCATING SPENDING WITHIN SECTORS

41. Three of the four sectors examined suggest the need for reallocating spending
to improve outcomes—education is the exception. Given the limited scope for raising
total spending, reallocation is likely to be the main source of improvement in the
medium term.
Agriculture

42. Public expenditure on agriculture accounts for about 6 percent of the state
budget and 1.3 percent of GDP. Although this is much lower than in China, India, or
Thailand (which spend 816 percent of their budgets on agriculture), the sector growth
has been one of the strongest among developing countries.
43. Given that most growth in the sector is expected to come from crop
diversification and increases in yields, improving irrigation, extension, and research
will be important. Irrigation currently accounts for half of agricultural expenditure, but
the imbalance between capital and recurrent spending means that a significant share of
irrigation facilities are not used because of inadequate O&M. Public spending on
research is very small and increased its spending (the returns to which are very high
worldwide) could raise agricultural productivity and enhance the international
competitiveness of Vietnamese agricultural products.
44. Several reforms could improve performance in the sector:
• Increase public spending on agricultural research and extension, especially
in the poorest communes. Funding of this additional spending could come
from reallocating state subsidies, transfers, and investments from some loss-
making state- owned enterprises.

34
 • Improve linkages between research and extension, and involve farmers and
agroindustry representatives in the management of these services.
• Improve irrigation service delivery and cost recovery by basing irrigation
charges on water consumption and improving the collection system.
• Extend pilot projects for developing water user associations.
• Improve the performance of reforestation programs.
Health

45. Public spending on health grew rapidly over the past five years, reaching 7
percent of the budget in 1998 (about 1.4 percent of GDP), although still relatively low
by international standards. Nearly two-thirds of spending on health is carried out by
provinces, communes, and districts. Curative care absorbs a disproportionate 70
percent of the health budget, while preventative care receives just 15 percent; another
7 percent goes to family planning.
46. Although public expenditures on health have risen rapidly since the early
1990s, households finance nearly 80 percent of total health care spending. Out-of-
pocket payments for the poor are very large relative to their incomes. A fee exemption
mechanism for poor patients exists, but it appears not to function well.
47. Increases in public spending on health have been accompanied by impressive
gains in the health status of Vietnam’s population, but there is scope for improving
delivery of health services by reallocating spending. Several reforms could help
improve health care delivery:
• Shift from high-cost hospital based services to more cost-effective
commune health centers.
• Establish a national strategy for assistance to the poor with their health care
costs. This may include improving the system of user fees exemption for
the poor, and ensuring that it functions effectively.
• Once such a strategy is in place the Government should consider raising
user fees at hospitals, to reduce budgetary subsidies to hospitals.
• Develop mechanisms for ensuring that provinces make their health
spending patterns consistent with national health priorities and strategies.
• Improve the budget transfer norms (used in determining transfers to the
provinces) for health sector public spending to reduce disparities among
provinces in the delivery of minimum services.
• Consider expansion of the health insurance program, especially the
voluntary scheme, as a means of reducing health costs to the budget.

35
 • In the longer run, rethink the role of the state in the health sector. It may
make more sense for the government to reduce its role in the direct
provision of curative, hospital-based health services and focus instead on
providing high-quality preventive health services; financing health
expenditures, especially for the poor; and improving regulation and
monitoring of the growing private health sector.
Education

48. Vietnam has made considerable progress in increasing educational enrollments

at all levels and improving the efficiency and equity of education spending. Total
education and training expenditure has grown significantly over the past five years,
reaching 17 percent of total public spending (exclusive of amortization) (about 3.5
percent of GDP) in 2000. As a result, the number of teachers and the average duration
of studies have risen, albeit from relatively low levels. However, additional public
spending will be necessary given the likely growth in enrollments in lower secondary
schools, flowing through from increased primary enrollments. Raising pupil/teacher
ratios can reduce but not eliminate the need for such increases.
49. Spending on education is highly decentralized, with more than 73 percent of
total spending carried out by provinces, districts, and communes. School education
represents 62 percent of total spending on public education, with 36 percent of
spending allocated to primary education and 18 percent to lower secondary education.
This intra-sectoral allocation appears to be appropriate and should be maintained. The
balance between wages and non-wage expenditure is also reasonable, although there is
some evidence of misclassification of non-wage spending. Nearly half of total
spending on primary education is financed by households, which implies an undue
burden on the poor.
50. There is little scope for reallocating of public spending across primary,
secondary, and tertiary education services without damaging service delivery. But
there is a need to reduce existing regional variations in expenditures and quality by
reviewing the system of budget transfer norms.
51. Several reforms could improve the effectiveness of spending on education:
• Consider gradually increasing spending on education from 15 percent of public
expenditure to around 20 percent by 2005.
• Simplify the system of allocative norms for education expenditures, and
replace them with guidelines under which local management has discretion as
long as educational outcomes are achieved and the budget allocation not
exceeded.
• Address existing regional variations by reviewing the present system of norms

36
 budget transfer for allocating education funds to the provinces.
• Increase pupil/teacher ratios at all levels as enrollment rates rise.
• Consider establishing a revolving fund that would leverage expenditure on
school construction by lending school funds for construction.
• Develop outcome indicators to assess the impact of expenditures by testing
student attainment on a regular basis.
Transport

52. Public spending on transport increased significantly over the past decade, but
the efficiency of the sector remains low. The poor state of the country’s roads imposes
economic costs on users of about $160 million a year, according to the World Bank.
Problems with ports and railways exist as well. Expenditure priorities have focused on
rehabilitation and modernization of transport infrastructure, especially roads
53. Nearly 11 percent of total public spending (about 2.2 percent of GDP) goes to
transport— a figure that is comparable to other countries—with over 90 percent going
to roads. Nearly a third of road expenditure is in the growth corridors of Ho Chi Minh
City (Ba Ria Vung Tau and Hanoi-Haiphong). But recurrent spending represents only
about 12 percent of total road spending, and road maintenance has remained under-
funded relative to capital investment. Progress in improving rural roads has been slow.
54. To address these problems, the Government will consider several reforms.
• For recurrent spending, it will consider reallocating expenditures to increase
road maintenance to an adequate level, possibly by establishing an earmarked
road fund financed by a levy on gasoline and other charges.
• It will also consider increasing spending on maintenance of inland waterways.
• For capital spending, the Government will consider reallocating spending
toward rural roads. It will also improve processes to ensure better quality and
management of transport infrastructure projects.
ASSESSING THE SCOPE FOR SHIFTING SERVICES TO THE PRIVATE
SECTOR

55. Given the pressures on the budget, there is a need to reassess the scope for
private delivery of services in education, health, and infrastructure. Doing so could
reduce demands on the budget without reducing the services needed for growth and
poverty reduction. Some growth in private services in health and education has
already occurred, mainly in urban areas, but little private investment has been made in
infrastructure, except in water supply. More private sector involvement will be needed
if the availability of public resources is not to be a constraint to achieving Vietnam’s
potential. The Government may consider undertaking a detailed assessment of the

37
scope for gradually shifting services to the private sector.
56. It may also be necessary to expedite the pace of state-owned enterprise reform
particularly in the transport and agriculture sectors and especially for troubled
enterprises, in order to reduce the fiscal risk borne by the Government. While state-
owned enterprises no longer receive direct or cash subsidies in Vietnam, some
continue to receive on implicit subsidies from the budget in the form of loans at
concessionary interest rates, debt and interest forgiveness, and tax exemptions. The
full extent of this support is not known. Moreover, with Vietnam’s integration into
AFTA and the consequent reductions in import protection, some of these state-owned
enterprises are likely to begin to require cash and direct subsidies.
57. Increased private sector participation could occur through new entry of private
firms and through shifting ownership by equitizing and divesting state-owned
enterprises. Private sector involvement in operations (e.g., of ports and airports), need
not be inconsistent with the Government's objective of retaining strategic control of
these activities. As privatization proceeds, sector ministries will need to strengthen
their monitoring and policymaking role to exercise this strategic control.
WHAT IS DOABLE IN THE SHORT AND MEDIUM TERM?

58. The attached Timetable of Next Steps sets out the possible time frame of the
main recommendations of this PER on the basis of short-term or medium term.
59. Preparation of the 2001 budget provides the Government with the opportunity
to institute some of the changes in spending suggested in this PER and to consider
some of the suggestions for improving the budgetary process. However, some
expenditure reallocations have institutional preconditions, suggesting that major
expenditure reallocations may have to be phased in gradually. The development of the
2001-2005 PIP also provides an opportunity for considering the findings and options
suggested in this PER, on both expenditure allocations and improvements in PIP
processes. The Government’s intention to review the operation of the budget law in
2000 will also provide the opportunity for many of the recommendations on
improving budgetary processes and public expenditure management to be considered.
60. The need to improve information and prioritization and to determine
affordability create common institutional requirements across sectors, such as
developing an aggregate medium-term fiscal plan and medium-term strategies.
Developing such plans and strategies will require that the Government commit itself
to a significant program of policy analysis and development and to improving the
budgetary and expenditure management system. Developing this institutional capacity
will take time. A shared commitment to and understanding of this process throughout
the Government (including the Office of Government, MOF, MPI sectoral ministries,
provincial governments, and the National Assembly) is an important precondition.

38
In considering these issues, the Government can build on the extensive consultative
process already developed for this PER. Apart from the National Assembly, the
provinces, and other sub-national levels of government it could also consider
consulting representatives of the media and civil society wherever possible. The
World Bank stands ready to provide assistance in these consultations.
Source: World Bank (2000), Vietnam - Managing Public Resources Better, Public
Expenditure Review 2000, Report No. 21021-VN

Questions:
1. What were impediments to economic growth and poverty reduction in
Vietnam by 2000?
2. What actions were proposed to expand budget revenue as a source of public
spending in the medium term in Vietnam?
3. Why were improvements in reporting and disclosing budgetary data important
to Vietnam? What should be done to enhance budgetary reporting and
transparency?
4. Why was budget spending prioritization challenged in Vietnam? What actions
were required to promote prioritization that maximizes the impact on growth
and poverty reduction?
5. How did the Government of Vietnam help the poor by public expenditure
programs? What were actions proposed to enhance the pro-poor bias of public
spending?
6. Why was public spending reallocation suggested in different sectors of
Vietnam?
7. Why was private sector participation encouraged and how could private
investments be promoted in Vietnam?

39
SELECTED REFERENCES OF PART 6

1. https://globalconnections.hsbc.com/singapore/en/tools-data/country-guides/vn/tax-
system
2. https://home.kpmg.com/uk/en/home/insights/2016/09/impact-of-brexit-on-tax.html
3. http://hocday.com/english-for-finance-and-accounting.html?page=6
4.http://siteresources.worldbank.org/PEFA/Resources/FinalTextofTheThreeRevisedIn
dicators.pdf
5. http://taxation5.blogspot.com/2008/11/i-introduction-to-taxation.html
https://www.english4accounting.com/unit/9/reading
6. Jonasson, T. and Papaioannou, M.M.G. (2018). A primer on managing sovereign
debt-portfolio risks. IMF Working Paper
7. IMF (2014), Revised Guidelines for Public Debt Management
8. OECD (2016), OECD Sovereign Borrowing Outlook, OECD Publishing, Paris.
9. World Bank (2000), Vietnam - Managing Public Resources Better, Public
Expenditure Review 2000, Report No. 21021-VN
10. World Bank and Ministry of Planning and Budget of Korea (2003), Report to the
Public Expenditure Management Seminar jointly organised by the Vietnam Ministry
of Finance, Republic of Korea

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