(Bloomberg) -- From excess savings and a lack of demand to the need for government-led investment, shades of Larry Summers's secular stagnation thesis are evident in Taiwan. Problem is, fiscal and monetary policy makers can't agree on what to do about it.
After cutting rates for the fourth straight meeting, the Central Bank of the Republic of China (Taiwan) warned June 30 that monetary policy was shouldering too much of the burden for reviving growth. Reductions in government spending could result in “serious consequences” for the struggling economy, the central bank said.
Yet that's exactly what the new administration has in store. It plans to cap debt growth and promises a balanced budget, including an overhaul of generous civil servant pensions.
The policy puzzle threatens to cloud the response to three consecutive quarters of economic contraction as the export-dependent island is battered by slower iPhone sales and anemic prices for petrochemical exports. Group tourism from mainland China is also down as new independence-leaning President Tsai Ing-wen tests relations with Beijing.
The cabinet's spokesman declined to comment Wednesday on spending plans.
The central bank, led by Governor Perng Fai-nan since 1998, on Tuesday nudged its overnight guiding rate -- seen by some as indicative of policy direction -- down 0.1 basis point. That helped drive government 10-year bond yields to another record low. Six of 15 economists surveyed by Bloomberg expect the main rate to be cut further in September.
Debt Limits
But the central bank doesn't want to do all the work. The combination of a long-standing need for structural upgrading and slowing global growth and trade could spell meager expansion for Taiwan in the long-term, it said last week. In contrast to the administration's plans, the central bank recommended the government have the power to raise the debt limit “as needed.”
Officially forecast to grow 1.06 percent in 2016, Taiwan may post less than half that rate of growth if a state-funded research institution proves accurate.
“If the economy doesn't turn around in the second half, the burden of boosting growth should fall on fiscal policy,” said Ma Tieying, an economist at DBS Group Holdings in Singapore.
Yet prospects for such an approach seem far off. Taiwan's new Premier Lin Chuan said last month the government's budget for the coming fiscal year was “stretched to the limit.” Budget increases were to be avoided.
In an interview Tuesday, Vice Finance Minister Su Jain-rong said increased government spending may not help much if conditions deteriorate.
And while recognizing that monetary policy has limitations, Su said "fiscal policy has its limits too."
To contact the reporters on this story: Debra Mao in Taipei at dmao5@bloomberg.net, Chinmei Sung in Taipei at csung4@bloomberg.net. To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Jeff Kearns, Debra Mao
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