FACULTY OF BUSINESS

MACRO – ECONOMIC – ECO121

INDIVIDUAL ASSIGNMENT
DETERMINANTS OF BUDGET DEFICITS AND NATIONAL DEBT IN VIETNAM

Student Name : Thao Thi Thanh Phan

Student ID : HA170158
Class : IB1717
Lecture : Phi – Hung Nguyen Ph.D
Course : Basic Macro Economics (ECO121)
Date : Spring 2023
Table of content:
1. What is budget deficits?...........................................................................................2
2. What is national debt?.............................................................................................2
3. Situation of budget deficits and national debt in Vietnam......................................2
4. Determinants of budget deficits and national debt in Vietnam...............................3
5. Reference.................................................................................................................5

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1. What is budget deficits?
A budget deficit occurs when expenses exceed revenue and can indicate the financial
health of a country. The term is commonly used to refer to government spending
rather than businesses or individuals. (Adam Barone, 2023)
Budget deficits affect the national debt, the sum of annual budget deficits, and the
cumulative total a country owes to creditors.

2. What is national debt?

The term “national debt” refers to the outstanding financial obligations of a country.
Such obligations may also be called government debt, federal debt, or public debt .
The national debt of a country is the total that it owes creditors.(Investopedia, 2022)

3. Situation of budget deficits and national debt in Vietnam

Over the past 10 years, Vietnam has always maintained a high level of public spending
(approximately 30% of GDP), higher than the average of emerging economies at the
same stage of development and the largest in the ASEAN region. Therefore, although
the budget balance revenue has increased significantly, it is still not enough to
compensate for the budget expenditure, leading to an increasing budget deficit. On
average, in the 2016-2020 period, our country's state budget deficit is at 3.6% of GDP,
although it has decreased sharply compared to the period of 2011-2015, which is 5.4%
of GDP. However, mainly because the method of accounting for state budget
expenditure has changed, while the state budget structure has not had many significant
changes in the direction of sustainability, the spending structure has not improved
when the rate of recurrent expenditure continues to increase rapidly. and account for a
large proportion, leading to the demand for state budget spending continues to outstrip
the ability to collect.(Tran Anh Dung, 2022)
In particular, under the negative impact of the COVID-19 pandemic, the decline in
economic growth combined with the Government's implementation of measures to
support the economy has caused the state budget deficit in 2020 to increase to 3.99%
of GDP and is expected to continue to increase in the period of 2021 - 2022.
According to the Ministry of Finance, it is expected that the state budget deficit in the
period of 2021 - 2022 is about 4% of GDP, and in the period of 2022 - 2024, about
3.8% of GDP.(Tran Anh Dung, 2022)

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 Vietnam's public debt ratio has tended to decrease in recent years. From 61.4% of
GDP (in 2017) to 58.3% of GDP (in 2018), 55.9% of GDP in 2020 and 43.1% in
2021. In 2022, the level of public debt is expected to be equivalent to 2021, about 43-
44% of GDP. Along with that, government debt, government guarantee debt and local
government debt also gradually decreased. Specifically, government debt also
decreased from 51.7% of GDP in 2017 to 39.1% of GDP in 2021. Government-
guaranteed debt decreased from 9.1% of GDP in 2017 to 3.8% of GDP in 2021. Local
government debt in 2021 is only about 0.6% of GDP while 2017 is equal to 1.1% of
GDP. By the end of 2021, the country's external debt decreased to 38.4% of GDP from
49% of GDP in 2017. The country's foreign debt repayment obligation based on total
exports in 2021 is 6.2%, the Government's debt repayment obligation compared to
state budget revenue is about 21.8%.(mof.gov.vn, 2022)

4. Determinants of budget deficits and national debt in Vietnam

a. The cyclical recession of the market economy
The market economy develops in a cyclical manner, in which recession and economic
crisis are major vibrations, having negative impacts on all socio-economic aspects and
leading to state budget deficit. According to research, the state budget is automatically
adjusted according to the economic cycle. The more the economy is in recession and
stagnation, the heavier the budget deficit will be. In particular, in the context of
fluctuations in the economic cycle, governments are forced to use fiscal policies,
accept budget deficits passively (by reducing taxes, increasing spending) to stimulate
the economy, so the state budget deficit also passively increased. (Tran Anh Dung,
2022)

b. Government spending
According to the General Statistics Office of Vietnam, the ratio of budget expenditure
to GDP is higher than the ratio of budget revenue to GDP, so the budget deficit rate is
high. In the 2016-2019 period, the budget deficit rate fell below 4% of GDP.
Particularly in 2020, due to the impact of the COVID-19 pandemic, which slowed
down production and business activities, reducing budget revenue, while increasing
budget spending to respond to the pandemic, the budget deficit is severe 11.12%.
(tapchitaichinh.vn, 2022)

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Inefficient state spending and investment is also one of the causes leading to
Vietnam's budget deficit and national debt. According to the report of the Monitoring
Delegation of the National Assembly, in 2016 there were 1,448 projects behind
schedule, in 2017 it was 1,609 projects, in 2018 it was 1,778 projects, in 2019 it was
1,878 projects, in 2020 it was 1,867 projects and 1,962 projects in 2021. Many
investment projects using state capital in enterprises still suffer losses, losses and
waste: there were 590 projects in 2016, 840 projects in 2017, 422 projects in 2018,
125 projects in 2019, 923 projects in 2020 and 185 projects in 2021 (baophapluat.vn,
2022) . Loss and waste in public investment lasted for many years, limiting investment
efficiency, causing budget deficit and increasing the size of the national public debt.

c. Loss of tax revenue

Tax is the main and most sustainable source of revenue for the state budget besides
other sources of revenue such as natural resources, loans, and aid... However, due to
the lack of strict management by the legal system, it causes tax evasion. causing a
significant loss of revenue to the state budget. In addition, the extension, reduction and
exemption of tax on the one hand helps support economic growth, but on the other
hand also affects the progress of budget revenue, causing a state budget deficit. In
particular, in the context of the COVID-19 pandemic, the implementation of a
prolonged policy of tax exemption, reduction and extension to support businesses to
overcome difficulties has increased the state budget deficit. (Tran Anh Dung, 2022)

Additionally, the country's ability to borrow money from foreign sources, such as
international banks, can also contribute to the budget deficit and national debt. Other
factors, such as the exchange rate of the Vietnamese Dong and inflation, can also
affect the size of the budget deficit and national debt.

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References:
Adam Barone. (2023), “Budget Deficit: Causes, Effects, and Prevention Strategies”, 7
February, available at: https://www.investopedia.com/terms/b/budget-deficit.asp
(accessed 17 February 2023).
baophapluat.vn. (2022), “Hàng nghìn dự án sử dụng vốn nhà nước thất thoát, lãng phí”, 1
November, available at: https://baophapluat.vn/bds/hang-nghin-du-an-su-dung-von-
nha-nuoc-that-thoat-lang-phi-post457009.html (accessed 17 February 2023).
Investopedia. (2022), “National Debt: Definition, Impact, Key Drivers, Current U.S. Debt”,
21 October, available at: https://www.investopedia.com/updates/usa-national-debt/
(accessed 17 February 2023).
mof.gov.vn. (2022), “Nợ công của Việt Nam có xu hướng giảm”, 29 September, available
at: https://mof.gov.vn/webcenter/portal/tttc/pages_r/l/chi-tiet-tin-tin-tuc-tai-chinh?
dDocName=MOFUCM245943 (accessed 17 February 2023).
tapchitaichinh.vn. (2022), “Thực trạng về đầu tư công từ nguồn vốn ngân sách nhà nước tại
Việt Nam: Những vấn đề đặt ra và kiến nghị”, 25 July, available at:
https://tapchitaichinh.vn/thuc-trang-ve-dau-tu-cong-tu-nguon-von-ngan-sach-nha-
nuoc-tai-viet-nam-nhung-van-de-dat-ra-va-kien-nghi.html (accessed 17 February
2023).
Tran Anh Dung, H.U. of B. and T. (2022), “Thực trạng nâng cao hiệu quả huy động vốn
cho ngân sách nhà nước Việt Nam trong bối cảnh Covid-19”, 23 May, available at:
https://tapchicongthuong.vn/bai-viet/thuc-trang-nang-cao-hieu-qua-huy-dong-von-
cho-ngan-sach-nha-nuoc-viet-nam-trong-boi-canh-covid-19-88850.htm (accessed 17
February 2023).