The Ministry of Economic Affairs (MOEA) faces a projected budget cut of NT$29.7 billion (US$907.08 million) in 2025 following the Legislative Yuan's passage of amendments to the Act Governing the Allocation of Government Revenues and Expenditures. According to Economics Minister Jyh-Huei Kuo, the reduction will impact subsidies promised to foreign companies like Nvidia, Micron, and AMD for their Taiwan investments.
Kuo warned that abrupt policy changes could damage Taiwan's reputation among businesses, especially foreign investors. "The government has signed long-term contracts with these companies," he said, "and such sudden policy changes will make them quite shocked."
During a recent meeting with European Union representatives, Kuo noted they had affirmed Taiwan's strong reputation as a reliable partner, an image built over years of government credibility and consistent policies.
The Legislative Yuan passed the revised fiscal allocation law with limited bipartisan discussion. While the Presidential Office has indicated that President Lai Ching-te will promulgate the law following the Constitution, the Executive Yuan is actively exploring remedies. If the law is implemented, both central and local governments will need to overhaul their budgets.
Broader economic implications
The MOEA's funding shortfall is not the only concern. Taiwan's defense budget is set to decrease by NT$80 billion, raising potential concerns among international allies, particularly as Donald Trump prepares to assume the US presidency in 2025. Additionally, cuts to MOEA subsidies for Taiwan Power Company (Taipower) are expected to lead to higher electricity prices, driving the nation's Consumer Price Index (CPI) above 2% in 2025.
Chien-Yi Chang, president of the Taiwan Institute of Economic Research (TIER), noted that while the previous fiscal allocation system had flaws, the new amendments have created inefficiencies and inequities among local governments. "Some counties or cities receive more than they need, while others get insufficient funds. This could lead to wasteful spending," he explained. Chang also warned that any external challenges arising during "Trump 2.0" would fall under the central government's purview, not local governments.
Strong fundamentals amid uncertainty
Fitch Ratings assigned Taiwan an AA long-term foreign-currency issuer default rating with a stable outlook in June 2024, citing strong external financing conditions, prudent fiscal policies, high governance standards, and a competitive business environment. Taiwan has maintained a current account surplus for over 40 years. The thriving global AI industry has bolstered high-tech exports in 2024, contributing to higher economic growth than in 2023.
However, Fitch cautioned that the ruling party's loss of a Legislative Yuan majority could hinder policy execution. It also highlighted persistent challenges, including cross-strait tensions, energy security concerns, an aging population, and declining birth rates, which could weigh on Taiwan's medium-term economic prospects.
Despite these challenges, Fitch stressed that escalating Taiwan-China tensions are unlikely to destabilize Taiwan's economy or political system.
