Making Fiscal Decentralization Work in Vietnam (2005)

Vietnam is a poor country with large and increasing needs in infrastructure, education, health, and other areas of the public sector. The current policy of the Government of Vietnam (GOV) is not to increase tax effort, but actually to reduce it. Recently, the GOV has cut the rates of several taxes with the goal of making Vietnam’s exports more competitive internationally and to attract more foreign direct investment. Tax revenues will be further cut in the near future as the GOV prepares for accession to the WTO by reducing the level and dispersion of customs tariff rates. The large current needs for additional public funds and the plans not to increase taxes, or actually to decrease them, present the GOV with a significant policy dilemma. Possibly the only non-inflationary solution to this dilemma is to increase the efficiency and effectiveness of the entire public sector. Because Vietnam has significantly decentralized expenditure responsibilities to the provincial and local governments (the share of subnational governments in total expenditures is around 40 percent; see Table 1), the GOV decentralization policy takes special importance in the overall drive for greater efficiency and overall fiscal balance of the public sector. The ability of the GOV to increase the quantity and quality of public services lies largely in a more efficient and equitable system of decentralized finance. This is the fundamental reason for assessing in this chapter of the Public Expenditure Review (PER) the ongoing decentralization process in Vietnam.