Addressing Challenges

As technological advancements persist, the global financial industry is undergoing substantial transformations. The integration of advanced technologies, notably artificial intelligence (AI), has emerged as a prevalent trend. Nevertheless, Taiwan currently lacks a clearly defined financial strategy and grapples with significant internal challenges.

Geopolitical uncertainty across the strait raises financial cybersecurity risks:

Taiwan is currently encountering a situation of geopolitical uncertainty with regards to cross-strait relations, exemplifying a classic scenario of "gray zone conflict." Particularly the information warfare and psychological tactics from China aimed at subtly influencing Taiwan's financial markets, eroding investor confidence, and undermining the stability of financial institutions.

Inappropriate fiscal and monetary policies contributing to systematic financial risks:

The systemic risks stemming from inappropriate fiscal, tax, and monetary policies constitute a more discreet yet significant issue. This is because they often manifest in a series of seemingly inconspicuous errors that accumulate over time, triggering a chain reaction without any prior warning and rapidly spreading damages across the entire financial system.

Inadequate protection for financial consumers heightening unpredictable risks and damages:

The existing framework's insufficient protection for financial consumers, especially its vulnerabilities in addressing to financial fraud cases, poses a substantial threat to financial stability. Due to the asymmetric information and a lack of effective regulation, the prevention of financial fraud is challenging, leading to significant losses for investors and undermining their confidence to financial market.

A Comprehensive Breakdown of Inappropriate Fiscal and Monetary Policies:

Issue 1: Overreliance on Taxation with Low Tax Revenue as a Percentage of GDP
Taiwan government heavily depends on taxes, constituting 74% of its total revenue. However, individual income tax accounts for an average of merely 2.4% of GDP, significantly lagging behind the OECD average of 8%, Japan's 6.2%, and South Korea's 6.1%. This discrepancy underscores a critical concern of tax evasion among high-income individuals, resulting in substantial revenue losses. To address the revenue shortfall, the government has to rely on the central bank’s "surplus to the treasury" annually.

Issue 2: Dependency on Central Bank’s Surpluses to fill the Tax Revenue gap
Over the past two decades, the central bank has primarily utilized the policy of weak New Taiwan Dollar to stimulate exports through low interest rates and low exchange rates. However, this approach fails to showcase the intrinsic value of the New Taiwan Dollar and overall competitiveness of Taiwan. Relying on foreign exchange reserves to manipulate exchange rates and implementing low-interest rate policies signal an unsound fiscal system.
In terms of the percentage of central bank surpluses to fill the tax revenue gap in various countries, Taiwan stands at approximately 10%, whereas Japan is at a mere 0.66%, South Korea at 0.1%, and Singapore at 6%.

Issue 3: Low-Interest Rates restrain Economic Growth and Hinder Industrial Transformation
Although policies of low interest rates and low exchange rates may boost exports, they have led to overall economic stagnation, exacerbated income inequality, and caused a surge in housing prices, hindering industrial advancement. Examining data from 2000 to 2021, Taiwan's mortgage interest rates declined from 6.776% to 1.354%, while housing prices escalated by 263%. Low interest rates reduce the cost of holding vacant houses and turn real estate into a tool for wealth accumulation among the affluent.

Issue 4: Inadequate Protection for Financial Consumers
Since 2013, the number of bank alert accounts has quadrupled from over 20,000 to nearly 100,000 by 2023. Notable fraud cases, such as the im.b scam of fake debts, have victimized over 5,000 individuals, with a total amount exceeding NT$9 billion. Additionally, the unapproved sale of Ayers Alliance overseas financial products in Taiwan, accumulating over NT$200 billion, has left victims with no recourse for assistance. This highlights a critical gap in the protection of financial consumers.
 

Solutions

1. Reforming the Tax System for a Sustainable Finance
Taiwan's tax rates are higher than those of Japan and South Korea, yet the actual tax revenue falls significantly below these countries. This indicates a substantial issue of tax evasion within Taiwan's tax collection. Ko Wen-je advocates for the establishment of a tax reform committee to address this matter by adjusting unreasonable tax structures and formulating measures to prevent tax evasion among privileged classes. The proposal includes separating the taxation of labor and capital gains to ensure that individuals with different income levels are subject to fair and reasonable taxation. These initiatives aim to create a more efficient and equitable tax system, fostering the normal flow of revenue, mitigating fiscal loopholes, and ensuring enough resources for government expenditures.

2. Establishing a "Financial Stability Committee" for an Independent, Transparent, and Accountable Central Bank
Due to the long-term inadequacy of tax revenue, the government relies on central bank interventions in exchange rates and interest rates to consistently contribute 10% of tax revenue annually. However, the central bank's purpose extends beyond supporting the government's overall income.
Ko Wen-je opines to enhance the independence of the central bank board in formulating monetary policies, minimizing political interference in exchange rates and interest rates to reconstruct Taiwan's financial system. The proposal includes the establishment of a "Financial Stability Committee" tasked with monitoring risks in the monetary system and ensuring market stability. As for the adjustments of exchange rate and interest rate, it should be based on a scientific approach, aligning with International Monetary Fund (IMF) standards for international reserves and foreign exchange flows. In addition, central bank’s disclosure of information on foreign exchange interventions and excess purchases is crucial for transparency, thereby bolstering confidence among international investors.

3. Establishing a Financial Consumer Protection Bureau to Reduce Fraud Cases
With a surge of fraud cases, Ko Wen-je advocates for leveraging technology, particularly AI, to prevent scams. Through AI technology, it can reduce fake accounts and identify potential fraudulent behaviors. Additionally, there is a call for intensified scrutiny of collusion between bank employees and scam groups.
Furthermore, he proposes the establishment of a "Financial Consumer Protection Bureau" under the Financial Supervisory Commission (FSC) to prevent illegal financial products from entering Taiwan. Regulatory measures are necessary for financial services and products that are prone to causing harm yet lack sufficient oversight. This includes implementing a dispute resolution mechanism to safeguard consumers' interests.

4. Establishing a "Sovereign Fund" for Optimal National Fund Investment
Taiwan’s foreign exchange reserves reach approximately 500 billion US dollars, with 30% allocated to the consolidation of stability of New Taiwan Dollar through low-risk, low-return investments. However, the remaining 70% has not been effectively utilized. Over the past few years, Taiwan has achieved an average annual return of only 2.75%, which falls short of the 3% inflation rate. Consequently, despite the central bank's annual surplus contribution to the treasury reaching 10%, the standalone return on investment appears negative. In comparison, Singapore's GIC sovereign fund, established in 1981, yields average annual return rates of 7%, presenting an effective mean of revitalizing government assets.
Ko Wen-je advocates to allocate 10% of Taiwan's US$ 500 billion foreign exchange reserves for establishing a sovereign fund. With an asset of US$ 50 billion, it has the potential to become the 30th largest among 180 sovereign funds globally. It not only vitalizes government foreign exchange reserves, but also facilitate Track II diplomacy. By leveraging the sovereign fund for financial investments, Taiwan could promote its foreign relations.