Use Fiscal Space with Caution in Public Investment
- Jun 18
- 6 min read
By Vo Tat Thang, HAPRI's Director, with Truong Thi Kieu Nhung and Nguyen Thi Bich Hien, HAPRI Research Assistants.
Originally published in Tia Sang (VnExpress) on June 6, 2026. English translation by HAPRI.
Vietnam's public debt today sits well below its legal ceiling. But that advantage does not automatically translate into room to expand public investment beyond the economy's capacity to absorb and oversee it.
Since 2025, Vietnam has run an expansionary fiscal policy aimed at supporting aggregate demand and accelerating public investment. It has done so from a position of budget surplus.
Total state budget revenue in 2025 reached VND 2,681.5 trillion, up 30.3% from 2024 and equivalent to about 20.9% of GDP. Total budget expenditure was around VND 2,424.6 trillion, of which development investment spending reached VND 755.1 trillion, or 5.9% of GDP.
One notable measure in this context is the 2 percentage point cut in VAT, from 10% to 8%, in effect from July 1, 2025 through December 31, 2026, and projected to reduce revenue by about VND 121.74 trillion.
On the surface, Vietnam enjoys a relatively comfortable fiscal space. Beyond the 2025 budget surplus, the final 2024 budget accounts put public debt at 34.02% of GDP, well below the 60% of GDP debt ceiling. Estimates for the end of 2025 place public debt in the range of 35 to 36% of GDP, still far below the legal ceiling.
This is the basis on which the World Bank judges that Vietnam still has fiscal space to manage external risks. The IMF (2025) likewise argues that, with monetary policy room constrained, fiscal policy needs to play a more leading role in supporting medium-term growth.
Yet assessing fiscal space should not stop at the public debt ratio. The more important question is how effectively budget spending is converted into the economy's real productive capacity. Expansionary fiscal policy therefore needs to be viewed along three dimensions: the efficiency of public investment, the risk of leakage in public finances, and the danger of fiscal dominance over monetary policy.
Public investment efficiency: investment does not automatically become useful capital
The IMF's DIG and DIGNAR models stress that the efficiency coefficient of public investment determines how far budget spending is converted into productive public capital. When investment efficiency is low, each additional dong of public spending generates less growth, while the financing costs and debt obligations still accrue in full. Fiscal expansion can then raise debt faster than growth, so that real fiscal space narrows more quickly than a mechanical calculation based on the gap between current debt and the ceiling would suggest.
This echoes a warning common across many developing countries: investment spending does not automatically become useful public capital. Corruption, misallocation of resources, and weak oversight can leave a large share of the investment budget without translating into useful infrastructure.
After reviewing 65 case studies applying DIG/DIGNAR, the IMF draws the lesson that “improving investment efficiency and raising the rate of return on public projects affects growth far more than simply increasing the scale of investment.” Conversely, front-loading capital into public investment while absorptive capacity remains limited can amplify debt risk rather than spur growth.
The institutional filter: public spending must match oversight capacity
Evidence synthesized from a range of empirical studies shows that leakage rates in public finances across developing countries can vary enormously. In some public programs the marginal leakage rate can reach 100%, meaning the entire increment of spending is absorbed by intermediaries.
The policy implication: when spending grows beyond oversight capacity, the additional amount can face a leakage rate far higher than the average.
Evidence from a randomized experiment in Indonesia shows that “top-down audits are markedly more effective at reducing leakage in road-construction projects,” while bottom-up monitoring through community participation produces almost no comparable effect. This suggests that state audit capacity and formal oversight mechanisms are pivotal in controlling leakage from public investment, especially for large-scale infrastructure projects.
In Vietnam, institutional bottlenecks show up clearly in disbursement data. The World Bank puts average public investment at 6.4% of GDP, higher than Indonesia and Thailand, yet the disbursement rate remains slow. In 2025, budget revenue far exceeded the estimate, but the pace of spending and public investment disbursement still shows that absorptive capacity bears watching: as of December 31, 2025, public investment disbursement reached only 83.7% of the 2025 capital plan.
This gap shows that the problem lies not only in resources but also in implementation capacity. The 2025-2026 restructuring of the state apparatus creates a long-term opportunity, but it can also give rise to transitional risk as units merge, personnel change, and procedures have yet to stabilize.
The risk of fiscal dominance over monetary policy
When it is dominated by fiscal policy, a central bank can lose the ability to control inflation independently. A case study of Brazil shows that, under high public debt and elevated investor anxiety, raising interest rates to curb inflation can increase debt-servicing costs, heighten default fears, drive capital outflows, and depreciate the domestic currency, thereby pushing inflation higher still. The case of Laos, with very high public debt, a sharply depreciating currency, and inflation above 25%, illustrates this mechanism in an ASEAN setting.
Compared with several ASEAN countries, Vietnam holds a more favorable fiscal position. In 2025, the ASEAN+3 Macroeconomic Research Office (AMRO) noted that Vietnam was the only economy in the comparison group whose public debt ratio fell relative to 2019, from 38.2% of GDP to 34% of GDP in 2024.
Over the same period, public debt rose in every comparison economy relative to pre-pandemic levels: Indonesia from 30.2% to 39.8% of GDP; Thailand from 33.7% to 55.8%; the Philippines from 39.6% to 60.7%; Malaysia from 52.4% to 64.6%; and Laos from 58.8% to 92.8%.
However, updating with Vietnam's final budget accounts, the fiscal picture warrants more cautious interpretation. The total financing the government must raise to cover the deficit and meet its debt obligations also rose, from 2.2% of GDP in 2019 to 4.4% in 2024. This level is still the lowest in the comparison group, but the speed of the increase shows that today's fiscal space should not be treated as fixed.
Seen this way, a public debt figure of 34% of GDP should not be read as ample fiscal space for unlimited expansion. Real space is measured not by the gap between public debt and the ceiling, but by the capacity to convert additional spending into growth.
Fiscal discipline even when debt ratios are low
Regional experience shows that many economies fall into debt distress not because debt was too high to begin with, but because they used up their fiscal space in good times and had no buffer left to absorb shocks when crisis struck. In the 1997 crisis, Indonesia saw public debt surge as contingent liabilities from the banking sector materialized. After COVID-19, the Philippines likewise recorded sharply higher public debt and interest costs. These lessons show the need to maintain fiscal discipline even when current debt ratios are still low.
Fiscal expansion not only increases the government's demand for capital but also risks crowding out the private sector. In Vietnam, outstanding credit has reached 142.1% of GDP, higher than most emerging economies. If the government steps up domestic bond issuance to finance its large infrastructure investment plan for 2025-2030, competition for capital could push up the general level of interest rates or alter credit conditions and weigh on small and medium-sized enterprises. Developing the capital market is therefore an important condition for expanding public investment without harming the private sector.
The composition of spending also determines whether fiscal adjustment is sustainable. If households and businesses worry that high public spending today will lead to higher taxes tomorrow, they may cut spending and save more in anticipation. Part of the demand-stimulating effect of fiscal policy can thus be neutralized. Recurrent expenditures that carry long-term commitments, such as wage reform or early-retirement support, can add to future budget pressure. Once the baseline of recurrent spending rises, reversing it is very difficult. If economic growth slows, these commitments risk creating a prolonged structural deficit and shrinking fiscal space.
Conclusion and recommendations
From the analysis above, the central concern of Vietnam's fiscal policy must be “how much real growth each dong of public spending generates” rather than “how much debt room remains.” In current conditions, this calls for three priorities.
First, institutional capacity must be assessed seriously before spending expands, especially during the restructuring of the state apparatus. Large infrastructure projects need to be paired with strong, transparent audit mechanisms and early oversight.
Second, Vietnam should maintain a practical public debt limit that is more prudent than the current 60% legal ceiling. This reinforces fiscal discipline, prioritizes high-return projects, and avoids spreading investment too thin.
Third, every new spending commitment should be matched by stable and sustainable revenue. Raising budget revenue should rest on long-term structural tax reform rather than on short-lived favorable economic conditions.
In short, genuine fiscal space depends on the efficiency of public investment, the capacity for oversight, the structure of spending, the ability to raise sustainable revenue, and the depth of the capital market. As external uncertainty grows, fiscal discipline is not only a requirement for public debt stability but also a condition for preserving the economy's capacity to respond to future shocks.
Tags: Fiscal policy, public investment, public debt, fiscal space, Vietnam economy
Category: Policy Brief
