Most of you probably haven’t noticed, but Taiwan has no budget for this fiscal year. The pan-Blue alliance, led by the Chinese Nationalist Party (KMT), have refused to pass the budget unless the Greens permit the Blues to reconstruct the Central Election Commission (CEC) in favor of the Blues:

To secure a majority for passage of the CEC amendment, the pan-blue camp has held the budget hostage since last year, leaving the government without funding at the start of the fiscal year.

The dispute over the CEC bill has led to angry confrontations between lawmakers, many times turning violent, as Democratic Progressive Party (DPP) lawmakers blocked voting on the amendment.

The DPP has accused the KMT of trying to thwart its plan to hold a referendum during next year’s presidential election on recovering assets stolen by the KMT during the Martial Law era, while the KMT has said the CEC bill is necessary to remove what it describes as “partisan bias” in the election committee.

When the Blues blow the 2008 Presidential election as they have blown the last two in ‘00 and ‘04, they hope to get a pro-Blue CEC to overturn the election results. Nor do they much care about passing the budget, since one of the pan-Blue goals is to make Taiwan appear as if it cannot govern itself, thus making annexation by China appear as an act of discipline for a recalcitrant and wayward child.

An interesting feature of this campaign to paralyze governance on the island is that the legislature has failed to pass a large number of major spending bills. The results, according to an economic analysis by UBS, may well be positive for some aspects of the economy:

What about the government? Government investment and infrastructure spending has all but ceased as a result of political differences between the ruling and opposition parties. Political disagreements have blocked many government spending programs in the last few years. This year is no different. The budget is currently on hold due to disagreements over how the Central Election Committee will be staffed. Whereas a few years a go the budget deficit exceeded 6% of GDP it has now shrunk to around 1% of GDP. This drop in the government’s need to finance the fiscal balance has contributed significantly to Taiwan’s low interest rate environment. The upcoming parliamentary election in December and the presidential election in March next year could reverse this pressures and lead to higher interest rates in 2009 if the government becomes unified again. However, that is a ways off.

Public debt has actually fallen, relatively, due to the lack of government spending. That’s good, from some perspectives. On the flip side, however, without the steady flow of government projects to drive the construction-industrial state that lies at the heart of Taiwan’s central/local government relationship, the economy has floundered. Incomes are stagnant — the report also notes that working hours have fallen and manufacturing labor costs in Taiwan have actually slid, without the upward pressure on wages — and all that has happened against the background of falling unemployment.

The KMT strategy is quite clear. (1) Paralyze the government (2) win the legislative election and the Presidency (3) release all those big bills (4) sit back and enjoy sudden bump to the economy (5) sell island to China. It’s a cruel strategy that has paid good dividends for them, since many people blame the President and the DPP for stagnant incomes.

Given, however, that much KMT support depends on getting flows of government contracts out to connected individuals at the local level, how long can the KMT continue to serve K-rations to its people in order to inflict political pain on the DPP? Many local governments in Taiwan are suffering from severe cash-flow problems. Local factions are notoriously unreliable and have been known flip from one party to the other based simply on whoever is handing them the most government lucre. The key point of the KMT strategy is having to win the elections. If the Blues blow it again in 2008, and somehow manage to lose a legislature whose make-up was rigged to give them great advantages, severe damage could be done to their local networks.