Mongolia’s Budget Hole Is Too Deep for Tax Relief

Tax cuts are tempting politics. But in Mongolia’s current fiscal state, they are misguided economics. With inflation still pinching households and growth losing steam, the public yearns for relief. Yet the government, peering into a widening budget hole, must hold the line.

https://tradingeconomics.com/mongolia/government-budget-value Mongolia’s monthly budget balance flipped into deficit in late 2024, underscoring the country’s worsening fiscal position

The math is brutal. The economy is growing too slowly, the tax base is too shallow, and the country remains too vulnerable to the whims of commodity markets to indulge in fiscal largesse. The only responsible option is to cut.

Prime Minister Zandanshatar delivered the bad news bluntly. Unless drastic action is taken, the 2025 budget deficit could hit ₮3.3 trillion (roughly $1 billion). That would send the togrog tumbling and reignite inflation.

In response, the prime minister has proposed a revised Mongolia budget: revenue projections down by ₮3.26 trillion, expenditures trimmed by ₮1.86 trillion. Even then, a shortfall of ₮1.37 trillion would remain—around 1.5% of GDP.

That’s the optimistic scenario. The real problem is structural. Mongolia budget remains tethered to the volatile price of coal, copper, and gold. Mining accounts for more than 80% of exports and roughly a quarter of GDP. When prices surge, so do revenues and spending. But when China, Mongolia’s main buyer, stumbles—as it has recently amid weak consumer demand and a property slump—the cash dries up. The result is a textbook pro-cyclical trap: the government spends in booms and is cornered in busts.

But commodity swings aren’t the only culprit. Overspending and political short-termism have compounded the pain. Generous subsidies, bloated public payrolls, and inefficient capital projects have turned windfalls into recurring liabilities. State-owned enterprises, in particular, are a drain. With ₮22.8 trillion ($6.5 billion) in debt they offer little return. Many are loss-making, poorly governed, and riddled with patronage. Reform is long overdue.

The growth outlook doesn’t help. Mongolia’s economy expanded just 2.4% in the first quarter—less than half the forecast. Estimates for the second quarter hover below 4%. Slower growth means weaker tax receipts, widening the deficit further. Calls for stimulus miss the point: there’s no fiscal room to manoeuvre. Any tax cuts now would need to be paid for by either deepening debt or gutting essential services.

The government insists it is serious about tightening belts. Plans to cut 14,400 civil service jobs by 2026 signal intent. But that message is muddled by talk of reinstating 19 politically appointed vice-ministers—a layer of bureaucracy previously scrapped. Officials argue these posts are necessary for continuity and coordination. But critics see patronage, not professionalism. At best, the optics are poor; at worst, they risk derailing the credibility of broader reform.

Public frustration is mounting. Businesses that comply with tax laws feel unfairly burdened. The shadow economy, estimated at 21% of GDP, continues to dodge taxes with impunity. Lost revenue from informality is pegged at 5.2% of GDP annually. That distorts the playing field and erodes trust. 

Prime Minister Zandanshatar hinted a tax reform package is coming this autumn, possibly including wealth or consumption taxes to broaden the base and shift the burden more fairly.

But before any tax changes, the system must function. Any credible tax reform must begin by closing loopholes, enforcing compliance, and proving that contributions are fairly collected and wisely spent.

Until then, talk of tax relief is premature. Targeted aid to farmers or small businesses may be justifiable. But across-the-board cuts would be reckless.