Written by Lucy Best.
Image credit: US-Taiwan-European Next Generation Working Group.
For international audiences, Taiwan is often primarily discussed as a geopolitical flashpoint in the U.S.-China relationship. This framing reflects real conditions—Taiwan’s location, its democratic system of governance, and its central role in the semiconductor industry have made it central to discussions of regional security and the global economy. At the same time, however, this framing risks obscuring issues of everyday governance that underpin Taiwan’s strategic success. Budgets, industrial development, energy availability, and local governance rarely attract the same international attention as cross-Strait tension or semiconductor production breakthroughs, but they nonetheless shape the Taiwanese government’s ability to ensure that strategic priorities are reflected in policy and that services continue to be delivered smoothly. These issues are not abstract institutional details—their proper and timely management shapes the government’s ability to execute policy and deliver services to citizens. While these domestic processes have always mattered within Taiwan, they increasingly shape issues of international concern, including defence readiness and industrial policy, making them important for Taiwan’s partners to understand as well.
Perhaps no issue illustrates this relationship between domestic governance and strategic policy better than the dynamics around Taiwan’s annual budget. This issue repeatedly emerged across conversations in Taipei given its importance to defence, policy innovation, and state capacity. For the last two years under Taiwan’s current divided government, the central government’s annual budget has been delayed into the fiscal year for which it is intended to provide funds. In 2025, Taiwan’s central government budget cleared legislative review in January, but a significant portion of those appropriations—including those related to defence—were cut or frozen before ultimately being released in the following months. In 2026, by contrast, although Taiwan’s legislature passed a separate defence spending bill in May, the annual budget has yet to receive final approval more than halfway into the year.
Unlike countries like the United States, where a lapse in appropriations results in government shutdown scenarios, Taiwan’s Budget Act allows government agencies to continue operating using the previous year’s level of funding in the event that a new budget is not yet approved. While this mechanism has largely prevented severe disruptions to public services, the effects of budget delays complicate the rollout of new initiatives, long-term planning, and discretionary spending, creating operational uncertainty for central ministries. For a government simultaneously responding to sustained military pressure from China while seeking to maintain its leadership in rapidly evolving sectors such as semiconductors and emerging technologies, the ability to implement new policy initiatives in a timely manner is itself strategically significant.
Taiwan’s budgeting delays are also related to the current balance of political power between its executive and legislative branches. Under Taiwan’s constitution, the Executive Yuan prepares and submits a draft budget to the Legislative Yuan, where lawmakers debate, amend, approve, and supervise these appropriations. Since Taiwan’s most recent elections in 2024, in which the ruling Democratic Progressive Party (DPP) was elected to an unprecedented third presidential term but lost its majority in Taiwan’s legislature to the opposition Kuomintang (KMT) and Taiwan People’s Party (TPP), this process has become increasingly contested. While the DPP administration controls the presidency and Executive Yuan, the KMT-TPP coalition holds the majority in the Legislative Yuan that must approve the budget.
Unlike some parliamentary systems, Taiwan’s legislature cannot independently introduce a government budget—its powers are constitutionally limited to reviewing, amending, and approving or rejecting the proposal submitted by the Executive Yuan. This dynamic gives the legislature significant leverage to block funding for elements of the administration’s agenda should they choose to do so, but it does not allow them to propose an actionable alternative for items as expansive as the government budget.
Taiwan’s budgetary debates have attracted international attention largely because of their implications for defence spending. In November 2025, President Lai Ching-te proposed a standalone NT$1.25 trillion special defence budget for 2026-2033 that encompassed foreign military procurement and investment in Taiwan’s domestic defence industrial base, particularly emerging areas such as drones. After months of review, the Legislative Yuan in May 2026 approved a smaller NT$780 billion package focused on procurement, leaving the administration’s broader industrial agenda unresolved.
In the months since, however, the Executive Yuan, KMT, and TPP have each proposed legislation aimed at developing Taiwan’s drone industry, revealing competing approaches to how this objective should be pursued. The Executive Yuan has proposed a NT$210 billion multi-year special budget intended to stimulate domestic production, build supply chains that are not reliant on China, and procure new capabilities under the leadership of the Ministry of National Defence (MND). The KMT, meanwhile, has proposed a total of NT$240 billion to be appropriated in six annual NT$40 billion tranches through Taiwan’s standard annual budget process, with implementation led jointly by the Ministry of Economic Affairs (MOEA) and MND. The TPP proposal similarly opts for funding through the annual process under a process led by MOEA, although it does not provide a fixed budget. While these bills differ in their level of and timeline for funding, main supervisory agency, and exact aims for industrial production, one important distinction lies in the logistics of how they would be financed. Whereas the Executive Yuan’s measure requires one-time approval, the KMT and TPP measures could theoretically be held up in subsequent annual budgeting procedures. Additionally, the specific dollar amount stipulated in the KMT’s proposal could lead to constitutional concerns about the legislature exceeding its mandate and directing rather than supervising budget policy. With further committee review expected before a potential vote later this year, the debate over Taiwan’s drone industry is likely to continue, with the focus of debate being how Taiwan should finance and implement such strategic initiatives.
Although the defence debate has elevated budget issues to international attention and remains an important topic, this security focus can obscure these processes’ broader significance. Taiwan’s economic success reflects decades of public investment, industrial policy, and sustained cooperation between government, industry, academia, and research institutions. Taiwan has achieved relevance to global supply chains not only because of its technological capabilities, but also because of the institutional environment it has cultivated to support them: developed science parks, competent governance, regulatory stability, rule of law, and the state’s capacity to implement long-term policy. Those institutions also matter to Taiwan’s citizens, who expect the government to deliver public services, respond to new challenges, and translate electoral mandates into effective policy. Maintaining that capacity is therefore not simply an economic or administrative concern—it is central to Taiwan’s long-term resilience and public trust in government across election cycles.
Taiwan’s resilience is not only a function of military capabilities, economic importance, or other geopolitical issues. It is also a question of whether its democratic institutions can continue to manage disagreement, produce effective policy, and maintain public trust under pressure. Particularly as Taiwan heads into a politically significant period ahead of local elections in 2026 and presidential elections in 2028, political processes unfolding within Taiwan will take on increased importance to its strategic direction. Taiwan’s future will be shaped not only by how others respond to it, but by how effectively its own democratic institutions continue to serve the people they represent in a day-to-day context.
Lucy Best is an incoming student in National Chengchi University’s International Master’s Program in Applied Economics and Social Development. She previously served as a Director in Albright Stonebridge Group’s Asia Practice, where she advised clients on regulatory developments and geopolitical risk in China and Taiwan. Before that, she was a Research Associate in the Asia Studies program at the Council on Foreign Relations. She received a Blakemore Freeman Fellowship to study Mandarin in Taipei and earned a B.A. in Political Science and Asian Studies from the University of North Carolina at Chapel Hill, where she was a Robertson Scholar.
This article was published as part of the special issue on U.S.-Taiwan-European Next Generation Working Group.