Fiscal policy in Thailand

Reference• Karel Jansen, The Scope for Fiscal Policy: A

Case Study of Thailand, in Development Policy Review, 2004

• Songtham Pinto, et. al., Assessing Fiscal Vulnerability in Thailand: Fiscal Risks and Policy Implication, an article presented at the Bank of Thailand Symposium 2007

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Reference

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• “THAI ECONOMIC PERFORMANCE AND FISCAL SCENARIOS AFTER THE CRISIS” by Dr. Porametee Vimolsiri, in Facing the Aging Society in ASEAN Countries Symposium on the Emerging Middle Income Class and Social Safety Network, March 15, 2010

Policy Tools:• Government revenue (taxes, charges, state enterprise income)

• Government expenditure (fiscal budget, state enterprise spending)

• Public debt4

Responsible agencies:•Directly: Ministry of Finance, Budget Bureau

• Indirectly: NESDB, Bank of Thailand, Local Government Organizations

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Objectives:• Macroeconomic stability [Management of aggregate demand affecting growth, employment, and inflation]

• Efficient resource allocation (promoting savings, investment, export)

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Objectives:• Fair income distribution (progressive tax rate)

• Poverty eradication (free hospital, transfer payments)

• public goods (law and order, environment protection)

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Government Revenue• 90% from taxes (value added, income, excise, import-export)

• 70% of total tax revenue derived from VAT (7 % of sales)–Relies more on indirect taxes–Most important tax base: consumption

–Depends less on international trade

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•Revenue from corporate income tax is greater than revenue from personal income tax (different from developed countries)

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Share of Direct Taxes

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1996 1997 1998 1999 2000 2001 2002 2003

Year

Per

cen

t to

GD

P

Personal income tax

Corporate income tax

Petroleum income tax

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• Small collection of personal income tax because:–Effective tax rate = 5%(compared with nominal rates of - 0% 37%)

–Out of more than 30

million labor force, only 5- 7 million file income tax

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Small collection of personal income tax because:

Two-thirds of income tax revenue are paid by rich earners (net income greater than 1 million baht), which account for only 3% of total taxpayers– Room for more revenue?

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Personal Income Tax, 2006

Net income class (baht)

Taxpayers

% of tax

  Mill. %reven

ue

< 100,0001.65

6 29% 0%100,001 - 500,000

3.528 62% 13%

50000, - 1 1

million0.37

5 7% 21% 1mill.- 4

mill.0.15

3 3% 40%

4> million0.01

1 0.2% 25%

Total5.72

3100% 100%

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Government expenditure

•Total budget about 1 8% of GDP : still lower

than Asian developing countries (23%) and lower than developed countries 35( %)

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Government expenditure•More than 70% of total is “current expenditure” (salaries, transfer payments), 26% is “capital expenditure” (fixed assets e.g. buildings, vehicles)

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• Pro-cyclical, rather than counter-cyclical

• Classified by function:•Education gets the biggest share (25%)

•Economic services (transport, agriculture and industry ) high share in 1990s, but declining

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•Classified by function:• “Defense” high in1970s and 1980s, but sharply reduced

• “Health and social security” increasing in recent years

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National Government Actual Expenditure by Classification of Function and Economic

Functional classification 1997/98 1998/99 1999/00 2000/01 2001/02 General public services 4.7 4.6 4.9 5.0 5.6 Defense 10.6 9.3 8.6 8.5 8.1 Public order and safety 6.2 6.4 6.3 6.7 6.5 Education 25.4 26.2 25.7 25.5 24.7 Health 8.2 7.8 7.4 7.6 8.4 Social security and welfare 4.6 4.7 6.0 6.4 8.9 Housing and community amanities 4.4 5.0 4.6 4.2 2.4 Recreation cultural and religious 1.6 1.1 0.8 0.8 0.6 Fuel and energy 0.3 0.2 0.2 0.2 0.1 Agriculture forestry and fisheries 7.3 7.4 7.7 8.0 7.4 Mining manufacturing and construction 0.5 0.6 0.6 0.6 0.8 Transportation and communication 15.1 12.0 10.9 8.9 5.2 Other economic 4.0 3.8 3.5 4.5 7.6 Other 7.2 10.8 12.7 13.1 13.8Total 100.0 100.0 100.0 100.0 100.0

Source: Bank of Thailand 19

• Budget Determinationo “Past-based budgeting” VS “performance-based budgeting”o Total budget depends on forecast revenue + macroeconomic policyo By law, deficits cannot exceed 20% of total expenditure fiscal discipline 20

•Budget Determinationo deficits during the two oil crises (1973 and 1979) o later more discipline and budget surpluses during 1988 -1996

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•Budget DeterminationoBudget deficits again after the 1997 crisis during 1999-2004 o balanced budget in 2005, and deficits during 2006-2010

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Fiscal sustainability issue•Government fiscal burden after the 1997 crisis to solve NPLs and stimulate economy

•Public debt increased from 12% of GDP in 1996 to 57% of GDP in 2001

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Debt / GDP

58 57.9

61.3

64.263.3

60.859.4

54.4

51.8

46.1

40

45

50

55

60

65

70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

FY

(%)

Before FIDF

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Fiscal sustainability issue•Loss of FIDF = 1.4 trillion baht, to be financed by government

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Fiscal sustainability issue•quasi-fiscal obligations: extrabudgetary “populist” spending mainly introduced by Thaksin Government e.g. housing for the poor, village fund, SME loans

•Could become budgetary burden 26

•Fiscal sustainability defined in 2004–Public debt/GDP < 50%– debt payment in budget <15%

–Balanced budget since 2005

–Capital budget/ total budget >2 5 %

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• Fiscal sustainability problem if– too much populist projects

– increase social security payments

– Low economic growth (< 4.5%)

– No tax reform 28

Fiscal decentralization• 1997 constitution: fiscal decentralization from central to local government to promote democracy, grassroot participation

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Fiscal decentralization– Some functions are delegated to local government:• infrastructure e.g. village roads, water supply

• protecting natural resources and environment

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Fiscal decentralization– Some functions are delegated to local government:• education• garbage collection• tourism promotion 31

Fiscal decentralization• require total budget for local governments to be at least 35% of total central government revenue since FY2007

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Revenue items Mill. baht

1. Total LGO 1. Total LGO budgetbudget

490490,0,00000

Own collectionOwn collection 32,02132,021

Joint collectionJoint collection 114,728114,728

VAT shareVAT share 64,30064,300

Subsidy from Subsidy from central central governmentgovernment

278,949278,949

2. Total central 2. Total central government government revenuerevenue

1,400,01,400,00000

3. 3. 1( . 1( . / 2.)/ 2.) 35.0 %35.0 %

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Fiscal decentralization• Lack of readiness of LGO to expedite spending

• In the 2007 constitution, LGO share was reduced to 25% of total central government revenue

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Role of Fiscal Policy in the subprime crisis

• Economic recession in 2008-9 reduced tax revenue

• Government adopted Keynesian policy by increasing spending to relieve suffering and stimulate economy 35

Role of Fiscal Policy in the subprime crisis

•Mid-year 2009 budget increased by over 100 billion baht for: (Stimulus Package 1 or SP1)– 6 welfare measures: free electricity, water, buses, trains, and lower prices on oil products and LPG

– 2 ,000 baht for income less than 20,000 ฿ /month

– 500 ฿ monthly allowance for the elderly

– Free education extended to 15 years36

Role of Fiscal Policy in the subprime crisis

• SP2 “From Strength to Strength” or “แผนปฏิบั�ติการไทยเข้�มแข้�ง ” to spend 1.

43 trillion baht in 3years 2010 2012( – ) to further stimulate the economy and increase competitiveness 37

Role of Fiscal Policy in the subprime crisis

• To invest mainly in economic infrastructure, e.g. transport, water supply, energy, education, health, etc. (including “creative economy”)

• Need to borrow 800 billion baht

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Role of Fiscal Policy in the subprime crisis

• Budget deficits will continue in 2010 and the next few years

• Public debts are expected to rise and could peak reaching 60% of GDP in 2013, and may decline if GDP growth of 5% can be achieved (Study by the Ministry of Finance)

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Role of Fiscal Policy in the subprime crisis

• Fiscal Sustainability Issue (Again) in the next 10 years:–Public Debt/GDP < 50% (?)– Debt repayments/ Budget < 15%

– Balance budget (?)– Capital expenditure/ total budget not less than 25% (?)

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Role of Fiscal Policy in the subprime crisis

• Study by Dr. Porametee Vimolsiri

• Fiscal Sustainability Issue in the future under three scenarios 42

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Thai capital expenditure as % of GDP far below average of 7.7% for Asian developing countries;and below the Thai average of 4.31% in 2000 - 2007

Role of Fiscal Policy in the subprime crisis• Tradeoff between fiscal discipline and capital spending by government

•Policy suggestions:› Use more “fiscal space”– more taxes

› More revenue collected by local administration 46

Role of Fiscal Policy in the subprime crisis•Policy suggestions:

› increase expenditure efficiency

› More fiscal consideration for some medium-term issues, e.g. aging population, climate changes, and public service obligations

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