Is responsible populism possible?

Can Finance Minister Thirachai Phuvanatnaranubala uphold fiscal discipline amid mounting pressure from the Pheu Thai Party to spend more?

The expenditure plan under the 2012 budget bill will serve as a major test of Thirachai's ability to uphold best practices in managing the government's finances.

Before taking the helm at Finance, Thirachai promised the public that he would maintain fiscal responsibility and downplayed the risks posed by the government's populist policy proposals.

The first test came when he had to negotiate over the excise tax on petrol with Energy Minister Pichai Naripthaphan last month. Thirachai failed in his bid to raise the tax to recoup some of the government revenue lost to the suspension of Oil Fund levies.

The second test is the budget bill for next fiscal year, whose scheduled passage in October is expected to be delayed.

Last week, Thirachai held serious discussions on revenue and expenditures with senior officials from the Finance Ministry, the Budget Bureau, the Bank of Thailand and the National Economic and Social Development Board.

Initial reports suggested they had agreed to set expenditures at Bt2.36 trillion against estimated revenue of Bt1.96 trillion, resulting in a budget deficit of Bt400 billion.

The deficit is Bt50 billion larger than forecast by the previous government under Abhisit Vejjajiva and departs from a previous plan to cap the deficit at Bt350 billion.

Under Abhisit, the Finance Ministry and Budget Bureau agreed to balance the budget in 2015 to demonstrate to investors and the public that Thailand was upholding fiscal discipline.

Thirachai, however, said the new government need not strictly adhere to that target. His statement, and the administration's policies, have many people worried that in its drive to boost consumption, the government will overspend.

Central bank governor Prasarn Trairatvorakul has urged the government to save money for investment and for more difficult days ahead.

Finance officials are also worried, as they have to find tax revenues to fund government expenditures.

Tax officials have limited tools at their disposal, given the government's plan to cut corporate income tax from 30 per cent to 23 per cent next year and to 20 per cent in 2013. The Revenue Department and the Fiscal Policy Research Institute, the Finance Ministry's think-tank, propose increasing the value-added tax (VAT) from 7 per cent to 10 per cent. A 1-percentage-point rise in the VAT should bring additional revenue of about Bt50 billion.

But as tax hikes are unpopular, the government is unlikely to pursue them. Instead, Deputy Prime Minister Kittiratt Na-Ranong and Thirachai are taking the easier route of trying to access funding via the Bank of Thailand's US$186 billion (Bt5.6 trillion) international reserve.

Thirachai last week asked Prasarn how the central bank could help the government repay its Bt1.14 trillion debt to the Financial Institutions Development Fund. The move is at odds with the government's line that public spending and corporate tax cuts will spur economic activity, leading to higher tax revenue.

The government may have some room to raise taxes on cars, liquor and beer, cigarettes and carbon emissions, but this would not significantly increase revenue.

Other solutions include wooing private investment in infrastructure projects, and better management of state-enterprise assets, but the likelihood of such steps being taken is unclear.