Populism at expense of fiscal indiscipline dangerous for future

Kittiratt Na-Ranong, the deputy prime minister and finance minister, argued that the Bt2.4-trillion budget for fiscal 2012-2013 would keep economic growth going and improve the living standards of Thai people.

This summed up the uninspiring, if not outright boring, Parliamentary debate on the budget that has set the course for public finances in the coming fiscal year, starting October.

The budget process illustrates how the Yingluck government continues to flout fiscal discipline. Of the target spending of Bt2.4 trillion, the Finance Ministry expects a tax revenue collection of Bt2.1 billion, resulting in a budget deficit of Bt300 billion. This is not to mention the extraordinary borrowing item of Bt350 billion to invest in flood prevention projects and other public investment programmes.

Korn targeted his attack on the Bt350 billion in borrowing that comes with little information or any details over how the money will be spent.

Nonetheless, to be fair, both the Democrat and Pheu Thai Parties are no different when it comes to spending beyond their means. The Democrats' Thai Khemkhaeng Programme also carried hard-core features of populist spending, which the Yingluck government does not hesitate to match while perfecting the art of overspending.

Over the past year alone, Yingluck Shinawatra has added some Bt1 trillion in fresh debt, on the books or off the books, onto the country. The rice-pledging programme alone requires upfront payment of Bt400 billion to buy up every single seed of rice in the Kingdom. The Thailand Development Research Institute has warned that the government might lose at least Bt100 billion from this rice-pledging scheme, marred by corruption and inefficiency. 

Fiscal balance continues to be untenable. In two consecutive fiscal years, the Yingluck government has added Bt700 billion – a deficit of Bt400 billion in the last fiscal year, to public debt on the books alone. The politicians love to kick the can further down the road.

A closer look at the budget formulation provides a gloomy view of remnants of chronic imbalance and misallocation of resources. Of the Bt2.38 trillion in total spending, Bt1.84 trillion, or 77 per cent, will go into obligatory or mandatory spending that contributes almost nothing to the Kingdom’s future growth or competitiveness.

There remains only Bt438 billion left from the budget for investment projects. This represents only 18.4 per cent of the total budget. When mandatory spending by far outgrows investment spending for the future in the budget formation at this ratio, it means that we are committing a misallocation of resources on a grand scale.

The targeted tax revenue collection of Bt2.1 trillion shows that the tax base of the Kingdom remains tiny or inadequate. This amount represents only 16-17 per cent of the gross domestic product. The tax base should have in fact been expanded to raise the ratio to the GDP to at least 25 per cent. This would ensure that future obligations and government total debt of Bt4.6 trillion are met with a strong revenue base. Going forward, mandatory spending in healthcare, education, social security and other welfare benefits would have a strong bearing on the budget as Thailand is inching into an ageing society.

On the contrary, the Yingluck and past governments have been bringing down both tariffs and taxes to please the corporate sector. With Free Trade Agreements and the Asean Economic Community obligations, Thailand’s tariffs have been reduced to zero. Corporate income tax is coming down to attract investors to Thailand and to compete with neighbouring countries. There is no plan to follow up on the inheritance tax proposed by the previous Democrat government. Nor is there any plan to raise the value-added tax from the current 7 per cent back to the original level of 10 per cent. The capital gains tax from stock market transactions remains exempted. In the meantime, only some 2 million people out of the work force of more than 39 million are paying personal income tax deductible at source. 

On top of this is the Yingluck government’s plan to raise the debt to GDP of the country from more than 40 per cent to 60 per cent through mega-infrastructure investment projects worth Bt2.2 trillion. This huge spending will span a period of four to five years.

There has been very little discussion over how to raise revenue or expand the tax base in contrast to an enthusiasm to spend future money in a hurry.

If the pace of budget spending continues along this path, Thailand is likely to face fiscal crisis over the medium term. For, global growth is slackening, with the growing crises in Europe, the US and Japan. Thailand’s credit worthiness is the envy of the world. The 10-year government bond yield is slightly higher than 3 per cent, compared with 6-7 per cent for the crisis-hit countries in Europe.

As former finance minister Thirachai Phuvanat-naranubala said, the government should have the ammunition for the future when a full-blown crisis hits the global economy. This is a wise recommendation to take.