Is Thailand going blindly down the same path as Greece?

But if one were to ask, “Is our economic behaviour, or rather policies, leading us towards a similar ruinous state of economic affairs as that of Greece?” the answer is “absolutely, yes”. Perhaps, in three or four years time,  maybe sooner.

This is like telling a 20-year-old kid who smokes that he will likely die of lung cancer soon; you are met with an incredulous glance. Try telling a 40-year-old heavy smoker the same thing, and your statement may have more credence.

Currently, the Thai government’s revenue is Bt1.98 trillion, whereas the budget was set at Bt2.38 trillion, leaving a fiscal deficit of Bt400,000 billion.  As of this Tuesday, the Cabinet unapologetically embraced the red ink bottle without any clear idea how to pay for everything, because the money is earmarked for not very productive investment. It is the case where tax money is not to be used in matters that generate high return.

There are three main fixed costs that are the main ingredients that could take us towards the Greek destiny. These are the populist policies, bulging public wages, and debt-servicing expenditure.

Populist policies are one of the platforms that got this government elected, so it cannot renege on these promises. But once these policies are in place, there is no wise or popular way that any government can rein in the subsequent populist policy expenditures. That would be perceived as a betrayal, which could cost politicians their seats. Reining this spending in would amount to political suicide.

Increased public sector wages is another easy means for politicians to win collaboration and the hearts and minds of their core constituents, who will go out and get more votes for them. Greasing the bureaucratic wheel also means politicians can get more mileage out of their projects and undertakings. This has been the strategic case with the last few governments. 

Debt servicing is something everybody always wants to forget, but cannot avoid. Today, Thailand, under the Financial Institutions Development Fund (FIDF), is carrying a debt burden of Bt1.4 trillion from the 1997 financial crisis. To date, the Bank of Thailand (BOT) has paid down Bt200,000 billion, (the agreement reached in 2002 between the BOT and Ministry of Finance (MOF) called for the BOT to pay Bt1.39 trillion over 30 years and the MOF to pay for the interest, but the BOT’s commitment was never materialised. To date, the MOF has paid up Bt600,000 billion and the rest remains on the balance sheet. Rain or shine, the chickens come home to roost, and eventually the hard question to eschew will have to be dealt with. This FIDF issue will be the subject of much analysis and commentary following Tuesday’s Cabinet decision to transfer the burden of the FIDF to the BOT, to wipe the slate clean so the government can borrow anew.

The three fixed costs are enormous and they are to be paid for by tax revenue. Unfortunately, they coincide with the generous gestures of the government to lower taxes, which means less revenue. The decrease in corporate income tax alone was estimated to cost the government Bt150 billion in income. The government is hoping that the tax reduction will result in growth in corporate businesses that will then lead to more taxes to be collected by the government. But that is not a sure thing; especially when many industries are seriously contemplating moving their production base away from Thailand.

So the government is borrowing more money that does not generate economic growth. And it will keep borrowing to fund populist policies that are worthless in the sense that they do not in any meaningful way benefit the people in an economically sustainable manner. The borrowed money will not in any way be genuinely productive, just like we borrow money to make ends meet, not to invest in a business venture, whose return would be used to service our debt. 

Given the government’s mindset to ignore fiscal discipline, among other things, Thailand’s debt burden of 3-4 per cent of GDP will likely continue to grow unabated. Worse yet, if the world economy shrinks further, and all signs indicate that it will, Thailand’s economic livelihood that is so export-dependent will face added problems. The government then will have to make a painful decision, either that it increases taxes or decreases spending. One way to increase revenue is through the value added tax, which, unfortunately, is regressive – i.e the burden on the poor will be more than that on the wealthy. Decreased spending would risk voters’ wrath.

Soon, the Greek analogy will no longer sound too far-fetched and the Greek tragedy will be the Thai tragedy.

Another interesting similarity between Thailand and Greece is noteworthy. To many observers, the current Greek fiscal crisis stemmed from deficits and accrued public debts by successive Greek governments. However, is it simply a question of successive economic mismanagement, or did the crisis have its root in the malfunctioning of the country’s political system?

Over the last three decades, Greek politics has been marked by personality clashes, the patronage system, populism, bribery and corruption. Out the door went fiscal discipline. In came universal healthcare, growing public sector wages and hiring increases, pensions, and innumerable fringe benefits. The public became so addicted to these candies to the point that any attempt to halt or slow down these extravagances were eventually annulled.  

If it sounds familiar to us, it’s because we in Thailand are embarking on the same ship as the Greeks did, and it’s called the Titanic.

So enjoy the ride for as long as you can, tomorrow is yet to come. This is how the thinking of the powers-that-be goes these days.

By the time the ship sinks, we the majority of the people will pay heftily for the sins of the few, who may already have long debarked the liner, with bags full of treasure.