On a dangerous path to financial uncertainty

The Bank of Thailand on Thursday warned the government of the possibility that its populist policies will increase the country’s public debt to the worrisome level of 60 per cent of gross domestic product (GDP) in the next 4 to 5 years.

The government plans to borrow more money to implement a series of pledged policies that are inteded to inflate economic growth, but are only likely to increase the level of public debt. Prime Minister Yingluck Shinawatra said that the government needs to borrow in order to compensate for the Bt300 billion budget deficit, as Bt2.4 trillion will be needed for state spending in fiscal year 2013. This is about Bt20 billion more than is being spent in the current fiscal year. 

During a recent press conference held by the central bank, the government was told that the budget deficit in 2013 could top Bt650 billion. The government recently received the nod from the Constitutional Court to borrow an additional Bt350 billion for flood relief and future flood prevention projects. This sum will be added to the original budget deficit of Bt300 billion. 

However, the government still insists that needs to borrow more money to stimulate the economy in the midst of ongoing economic problems. But if the government continues borrowing at this rate, with the budget deficit accounting for 4 to 5 per cent of GDP, that deficit will likely increase every year. 

Even if the deficit does not decrease, Thailand’s level of public debt over the next four to five years could rise to 60 per cent of GDP, which is a sign that our fiscal status may become unstable.

The ongoing economic and financial woes in Europe should serve as a lesson for the Thai government that fiscal indiscretion can wreck the economy, especially if money is squandered on unnecessary projects that do not enhance the competitiveness of the country in the long term.

The government has so far focused on how to acquire more money in the future to fulfil pledges made to voters during the last election campaign. These promises include a rice subsidy programme, credit cards for taxi-drivers and farmers, computer tablets for school students, a women’s development fund, a nationwide rise in the minimum wage, among other schemes. It remains to be seen if any of these policies will yield satisfactory returns. 

There are definite risks in these populist policies. For instance, the low quality of the screening process for the credit-card project will create an additional burden for the government if many of the borrowers cannot repay their debts. This will lead to non-performing loans that will end up being the burden of taxpayers.

The government may be accused of being complacent in borrowing vast sums to finance these policies when the country’s fiscal status is currently sound, with public debt accounting for around 40 per cent of GDP. Prime Minister Yingluck says that more spending is necessary to stimulate growth. Thailand’s economy expanded by only 0.1 per cent last year due to the flood crisis. The government expects the gross domestic product this year to grow by 5.5 per cent to 6.5 per cent. But Thailand is on the path to higher-than-estimated GDP growth this year mainly because of last year’s low base.

Apart from increasing spending and borrowing, the government should consider alternatives that can generate more earnings. One way is to address the fundamental problem of revenue collection in Thailand. Tax reform must be carried out to expand the tax base. Revenue collection remains unfair if only some 2 million people are paying taxes. Millions of others manage to avoid paying taxes due to loopholes provided by the system which, for instance, enable some people to transfer billions of baht worth of shares on the stock market without paying a single baht in tax.