Wrong policies could lead to national crisis

Although the government’s fiscal bill managed to sail through its first reading in Parliament earlier this week, the government cannot be complacent about its massive spending spree on populist schemes. In fact, if the government thinks the budget debate was politically motivated by the opposition Democrat Party, it should instead think twice and heed a warning from the World Bank.

Earlier this week, the World Bank, led by one of its economists, Kirida Bhaopichitr, issued a warning to the Thai government about being more prudent on its spending plan. The reason: to be prepared for the possibility that the debt crisis in Europe will worsen considerably and begin to adversely affect other regions.

The World Bank cautions that the government should review its populist schemes in order to save money for future investment. These populist schemes include rice price subsidies, tax exemption for first-home buyers, tax rebates for first-car buyers, cuts in corporate income tax and diesel excise, increased incomes for civil servants and employees of public-sector organisations, free tablet computers for school students and a debt moratorium for farmers.

The World Bank warns that there is a high probability that the euro-zone crisis will deepen in the next few years, so the government needs to prepare for the impact of that on the Thai economy. The government should invest more on long-term projects instead of trying to stimulate short-term consumption via free handouts and subsidies. 

The government of Prime Minister Yingluck Shinawatra has set its expenditure for the 2013 fiscal year at Bt2.4 trillion, with a deficit of Bt300 billion. Although the deficit of Bt300 billion appears to be a small amount, the government’s off-budget borrowing could become a worrisome issue if it has to borrow even more to finance its spending on populism policies.

The government may be complacent in its confidence that it will be able to borrow as much as Bt1.15 trillion until the debt to GDP ratio hits 60 per cent.  But if there is a renewed global financial crisis stemming from a prolonged slump in the euro zone, Thailand could run out of fiscal resources within two and a half years, warns the World Bank.

Some of these populist policies are aimed at simply boosting consumption, but they are very unlikely to have a positive impact in the longer run, and it is highly doubtful that they will boost the country’s economy in a sustainable manner. The consequences of these projects so far are testament to the fact that there has been a lack of thorough study to ensure the money has been wisely spent. 

As the opposition party pointed out during the budget debate, the first-car-buyer project, for instance, does not cater to only low-income earners, as it was supposed to. The energy subsidy policy promotes wasteful consumption, while the debt moratorium for farmers is likely to result in the encouragement of bad financial habits. We are thus likely to see more people defaulting on debt payments as they get used to being supported by the government.

The lower economic growth rate last year reflects all of these uncertain factors, but it seems that the government is not concerned about being prepared for the future. The massive flooding last year is an example of how unexpected incidents can always happen and how they will inevitably affect the country’s economic performance. 

It is understandable if the government has to borrow to finance recovery efforts after the flooding crisis. But some projects such as the rice price subsidy programme, which has already cost hundreds of billions of baht, do not really help improve the livelihood of farmers.

Thailand should not set its priority on short-term populist spending. Taxpayers’ money should be spent to help the country realise a future vision. This money should be spent to help us stay competitive in a world where changes are driven by technology and people need ability to apply knowledge to gain an edge.

While the world is highly vulnerable to the effects of the debt crisis in Europe and its spill-over effect on the international economy, Thailand should exercise caution to cushion against whatever economic impact might be coming. After all, there is no such thing as being too careful.