Time to rein in populism and excessive spending

After the first year of full-blown populism, the government will now have to ensure that its policy platform yields results in a sustainable manner. 

The government’s populist policies encourage the public to spend more now by borrowing money. These borrowers are betting that they will enjoy a booming future. But this is not guaranteed to be the case, especially amidst the current external economic turbulence.

The Bank of Thailand shows a rise in defaults on debt and an increase in personal debts over the past six months. Thai people have been encouraged to borrow to satisfy their material appetite through populist schemes and low interest rates.  But these spending habits will not produce constructive results. Thai household debts are already at a worrisome level, and if this is not rectified in the long term, it will destabilise the country’s fiscal security.

The government’s populist policies include a subsidy for customers who buy a first car, and similar breaks for people to buy a first house. With such enticements on the table, people are willing to spend recklessly, and the low-interest rate policy makes many people less hesitant to borrow.

The signal being sent by the government is that people should continue to spend more, even though the Thai economy is facing many challenges. First, Thailand’s competitiveness and productivity have not improved to a satisfactory level. Thai export growth is decelerating and the country is still trapped in the middle-income bracket while failing to move forward rapidly enough due to a lack of skilled workers. 

Although the government claims it is promoting moderation, its economic policies and general message to the public suggests otherwise.

The ongoing economic trouble in European countries and the sub-prime mortgage crisis in the US should serve as a reminder to Thais about the danger of excessive spending. Thailand faced a similar financial crisis in 1997, but the problem was fixed and the economy managed to recover a few years afterwards because of the austerity policy imposed upon the then government.

At any rate, Thailand’s household debt at that time was lower than the current level. Then, it was around 40 per cent of gross domestic product, compared to more than 50 per cent of GDP currently.

Aside from household debt, public debt is also rising. Before the 1997 crisis, the level of public debt was only 20 per cent of GDP, compared to around 40 per cent now. If our debts continue to rise and creditors cannot service those debts, the number of defaults will rise. And this will cause a wider problem in the economic system.

If people continue to spend money on short-term consumption, it will affect the level of savings. In the bigger picture, lower savings can affect the country’s ability to finance long-term investment projects. 

The government should take the lead in making people more conscious of their spending. First, it should start by re-examining its own populist policies, to ensure that hard-earned taxpayers’ money is well spent. 

The government has no right to squander taxpayers’ money on policies that do not generate benefits in a sustainable manner, nor create multiple positive effects in the long term. The financial institutions and banks should also be careful before approving loans to creditors.

The rising levels of both public- and private-sector debt will weaken the foundation of the Thai economy. Thus the government should curb its spending and send honest and correct message to the public about the state of the Thai economy, which is certainly not immune to external and domestic shocks. Sending the wrong message that the economic good times will last forever can only lead to disaster.