Economic Mid-Year 2001

State takes over
the driver's seat

Swichit Sirithaveeporn

FISCAL POLICY

While the Democrats looked to the markets for solutions, the Thaksin administration crafted an ambitious plan for state spending to revive the economy, with state-run lending institutions leading the way

Fiscal policy took centre stage in the first half of the year, in part to compensate for ills in the domestic and overseas economies and reflecting the new state-led philosophy of the Thaksin Shinawatra government.

In sharp contrast to the Democrats, who favoured market-based solutions and a smaller role for the state in the economy, the Thaksin government has moved relatively swiftly to implement its ambitious spending and stirmulus programmes.

By June, programmes such as the 30-baht-per-consultatian national health scheme, a three-year debt suspension for small farmers and a People's Bank micro-credit programme had already been launched.

The legal framework for the Thai Asset Management Corp, a state agency to take over 1.37 trillion baht in bad loans from local banks, was passed with operations to begin in July.

While the Chuan government had been looking to consolidate fiscal spending with an eye on the growing public debt, the Thaksin government has decided that the immediate problem is dealing with the slowdown in local investment and exports.

The fiscal 2002 budget, which starts in October, calls for a deficit of 200 billion baht, or nearly 3.5% of gross domestic product, with expenditures at a record 1.02 trillion baht.

This would mark the sixth straight year of deficit budgets since 1997, the start of the economic crisis, collectively amounting to a cash deficit of more than 700 billion baht as a result of falling tax revenues, stimulus programmes and efforts to maintain social welfare and education spending.

Tax incentives to boost domestic spending and the equities market will also have an immediate impact on the fiscal purse. The government decided to delay until September 2002 a scheduled increase in value added tax to 10% from 7%.

To boost the equities markets, the government agreed in April to reduce corporate tax to 25% from 30% for five years for new listings on the Stock Exchange of Thailand, and to 20% for listings on the Market for Alternative Investment.

Existing firms on the SET can apply the 25% corporate tax to profits of up to 300 million baht per year.

But while most agree that under the circumstances, expanded fiscal spending is needed to help turn around the economy, it remains a concern that such spending cannot go on forever.

At the end of 2000, the country's public debt stood at 55.78% of GDP, or 2.81 trillion baht. Debt is expected to rise to around 60% of GDP once costs of the 2002 fiscal budget are factored in.

Finance Ministry offficials say the overall costs remain manageable.

Assuming that spending leads expected gains in growth, a return to a balanced budget is possible by fiscal 2007.

The government also hopes that its efforts to restructure state enterprises and accelerate listing on the stock markets will help maximise asset values which could offset public debt.

Still, it remains clear that room for fiscal manoeuvring is becoming increasingly squeezed, as debt service costs and current expenditures squeeze out available funds for new investments in public infrastructure, utilities and public services.

Of the public debt, around 1.3 trillion baht or more than 25% of GDP reflects costs from financial sector reform. While this will be offset to some degree from future sales of shares held in state banks such as Krung Thai Bank, Bangkok Metropolitan Bank and Siam City Bank, additional losses could still come from the bad loans transferred to the TAMC.

The TAMC is viewed as a crucial pillar of the government's economic reform programme. Policymakers hope that once bad loans ate taken off the balance sheet of local banks, institutions will have greater scope to boost loan growth.

Borrowers also can benefit from a resolution to their debt troubles and new access to capital to revive operations.

Yet while the premise of the debt workout agency is promising enough, analysts remain cautious about whether in practice the TAMC can accomplish its goals to revive the corporate sector while limiting downside risks for taxpayers.

Other fiscal-led initiatives are expected in the future, including new venture capital funds supported with tax incentives and an expansion of state guarantees for bank loans.

Critics of the government argue that many question marks remain over its cornerstone programmes.

The farm-debt moratorium, for instance, has attracted more than one million applicants, but the real work of debt restructuring, skills training and marketing and technology support for farmers has yet to begin.

The national health-care programme is estimated to cost a minimum 90 billion baht per year for the state, or another 20 billion on top of the 70 billion already spent each year on health services.

Long-term management of a universal health-care system within fiscal constraints requires increased accountability for end-users and providers alike, an issue which critics say has been given relatively little attention by the government.

But state officials say that the programme has been designed following careful study of the various approaches taken to health care in Europe and the Americas.

Among the cost controls involved in the programme is a cap on costs at 1,450 baht per person per year, reinsurance systems for high-cost procedures, incentives for users to adopt preventive measures and mandatory registration of users to nearby hospitals to better allocate resources.

The village fund programme, meanwhile, will incur a cost of one million baht for each of the country's 70,865 villages. The revolving funds are intended to serve as a financing source for small businesses and entrepreneurs.

Some seven billion baht has been allocated for the programme in fiscal 2001, with the budget jumping to 50 billion in fiscal 2002 and 16 billion in fiscal 2003.

Another key fiscal cost change under the new government has been in civil service salaries and incentives.

Salary costs for the 2.3 million civil servants, teachers, police and armed forces already account for some 30% of total government spending each year.

While various programmes have been adopted to streamline the civil service and limit headcount growth, budget cost increases for 2001 still totalled 3.6 billion baht, with planned expansion to four billion in fiscal 2003 and 2004.

The real risk, some economists warn, is that the efforts by the Thaksin government to revive domestic demand through state spending will prove insufficient to offset the fall in exports due to weaknesses in the US and Japanese economies.