Thailand's fiscal position will begin to improve in 2022 as the impact on public finances from Covid-19 gradually recedes.
In the period from October 2020 to August 2021, central government expenditure rose 12.9% year-on-year as fiscal support measures were ramped up because of the pandemic. At the same time, revenues continued to suffer, declining 3.2% year-on-year.
For the full 2020-21 fiscal year to Sept 30, we estimate the budget deficit at 7.4% of GDP, compared with from 4.0% in fiscal 2019-20, reflecting the deterioration in the state budget amid the pandemic.
However, despite lingering uncertainty due to Covid variants, we expect Thailand's economic recovery to pick up in the fourth quarter of 2021 and into 2022, bolstering revenues and reducing the need for additional stimulus. As such, we forecast the central government budget deficit to narrow to 4.9% of GDP in fiscal 2021-22 and to 3.0% in fiscal 2022-23.
Risks remain tilted to the downside, however, given the potential for further disruptions to the economy from Covid.
The government has stated its intention to continue to provide fiscal support but to also seek to reduce the budget deficit as the economic outlook improves. For fiscal 2021-22 budget, the government announced a 5.7% reduction in expenditure from the previous year.
SPENDING CUTS
At 3.1 trillion baht, the budget will see cuts across most ministries, with the central budget seeing the most significant decline at 18.4% as a reflection of the reduced need for emergency support measures. In contrast, the ministries of agriculture and education will see expenditure declines of 3.6% and 4.0% respectively, which brings spending closer to pre-pandemic levels.
As part of the budgeted expenditure, the government will continue to support the country's vaccination programme, with a faster rollout of booster jabs planned in light of the spread of the Omicron variant. Authorities are also pressing ahead with supporting economic programmes such as the Thailand 4.0 development plan and the Eastern Economic Corridor.
We forecast expenditure to fall more significantly by 7.0% in fiscal 2021-22, due to a reduction in supplementary spending packages as the economic disruptions from the pandemic prove less significant. With the country gradually reopening its tourism sector and shifting towards a "living with the virus" approach, we expect economic activity to need less government support.
Moreover, we believe that the Bank of Thailand will maintain an accommodative stance through 2022 to ensure that monetary conditions remain supportive to growth, reducing some of the need for additional fiscal support. We expect a further 1.0% decline in expenditure in fiscal 2022-23, as fiscal consolidation becomes an increasing priority.
On the revenue side, we expect the recovery to boost tax receipts and other revenues. We forecast revenue growth to rebound from an expected contraction of 5.5% in fiscal 2020-21 to 4.0% in fiscal 2021-22 and 10.0% in 2022-23.
Revenues struggled through the third quarter of 2021 as pandemic-related restrictions weighed on economic activity. Indeed, the economy contracted 1.1% quarter-on-quarter in the third quarter, with government revenues down 3.5% year-on-year in July and 29.4% in August.
However, there have been signs of an economic rebound in the fourth quarter and we expect economic activity to be stronger in 2022. Tax relief measures will cap the rebound in tax revenues. We expect such measures to be announced through further support measures by the government to boost fixed investment and employment.
Prior to the pandemic, the government announced the Thailand Plus package, which offered tax incentives for foreign direct investment. Furthermore, it offered pandemic tax breaks to small businesses and households to spur domestic demand. Given the slow recovery of the tourism sector in 2022, we expect tax breaks to continue in an effort to boost domestic demand.
We expect the budget deficit to narrow over the longer term, albeit remaining supportive to the government's aims of stimulating domestic demand and investment. We forecast the deficit to average 2.3% of GDP over the next decade, compared with 1.3% in the 10 years prior to the pandemic.
LIMITED DEFICIT RISK
We do not expect the wider deficits to pose risks to Thailand's fiscal outlook given the country's high domestic savings rates and low exposure to external debt. Thailand went into the pandemic with a relatively low public debt ratio, at 35% of GDP in 2019. Indeed, we expect the ratio to remain below the 70% limit set by Prime Minister Prayut Chan-o-cha on Sept 20 (it previously stood at 60%).
Based on Bank of Thailand data, we forecast the public debt-to-GDP ratio to stand at 61.2% in 2022, before falling to 59.7% by 2025. Given high domestic savings rates -- estimated at 30% of GDP -- and a developed domestic bond market, nearly all of the public debt is held domestically (98.9% as of 2020).
Having a strong domestic market means the government is less exposed to volatile market sentiment, while the fact that most debt is held domestically implies that the need for foreign currency debt issuance is low.
Given Thailand's relatively low private consumption, at around 50% of GDP, there is a strong need for government demand to boost domestic investment, foreign direct investment and job creation. Such fiscal transfers are key to supporting lower-income households and reducing income inequality, which in turn would improve the country's longer-term economic outlook.