Don't bet on stimulus saving economy

Don't bet on stimulus saving economy

A man buys a pack of rice at a market in Bangkok. The government has launched a new financial package to boost the economy.  VARUTH HIRUNYATHEB
A man buys a pack of rice at a market in Bangkok. The government has launched a new financial package to boost the economy.  VARUTH HIRUNYATHEB

You may have read elsewhere that the government's new 316-billion-baht economic stimulus package will not work. I second those opinions but for totally different reasons.

My reasons are based on economic theories not from intuition such as the money will benefit big corporations, not the low-income population. The underlying logic is that the money will be spent on products of big corporations, not on community products. This kind of logic is economically inaccurate.

Let's look at an example. What if the government gives all the money directly to big corporations to produce instant noodles, eggs and bottled water to give them to welfare cardholders for free? The effect on GDP will be no different than giving money directly to the cardholders to buy the same products from big corporations. Why? The money, whoever gets it, increases the production of instant noodles, eggs and bottled water by the exact same amount, hence causing a rise in GDP at the exact same level. Of course, there is a thing called the "multiplier effect", which will be explained later.

If the distribution of money is not an issue, why am I saying that the stimulus package will have little or no effect on the economy, in other words, GDP growth? The answer is simple. There is no "stimulus" money.

To be precise, the government is not spending new money. The government makes it sounds like it will be spending a large sum of money on several new cash handout measures. For this and next month, it will spend 14.6 billion baht to fund additional allowances of 500 baht per month for 14.6 million low-income welfare cardholders, 5 billion baht to finance a measure to give 5 million elderly an additional 500-baht monthly allowance, and 500 million baht for a programme to give parents, who are welfare cardholders, an additional allowance of 300 baht for taking care of each child.

In addition, a 15-billion-baht sum is budgeted for a programme to boost domestic tourism by giving a 1,000-baht cash handout to each person travelling outside their home province.

In total, the state will spend 35.1 billion baht on this round of cash-handout measures.

The real question is where the 35.1-billion-baht sum comes from. If the money comes from an extraordinary budget, it means that the government will have to seek parliament's approval for new money and to increase the ceiling of the allowed budget deficit.

The cash handouts will definitely raise the GDP level as intended. But if the money is from the existing 2019 fiscal budget, other governmental expenses will be cut for budget reallocation. This will be a zero-sum game. The positive effects of the cash handouts will be cancelled by the negative effects of the 31.5-billion-baht cut from other planned expenses. In this particular case, the money will be deducted from the central budget of 468 billion baht in this fiscal year. This central budget is for funding pensions, emergency funds, medical expenses for government employees, and contributions to retirement funds. Now you understand why the drought-relief spending is so small.

The other key argument to support the cash-handout programmes to welfare cardholders is that the money will be multiplied more than 2 times. In other words, the 31.5-billion-baht sum can affect the economy by 2 or 3 times the original amount, which can theoretically raise GDP by up to 0.6%. This is called the "multiplier effect" in economic textbooks. If this were true, the government should give out free cash every month.

Unfortunately, the multiplier effects do not work in a modern economy. They work in a small community-type economic system. For instance, in a small, closed economy, money given to farmer A will be used to purchase eggs from farmer B. Farmer B then uses the money to buy chicken feed from farmer C who, in turn, buys egg omelettes from farmer A. In this case, the money changes hands three times and produces three products -- eggs, chicken feed and omelettes. But in an open, modern economy, farmer A would buy eggs from a store and the egg money would be lost in the massive national egg production system. No more multiplier effect of the textbook.

In the Thai economy, the current money multiplier is 0.8 times, not 2 or 3 times as dreamed by the government and many text-book economists.

Supporters of the stimulus package might wonder why I concentrate only on the cash-handout programmes and ignore the lending measures for small and medium-sized enterprises (SMEs) such as the 100-billion-baht SME loans and the 150-billion-baht loan-guarantee programme.

It must be noted that loans and loan guarantees will be given only to credit-worthy projects. If any SME has a good project and a good credit standing, they will certainly get a loan with or without the stimulus package. But if they do not have good projects or dubious credit standings, no loan or guarantee will be issued despite the lending programmes.

If the condition is that loans and guarantees will be given unconditionally to any SME that asks, that would be a different story. Therefore, I discount these loan programmes from having significant additional effects on the economy.

To effectively stimulate the economy, the government -- any government in the world -- will have to do two things. First, there must be new money. It must not syphon money from other governmental budgets. Second, there must be lots of lots of money as the money multiplier is less than 1.

In the case of Thailand, if the government runs an additional 100 billion baht of deficit, the effect on GDP will be merely 80 billion baht, or 0.5% of GDP. This is really tough for governments. To run huge deficits, governments will risk pushing up domestic interest rates and destroying private-sector investments through the crowding-out effect. Crowding out occurs when savers withdraw money from banks to buy government bonds. That is why many countries like the US, Britain, Germany and Japan opt to use monetary policies to stimulate the economy rather than using fiscal policies.

With little doubt, the world economy is going into recession and stimulus packages will be needed around the world. Economists agree that monetary policy is no longer effective as the world is already flooded with too much liquidity. That is why the US Fed and major central banks are reluctant to lower interest rates further as it could cause more harm than good. Governments have no choice but to resort to fiscal policy. A bigger question for them is how they are going to it?


Chartchai Parasuk, PhD, is a freelance economist.

Chartchai Parasuk

Freelance economist

Chartchai Parasuk, PhD, is a freelance economist.


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