The Covid-19 lockdown forced the Prayut Chan-o-cha government to launch a series of relief packages aimed at easing public hardship and stimulating the economy, but there has still been a severe contraction in GDP.
Such schemes have left state coffers dried up. And there are more difficulties ahead as key economic engines that used to churn out enormous revenues like exports and tourism are crippled. Under such circumstances, Prime Minister Prayut Chan-o-cha needs to listen to wise words from experts to engineer a turnaround.
One of the experts is Sommai Phasee, a former finance minister who served in the military regime under Gen Prayut from 2016-2017. He is known for major initiatives such as land tax reforms that were designed as a crucial measure to narrow the wealth gap and inequality. But the tax reforms, after several delays, were watered down, and the principles of land justice were bypassed.
This week Mr Sommai came up with a bold suggestion: the government should raise the value-added tax (VAT) rate from 7% to 10%. The hike, he said, will generate tens of billions of baht in revenue. Such a tax increase may be inevitable as numerous relief packages have left the state loaded with debt.
The Prayut administration has taken out loans and implemented fiscal transfer measures to the tune of 1.9 trillion baht. It is in dire need of more money to stimulate the economy further. Economic forecasts are unfavourable this year and for years to come as the coronavirus is still hitting the world hard.
Also this week, top business associations said Thailand's economy for this year is expected to contract between 7% and 9% because of the impact of the coronavirus pandemic. Frequent anti-government protests that may rattle the government's stability are also a concern.
Under such circumstances, more loans are not an option, while the government is in dire need of more revenue.
Mr Sommai also issued a warned regarding the country's debt ceiling.
VAT was introduced in the country in 1992 at a rate of 10%, but it was slashed to 7% in late 1997 at the private sector's request. Since then, all administrations have fixed the rate at 7%, a very low rate compared to other countries, to keep the public satisfied.
Previously, the private sector petitioned for the fixed 7% rate, saying that an increase would hurt economic growth and GDP.
But as the state coffers are nearly empty, the Prayut government may not have much of a choice. Instead, it will have to make a bold decision that will not hurt the country so much.
The Prayut government should study the possibility of raising VAT back to the 10% rate. Of course, there will be adverse effects from the increase, with more hardship for several sectors, but if the money is used prudently, the tax hike could offer an advantage eventually. This also means a no-no to arms purchases.
More importantly, the government, if it is to raise VAT as suggested, should strictly adhere to fiscal discipline to ensure that not a single baht is wasted.