The greatest mistake the world is making is believing that governments will save us from the Covid-19 economic disaster. Even the International Monetary Fund (IMF) is encouraging governments to spend more to counter the downturn.
In light of this, the IMF has prepared US$250 billion (7.85 trillion baht), about 25% of its lending capacity, for emergency loans. Governments around the world have spent more than 10% of GDP to lessen the effects of lockdowns. Financial support to the public comes in all forms such as universal cash handouts, selective cash handouts, household debt holidays, soft loans etc. The results have been much less than desired, as all countries experienced economic contractions of historic proportions.
Originally, governments thought that the outbreak would be short-term, three months or maybe six months at most. Stimulus packages would only be needed during this short outbreak period. Therefore, governments did not mind going all out to support their economies without keeping an eye on the cost of fiscal deficits. Thailand did just that. The 1.9-trillion-baht fiscal stimulus package was launched in the second quarter in the hope that it would somehow deter a slump in the economy, which had already contracted by 2% in the first quarter. Yet by the second quarter, the GDP growth rate was at negative 12.2%.
Here comes the bad news. Experts now say that the pandemic could last 18 to 24 months. Global new daily infections in August were three times higher than in April. There is no sign of a slowdown. Many countries are now experiencing a second lockdown.
What should government reactions be? More stimulus packages, I suppose. But that could be in vain, as we can see from the GDP growth numbers around the world in this year's second quarter. The reasons for this are:
First, governments are relatively small in economic size compared to the private sector. On average, the size of governments is around one third of the economy. Government spending accounts for 35.1% of GDP in the US, 37.1% of GDP in Japan, and 34.1% of GDP in China. For Thailand, that figure is a low 26.1% of GDP. Just imagine a little brother trying to carry his big brother on his fragile shoulders for an extended period of time.
To think a government could pull an entire economy out of a global meltdown caused by a pandemic like Covid-19 seems unrealistic.
In the case of the Great Depression of the 1930s, it was calculated that the US government needed to spend about 100% of the country's GDP in order to stop the depression. President Roosevelt spent only 20% of GDP on the New Deal stimulus package, and, therefore, could not stop the slump. However, he later did spend 100% of GDP on the war budget, and the economic depression consequently stopped.
The depression ended, but World War II began. Good policy?
It is not as easy for governments to spend money as you might think. Before a government can spend, it needs to come up with projects. They must be sensible and productive projects too, or they risk facing public condemnation. An example is the proposed 3,000 baht co-spending cash handouts for 15 million Thais. Theoretically, it makes sense as the fourth quarter is projected to lack fiscal stimulus. However, the public has already criticised the project as favouring big businesses.
If we, on the one hand, encourage the government to spend more (and more and more) money to shore up the economy, to help the unemployed, and to salvage SMEs, but, on the other hand, scrutinise every baht spent on every project, I guarantee not many stimulus projects will emerge. Money will in turn go towards the proposed projects being sent to either the National Anti-Corruption Commission or Constitutional Court for verification. By the way, I support public scrutiny of government projects and stimulus packages, as they all use our money.
This leads to the second reason. It's our money being used.
There is no such thing as a free lunch. If a government spends 10% of GDP to stimulate the economy today, it means they either have to tax an extra 10%, or spend 10% less of GDP in the future. Either way, this will slow future GDP growth. Would this be acceptable to the public?
To be honest, an extra 10% of GDP in government debt might be okay as it would be paid off over a long period. The problem is, government deficits do not stop there. The 2003-04 budget calls for an additional 3.5% of GDP deficit. If we have deficits like this for 10 more years, our government debt levels will proudly break the 100% of GDP mark. Mind you, this is without any additional Covid-19 stimulus packages.
Let me repeat it again. It is our debt; it is our money.
Those who support higher deficits often cite Japan's government debt as an example, which was probably around 240% of the country's GDP before the pandemic. After Covid-19, its debt level might approach 300% of GDP. To cover this deficit, the IMF has estimated that Japan will have to raise its consumption tax from the current level of 10% to 22%. In light of Covid-19 budgets, the IMF will certainly need to re-estimate the deficit-neutral consumption tax rates. This time it might exceed 25% which would be the world's highest consumption tax rate. You see. There is no free sushi either.
The final reason is: Who has the money to finance deficits?
This problem has caused the biggest headache to the government and might be one of the reasons for the recent resignation of the finance minister. Imagine if you have financial problems and run to a bank for an emergency loan and the reply from them is "Sorry. We have no money in the bank." That is the current situation in this country. As explained in my previous articles, the Thai government has two choices; either borrow money from abroad and/or ask the Bank of Thailand to buy government bonds. Japan, the US and the EU all opted for the latter.
Rethinking dependence on government fiscal stimulus must happen all around the world, not only in Thailand. The role of rescuing an economy must be shifted from public to private. If not, we will have short-term solutions while creating long-term problems. Perhaps it's time the IMF rethinks its recommendations.