Government spends its way into trouble

Government spends its way into trouble

With the economic contraction and relief burdens, there are signs the state's coffers are drying up. (Photo by Pornprom Satrabhaya)
With the economic contraction and relief burdens, there are signs the state's coffers are drying up. (Photo by Pornprom Satrabhaya)

The 2021 Budget Bill, covering the period of Oct 1 2020 to Sept 30 2021, authorises the government to borrow up to 609 billion baht to cover its fiscal deficit -- 140 billion baht higher than the 2020 borrowing limit. In the bill, revenue is estimated to be 2.7 trillion baht (an 11.4% increase from the previous year's actual collection) and expenditure is budgeted to be 3.3 trillion baht (7.1% increase from the previous year's actual spending).

But only four months into the current fiscal year, the government has already run a 484 billion baht deficit, which means that 80% of the borrowing limit has been exhausted. Under this circumstance, it is not possible for the government to finance its budget for the remaining eight fiscal months. According to my estimation, the 609 billion baht borrowing limit will be reached by the end of March. After that, over two million government employees might not get a full salary.

This has never happened before. Even with a 6.1% contraction of the economy in 2020, the government did not reach its borrowing limit until mid-August, which was the 11th month of the fiscal year. At that time, an additional 214 billion baht's worth of borrowing was approved by the cabinet.

Under the Pubic Debt Administration Act, in the event of a revenue shortfall, the law allows the government to borrow to cover its deficit in the amount of no more than 20% of that year's spending budget, plus 80% of the debt principal repayment. This additional borrowing can be done using the cabinet's approval. For the fiscal year of 2020, the additional borrowing amount allowed was 214 billion baht which, not surprisingly, the government borrowed to the max. For the fiscal year of 2021, this amount, calculated by myself, is 123.2 billion baht. The reason why this year's extra borrowing limit is substantially less than last year's is because of the already high level of deficit set in the Budget Bill.

Last week, out of desperation and necessity, the cabinet authorised an additional 120 billion baht of deficit borrowing. This additional cash will allow the government some room to breathe until May. After that, if the government should need more money to finance its deficit, it has three choices: delay certain expenditure until the next fiscal year; default on certain expenditure; or submit a budget amendment to raise the borrowing limit of the 2021 Budget Bill to parliament. Other laws such as Public Debt Administration Act and Financial Disciple Act might need to be amended at the same time.

What are the problems with the current fiscal year's budget?

First, revenue collection is much less than expected. Despite the government's GDP growth projection of 3% for 2021, revenue collection for October-December 2020 was 6.4% less than the same period the year before. The situation did not improve in January of 2021 as revenue was still 4.7% lower than last year. Forget about the dream of revenue collection being 11.4% higher. The government will be lucky if it can maintain 2020's revenue level of 2.3 trillion baht.

Second, the government is spending like there is no tomorrow. I do not know the reason but Bank of Thailand data shows that government expenditure rose 20.5% in the first quarter of the fiscal year of 2021. This was very unwise because revenue collection was declining. Uncontrolled spending led to a whopping 352 billion baht budgetary deficit in one single quarter. Mind you, this deficit comes before the launching of the "We Win" programmes which will drain the government of more than 200 billion baht in cold hard cash.

Third, there are significant withdrawals from treasury reserves. No details on the purposes of these withdrawals are provided. However, in the first four months of the 2021 fiscal year, 114 billion baht has been withdrawn.

The withdrawal put further pressure on the government's borrowing needs. Withdrawals occur when government organisations and local governments experience revenue shortfalls and have to withdraw reserve money deposited at the Finance Ministry to cover their own expenses. If I have to make a guess, the main culprit is the Social Security Fund. Just my wild guess. What could be the consequences of government going (very) broke? Theories provide three obvious solutions.

First, the government will have to borrow more. As the legal limit has now been reached with the approval of 120 billion baht for additional borrowing, the next step is to ask (beg) parliament to raise the legal borrowing limit. However, in my personal view that is unlikely as the political repercussions are too strong. Asking to borrow more is equivalent to admitting the economy this year is (much) worse than last year resulting in a (much) lower revenue collection. More importantly, before agreeing to a higher budget deficit, the opposition parties will ask the government to cut some expenses first, like the military budget. I really do not see this happening.

Second, the government could raise more revenue like increasing VAT from 7% to 10% to bring in an additional 300 billion baht in tax income. I do not see this happening either as it will create opposition from the public, especially low-income groups. By the way, many may not know the official VAT rate is 10%.

The current 7% VAT rate is only "temporary". Therefore, an increase of VAT up to 10% does not require parliamentary approval. Third, the government could cut unnecessary expenses. Unfortunately, there is not much room to cut as current expenditure, like salaries and compensation, accounts for 76.5% of the total budget while capital spending is only 20.5% of the total budget. Any meaningful budget cut will mean salary cuts and layoffs. Another NO for the government.

When I was working for the IMF, we recommended governments lay off 20% of employees to cope with a ballooning fiscal deficit. Instead of cutting its workforce, the government cut workdays from five days a week to four days a week and cut everyone's salary by 20%. Goal achieved!

Back to the real world. If all three theoretical solutions cannot be imposed, what would be a practical solution for the prime minister on the fiscal deficit issue?

First, he could resign and this unsolvable deficit problem will no longer be his. Second, he could dissolve parliament and, again, the problem will no longer be his.

Third, he could stage a coup and abolish the constitution, effectively annulling all the budget bills.

If you were the prime minister, which would you choose?

Chartchai Parasuk

Freelance economist

Chartchai Parasuk, PhD, is a freelance economist.

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