The title of this article says it all. Pheu Thai Party's flagship economic stimulus policy of handing out 10,000 baht to all Thais aged above 16 years old, with an estimated cost of 560 billion baht, will most likely fail to stimulate (or jump-start) the economy from the recent economic slump.
The key reason is the package is not devised in accordance with economic theory.
Economic theory says ALL economic stimulus packages — both monetary and fiscal policy — must be financed by new money or unproductive savings, ie excess liquidity.
Money, not type of packages, would push people to consume and invest. Of course, different types of packages would yield different effectiveness. However, the essential rule remains the same that the package would have to be financed by new money.
Just think of this scenario: The government taxes you 100 baht on Monday, then turns around and gives you "free" money of 100 baht on Tuesday on condition that the money has to be spent in a limited time.
Your question would be: "What free money because that is my money the government took away the day before?" With no change in net income, how could anyone expect consumers to rush out spending so-called "free" money? This is indeed a zero-sum game.
In reality, consumers may go out spending "free" money due to fear of the expiration date. Subsequently, they will reduce spending by 100 baht to make up for the increased taxation. The stimulus effect of the free money would then be cancelled out.
Some readers may recall that I once praised this 10,000 baht universal cash handout package and compared it to Milton Friedman's helicopter theory.
Well, I thought that the package would be financed by government borrowing, which would make the policy theoretically effective. Friedman's theory requires that freshly printed money by a central bank be distributed to the public as if from a helicopter.
The Pheu Thai Party aims to finance this 560-billion-baht package entirely from the 2024 fiscal budget. The details are as follows:
- 260 billion baht from more tax collection
- 100 billion baht from the extra tax income generated by the package
- 110 billion baht from a general expenditure cut
- 90 billion baht from welfare budget reduction
In conclusion, no NEW money or no new borrowing. The deficit of the (draft) 2024 fiscal budget remains unchanged at 593 billion baht.
According to my information, the welfare budget reduction targets the Palang Pracharath Party's government welfare card programme distributed to 15 million people. With the party joining Pheu Thai's coalition government, this option is not one on the table for now.
I used the word "draft" for the 2024 fiscal budget because although the budget has received cabinet approval, the 2024 Budget Act will need to be passed by the new parliament.
Why do economists obsess with the NEW money concept? It is because of the formula of MV = PQ. Without an increase in money supply (M), there would be no increase in output (Q) — unless the new finance minister is able to magically change V (velocity of money) to affect Q without changing M.
Dr Ben Bernanke, former US Federal Reserve chairman and a recipient of the Nobel Prize in Economics, could not. That is why Dr Bernanke had to pump in an enormous amount of NEW money through quantitative easing programmes to save the US economy from entering a recession.
Apart from the fact that the cash handout package is not devised in accordance with economic theory and cutting expenses under the coalition will be a difficult task, I have a few doubts about the practicality of the 560-billion-baht package. These doubts are:
Number one. Would the package be a part of the 2024 fiscal budget?
If not, separate legislation like the Emergency Decree of 2020 allowing the Ministry of Finance to borrow might need to be enacted as no one is legally allowed to use the money not specified in the Budget Bill. Or the new finance minister might want to study the rice price guarantee programme of the Yingkuck Shinawatra government.
That programme avoided touching the fiscal budget as the rice price guarantee expense was to be advanced by the Bank of Agriculture and Agricultural Cooperatives. Financial losses from the programme would later be reimbursed to the bank through a debt repayment category in subsequent fiscal budgets.
Number Two. Is there double counting on sources of income? The draft budget incorporates higher income tax revenue of 267 billion baht than the 2023 budget and the higher income is already assigned to finance the expense budget.
Does the new government mean that they can collect even more taxes, 260 billion baht more to be exact, than those targeted in the 2024 budget to specifically finance the cash handout package? If that were the case, tax collection in 2024 would be 3.01 trillion baht or 21.2% higher than tax collection in 2023. Possible?
Number Three. Is there a cashflow mismatch between income and expense? The 560 billion baht of financing expected from the fiscal budget would gradually flow in over the course of 12 months, starting in October 2023 and ending in September 2024.
But the cash handout package would commence on Jan 1, 2024, or earlier. Therefore, when the package starts, the government is likely to have 115 billion baht in cash available for immediate disbursement. How would this cashflow mismatch be managed?
If the new government must implement this cash handout package as the party repeatedly tells the public, an emergency decree allowing the finance ministry to borrow 560 billion baht might be the only practical solution.
I think that altering the draft budget to accommodate the 560 billion baht package is next to impossible and, at a minimum, could take months. The government should be prepared to be bombarded with criticism.
Unfortunately, new legislation will not be the end of the story as the country is facing a severe negative excess liquidity situation. More government borrowing will rob (the technical word is "crowd out") precious cash from the private sector which also needs financing for its economic activities.
That is the very reason why John Maynard Keynes said that funding of budget deficits must come from "unproductive savings".
The stimulus power of the package would be countered by less investment and consumption from inadequate funding of private activities.
There are several academic studies on the crowding-out effects of government spending. The notable one would be "Public Expenditure Multipliers in Recessions: Evidence from the Eurozone".
Pheu Thai's economic team should read these articles to see that fiscal policies can be counter-productive when they run against Keynes' General Theory of Employment, Interest and Money. Alternative policies should be sought, such as household debt management and a quantitative easing programme.
To emphasise the seriousness of the domestic liquidity problem, the latest Bank of Thailand data shows that, during the first two weeks of August, there was US$3.95 billion (138 billion baht) less in foreign currency reserves, implying that the 138 billion baht more in domestic liquidity has left the country. It will not be long before we see a liquidity war between the public and private sectors.
Good luck to the new government.