Fiscal bungling
Re: “PM calls for urgent meeting”, (BP, May 22).
There is some irony in Prime Minister Srettha Thavisin’s call for urgent talks on the economy. After all, one can’t escape the fact that his own economic policies and inactions have contributed to the economic turmoil the nation now faces.
The slower-than-expected economic growth Q1-24 should come as no great surprise. In an environment where the Bank of Thailand is deploying monetary policy to bring down inflation, there should be some moderation in economic growth. In times like this, it is incumbent on the government to craft complementary fiscal policies to bolster long-term growth and reduce inflation.
Thus far, the government’s fiscal contribution to growth has been negative. The prime minister’s first fiscal policy, a change to tax on foreign income, amounts to a tax on inbound remittances starting Jan 1, 2024. There can be no doubt that this has disrupted foreign currency inflows vital to Thailand’s growth in 1Q-24 and is likely to continue to do so. The retirement/mobility hub, which makes up a large proportion of foreign currency inflows, now stands decimated, with foreign nomads likely to avoid Thailand and many existing long-stay foreigners likely to relocate to more tax-friendly shores or remit much less to avoid tax.
Even the lucrative Chinese and Russian long-stayers are likely to think twice about living and investing in Thailand now they face up to 35% tax on inbound remittances and the bureaucratic nightmare of the Thai tax system. This is not an insignificant blow to Thailand’s economic growth prospects. Foreigners punch above their weight when it comes to property purchases and consumption, and it is worth noting almost 5% of deposits in Thai banks are held by foreigners.
There are sound economic reasons why so many countries around the world work so hard to attract these types of foreigners and their capital. This poorly conceived tax policy remains at odds with exactly the type of growth Thailand needs at this point in time. Moreover, for all of the prime minister’s travels, he seems to have failed in his efforts to secure meaningful capital inflows that could compensate for the drop-off caused by the tax change. The net result is lower foreign currency inflows, a more vulnerable baht, and lower economic growth.
To make matters worse, the government has embarked on a range of inflationary populist policies, such as wage hikes and the much-touted digital wallet. These policies seem to add more to inflation than they do to growth. Poor policy timing is working to keep inflation high, forcing the Bank of Thailand to keep interest rates higher for longer.
To compound the problems, the government seems unwilling or unable to grasp the basic economic premise that reducing interest rates goes hand in hand with a reduction in inflation. If the government were to succeed in its efforts to bully the Bank of Thailand into reducing interest rates in the current inflationary environment, the consequences are likely to be severe: the baht is likely to plummet, and inflation will spiral out of control.
The Bank of Thailand would have no option but to increase interest rates substantially. In the absence of solid growth, highly leveraged Thai companies would collapse at a time when interest on national debt would approach unsustainable levels. The outcome would almost certainly be a debt crisis, perhaps even on a scale of the Tom Yum Kung economic crisis of 1997 with all of the negative social consequences.
If this were to transpire, the prime minister would not find himself on a plane headed to his next marketing junket, nor would he be in Thailand talking about the economy, but he would be en route to New York, cap in hand to discuss a bailout with the IMF. Make no mistake, this would be a financial crisis of the government’s own making.
MP Foscolos
