Fiscal Policy, Debt and Budget deficits in Thailand The size of Thailand government debt To judge the size of Thailand government debt is to compare it to the debt of other countries and to the debt that Thailand has had during the own past.
Table 1 shows the amount of government debt for 34 countries express as a percentage of each country’s GDP in year 2009 and year 2010. On the top of the list are the heavily indebted countries of Japan and Italy, which have accumulated a debt that exceed annual GDP. At the bottom are Luxembourg and China, which have accumulated relatively small debts.The United States is in the middle of the pack. Thailand debt is around 30% of GDP. TABLE 1: How Indebted Are the World’s Governments? CountryGovernment Debt as a percentage of GDPCountryGovernment Debt as a percentage of GDP 2009 2010 2009 2010 Japan192. 8198. 4Spain 62.
472. 2 Italy127. 7131. 3Poland58. 563. 9 Greece120. 2129.
2Finland52. 658. 4 Iceland119.
5124. 9Sweden51. 951. 3 Belgium100.
4102. 5Denmark 51. 853. 7 France87. 192. 4Norway49.
551. 8 Euro area86. 391.
6Slovenia44. 149. 9 Portugal86. 392.
9Czech Republic42. 449. 0 Hungary85. 289. 0Switzerland42. 42. 1 United States 84. 492.
8Slovak Republic39. 847. 1 Canada83. 484.
4New Zealand34. 538. 8 Israel79.
279. 4Korea32. 633. 2 Germany76. 579. 9Thailand28.
829. 6 Austria72. 775. 9Indonesia27.
430. 0 Ireland72. 7104. 9Australia 19.
223. 6 United Kingdom72. 481. 3Luxembourg18. 021.
0 Netherlands69. 474. 6China16.
922. 0 Source : OECD Economic Outlook ,MIF and BOT Over Thailand history ,the indebtedness of the government has varied substantially. Figure 1 shows the ratio of the government debt to GDP since 1988. FIGURE 1: The Ratio of Government Debt to GDP Since 1988Source : BOT Thailand current government debt is of a small size compare to the debt of other countries or compare to the debt that Thailand has had throughout its own history. The 1997s to 2000s were unusual in that the ratio of debt to GDP increased during the Asian financial crisis with the devaluation of Thailand’s baht. From 2005, the ratio of debt to GDP declined significantly . Thailand Government budget constraint The fiscal budget of Thailand between year 1987 to 2010 show history of economic situation ,crisis period and decision on fiscal policy of each government.As table 2 can separate period of fiscal policy in 4 periods : (1) Fiscal policy between year 1987 to year 1996 when economics boom.
(2) Between year 1997 to year 2000 when Thailand face with crisis. (3) In year 2001 to year 2006 is economic recovery period. (4) From year 2007 to year 2010 Thai economics influent by Subprime crisis. 1. Fiscal policy in year 1987-1996 : Economics booming Between year 1981 to 1986 Thailand got the stagflation.
Government run budget deficit and public debt significant raise in year 1987. In the same year economics return to growth and continuous until 1996.Government run budget surplus, which make improvement in government finance.
TABLE 2: The Government Budget Year 1987 to Year 2010 Source: Bureau of the Budget ,Thailand 2. Fiscal policy in year 1997-2000 : Tom Yum Kung Crisis After Thailand face Asian financial crisis in year 1997,cause problem in financial economics. International reserves has been used for protect value of Thai baht and continuous of foreign capital outflow. This impact on value of Baht and liquidity inside country. In the mean time, financial institutes experience in liquidity problems and bankrupt in the end.The remain financial institutes concern about NPLs,then they reduce lending. Private sector decrease. These factors make inefficient in monetary policy.
Government stimulate economics by run budget deficit. During this economic downturn severely and quickly than anticipated, there is impact on economic and social extensively. Making fiscal policy was forced by the economic downturn and the agreement under which Thailand has a letter of intent with the IMF. The proposal of the agreement make Thai government fiscal policy must be strong in order to reduce total demand.
Because the IMF saw that in the past, Thailand has spent too much, as it is one reason that caused the crisis. The Thai government has made a budgetary surplus in the year 1998 by 1% of GDP, with the aim to create a stable external ,make confidence. and prevent capital outflows by the IMF requirements.
However, the by running a strict fiscal policy adversely affect the Thai economic growth even more. The Thai government has made negotiations with the IMF to relax fiscal policy in year 1998 for adjusting a surplus budget of 1% GDP to budget deficit of 3%GDP.For fiscal year 1999 and 2000 set 5. 5% and 5. 1% deficit of GDP respectively. In period of government budget deficit, government must borrow to offset the budget deficit and borrow money to invest in economic, social restructuring and mitigation of the crisis.
Government also use Tax measure to increase buying power in economics such as cutting VAT from 10% discount to 7% temporarily. Exception of personal income tax for those with net income not exceeding 50,000 baht per year and reduction taxes on diesel fuel. Reduction of real estate transfer fee from 2% of the appraised value to 0. 01%.The result of deficit spending and borrowing is outside the budget, Government debt will increase .
This can be seen that ratio public debt to GDP start rising quickly from 14. 8% in 1996 to 56% in 2000. To solve economic crisis during Y1997 effect on the government debt increased almost threefold , from 685,234 million at the end of the year 1996 to 1,901,355 million at the end of the year 1997.
Debt increased mainly cause by Baht depreciation and the indebtedness of the fund, which provide liquidity to 56 insolvency financial institutions and others that are officially intervene, by 835,901 million within a year.Public debt at the end of October 2000 is 2. 79 trillion baht. Government debt consists of 1. 1 million million direct loan debt, 0. 91 million baht non-financial enterprises debt and 0. 78 trillion baht of Development financial institutions Fund’s debt. while Gross Domestic Product (GDP) currently 5 million million baht.
For 56% of public debt to GDP ratio, 22% come from debt by the government. Although fiscal policy can be effective to support the economy and solve problems due to the economic downturn. But there is a cost. The government must increase the debt burden inevitably.
. Fiscal policy in year 2001-2006 : Recovery stage Fiscal budget deficit since year 1998-2000 increase domestic demand ,while global economy expanded satisfactorily good and the baht depreciation. These are the factors to help exports growth. As a result Thai economy grew 4. 2% in Y1999 and 4. 3% in Y2000. However, in year 2001 the world economy had slowed especially in United States ,our major economy partners.
In years. 2002 – 2003 Thai economic recovery along with the U. S.
and the global economy, Thai economy in 2002 growth 4. 8% and increased to 5. 2% and 6.
% in years 2003 and 2004 respectively. Nevertheless, The Government continued its fiscal budget deficit since fiscal year 2002 – 2004. From a satisfactory level of the economy growth continuously. The government can increase taxes collection. Then, make a balanced budget policy in 2005 and 2006. Economic Growth 5. 0% in Y 2006 higher than the 4. 5% in Y2005 by impulses from abroad and tourism recovery.
4. Fiscal policy in year 2007-2010 : Subprime Mortgage Crisis Between year 2008 – 2010, Thailand got political crisis and economics crisis from Subprime Mortgage crisis in the end of year 2008.The subprime crisis spread through Europe in year 2009. According to GDP of USA and Euro zone is 47% of world’s GDP, then other country got the impact of the crisis. Thailand import reduce 70% of GNP come from import. The economic also got double impact from political crisis that lead to revolution in 19 September 2007. Following by political protest make economic growth decrease since 2009.
In year 2009 GDP is -2. 3% reduce respectively from 2. 6% in year 2008 and 4. 9% in year 2007 Government need to use fiscal policy to stimulate the economy with mitigate the problem caused by economic recession.The government has prepared a budget deficit continuously since fiscal year 2007 – 2010. In addition, the government has also made additional budget in the amount of 1,167,000 million baht for project called ” Thai Khem Kaeng (Strong Thailand) Phase 1″ to solving short term problems facing the country in the first half of the year 2009.
They also approved a long-term economic recovery plan, ” Thai Khem Kaeng (Strong Thailand) Phase 2″ to stimulate the economy and increase employment through Public investment projects. Strategy of capacity building for long-term competitiveness.In the amount of the approved 1. 43 billion baht. In conclusion, from fiscal policy in Thailand history shows that in the past 10 years government mostly using budget deficit ( as in figure 2) when economics recession. Does Thai government certain that the budget deficit policy is efficient to stimulate economics? If Thai is forward-looking, should government change policy due to cost of deficit budget and tax cut that they should pay in the future.
There are studies about Thai behavior on fiscal policy which will discuss later. FIGURE 2: The Government Budget to GDPSource : BOT and Budget Report Ricardian view of government dept in Thailand The Ricardian view of government debt ,a debt–financed tax cut does not stimulate consumer spending because it does not raise consumers’ overall resources-it merely reschedules taxes from the present to the future. The debate between traditional and Ricardian view of government debt is ultimately a debate over how consumer behave. The rational tax-payers contemplate their future tax obligations while making current consumption decision. Therefore, a deficit fiscal policy will not lead to an increase in private consumption.There are 2 studies analyze in the effective of fiscal policy on Thai household consumption under Ricardian Equivalence Theorem by using information gathered serially from the annual report of Public Consumption and Investment Expenditure, Private Consumption Expenditure and Disposable Personal Income over the period of 1970 to 2006. Both researches indicate that the presence of liquidity-constrained individuals may be the source of Thai Household Consumption deviated from the Ricardian Equivalence. Therefore, government fiscal deficit budget is efficient.
The researches also study on Thai consumer behavior plan.The result are inconsistency. For finite horizons show that risk premium are corresponding to probability of death. Cost of government dept Thailand face with economic crisis in year 1997 and between year 2008-2010, government usually use budget deficit to recover economics.
However, some government would like to use populist policy. As well as ongoing commitments to be, the government’s debt burden increased dramatically. They pay under the benefit programs such as education, public health without adding a new category of tax to gain revenue for populist policies offered.The Government may face with the debt crisis as in Latin America during the 1980s. High government debt lead to the lower capital accumulation. By fiscal consolidation , government should increase tax rate . A high level of government debt may risk capital flight and diminish a nation’s influence around the world, leading financial markets to become even more worried and require higher risk premium. As in figure3 Thailand risk premium is quite low compare with other in the East Asian and the US.
Notice that Indonesia has high risk premium as European.FIGURE 3: Emerging East Asian DCS – Senior 5-year compare to US and EuropeanSource : AsianBondsOnline Reference N. Gregory Mankiw . Macroeconomics. 6th Edition. Assoc.
Prof. Dr. Bhanupong Nidhiprabha . Handout Lecture no. 6 Fiscal Policy,Debt and budget deficits. MF621 Financial Market and Macroeconomic Policy. Year2010 Bank of Thailand : http://www. bot.
or. th AsianBondsOnline : http://asianbondsonline. adb.
org/ National Statistics Office of Thailand : http://portal. nso. go. th/otherWS-world-context-root/indext.
jsp Bureau of the Budget Thailand : http://www. bb. go. th Fiscal Policy Office : http://www.
fpo. go. th/FPO/index2. php