Today, although we are nowhere near a recession, the prevailing outlook is not rosy. Consumer and investor confidence is near an all-time low. Growth is expected at around 4-5 per cent this year. But data indicate that private investment and consumption of durables are the economy's soft underbelly. Exports, still galloping at roughly 18 per cent year-on-year in January, may begin to decelerate, as the prospects for the US economy worsen and the dollar continues to weaken against a broad index of currencies. What's left is the fiscal thrust. But that appears to be weak.

It is obvious the economy needs short-term stimulus. The Bank of Thailand and the Ministry of Finance share this responsibility. A good policy mix can help shore up confidence and put the economy on a firmer track. So, what are the policy options that will get the job done right? Anticipating a softer economy, monetary policy has already started to accommodate growth, as confirmed by two recent interest-rate cuts. Long-bond rates are at 4 per cent and dropping. Also overlooked is the positive story of economic stability. Inflation has fallen from 6 per cent to roughly 3 per cent over 2006. Excluding raw food and energy, it is as low as 1.5 per cent. Today's low and stable inflation can help unleash the dormant strength of the economy. It reduces uncertainty in business investment planning and provides a near-term boost to consumers' purchasing power. Over time, interest rates on bank lending and debt instruments tend to remain low with low inflation.

International experiences show that inflation does not just fall by itself; it takes effective and credible monetary policy. Policy credibility takes good strategies and time to build. In the final analysis, it means that even when oil prices gyrate, inflation won't spiral out of control because people trust the BOT to do the right thing. That trust helps reduce the interest-rate dosage needed to bring inflation down.  Any veteran economist knows that in a downturn, all fingers point to the central bank. To lift near-term growth, calls for immediate and drastic policy rate cuts to the tune of 1 per cent are in vogue. But portraying rate cutting as a silver bullet is unrealistic. It is also bad economics. The real downside of pushing the BOT onto such a slippery slope is additional, unnecessary risks for the financial markets down the road. Besides, the time it takes a monetary policy signal to materially affect real economic activities can be long and imprecise. This is why no responsible central bank takes credit for short-term economic growth when it cuts rates. In the same vein, that central bank should not take the blame for a temporary slowdown after rate hikes.

Conspicuously lost in the narration these days is the more potent, timely and primary tool for effective short-term growth boosting: fiscal policy. As a rule, a country should observe fiscal prudence and focus public investment on infrastructure and human capital. Doing so would raise long-term competitiveness. Much of the required investment can and should be made by the private sector, which responds well to incentives. The tax system is an important incentive mechanism. It may also be the answer to our problem. To its credit, the MOF has taken a long view with fiscal prudence. If fiscal policy was a mess, the BOT would have a much harder time keeping inflation in check. That said, fiscal policy could do more to stimulate growth this year. Policy clarity and consistency can help lift investor confidence. And taking a longer view, the government could also do more to usher in better incentives to boost investment. The fact is, government cash balance today is far from what economists estimate will push the economy back toward potential. Fiscal impulse, or year-to-year change in the discrepancy between the actual fiscal balance and its neutral level, is much weaker than last fiscal year. In plain language, the government runs too small a deficit for the good of the economy.

The slow pace of its cash disbursement can be a challenge. Expenditure shrank during the first four months of the fiscal year compared to the same period last year. Indeed until February, the fiscal thrust had been unexpectedly weak. With public debt well below the internationally recognised benchmark of 60 per cent of GDP, there is room to push harder. A supplemental budget may be a possibility. But the merit of a tax cut, which can be readily done, should also be discussed. Malaysia and Singapore have lower, less progressive individual and lower corporate income tax rates than we do. This helps improve their competitiveness. In Thailand, even if scheduled to take effect next year, forward-looking firms and households could respond to the tax cut immediately. Perhaps it's not too late to start thinking seriously about policy coordination. The limelight should be given to fiscal policy in 2007, with monetary policy easing taking a supporting role.

Ashvin Ahuja

Special to The Nation

This article written by the Bank of Thailand's senior economist does not necessarily reflect the opinions of the central bank.