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Published on November 19, 2007

 In campaigning for next month's general election, all of the political parties have promised to raise living standards in Thailand through a variety of policies that, if pursued, would eventually turn the country into a welfare state, one in which all basic services are provided at taxpayers' expense.

High among the promises are the provision of free medical services and free education for all.

Needless to say, such policies will cost a lot of money for a country whose society is ageing rapidly, with a growing proportion of elderly depending on a smaller proportion of young, productive people.

Fiscal Policy Office official Pornchai Theeravej says 40 per cent of government spending presently goes to health and education. Imagine how that cost will skyrocket, he says, if everyone is entitled to greater benefits, especially when Thailand is short of money for many development projects to ensure sustainable economic growth.

While consumers and investors are generally optimistic that life will be better under a new, democratically elected government, voters remain confused about how a new government will deliver all of its promises, given the vague answers they are getting on how those promises will be financed.

Recently, academics suggested that the move towards a welfare state should be gradual.

"There's room to provide more welfare for people, taking into account the current small spending on state welfare relative to the country's output," says Thailand Development Research Institute (TDRI) researcher Worawan Chandoevwit, who presented the results of a study to the TDRI's year-end conference.

Last year, Thailand spent Bt180 billion on such social-welfare areas as universal healthcare, housing for the poor, unemployment benefits, pensions for the elderly and assistance for families and the disabled. The sum excludes the cost of primary education and equals 2.3 per cent of gross domestic product (GDP).

Worawan points out that Mexico and South Korea, whose economic development is ahead of Thailand's, spend 6-7 per cent of GDP annually on social welfare. In super-rich countries like Germany and France, the figure for welfare spending can reach 20-30 per cent of GDP.

She says there are two options for financing increased state welfare: either cut other spending items or increase taxes.

She gives the US as an example, where spending on state welfare last year amounted to 60 per cent of the government's budget. In 1956, 60 per cent of the US government's budget went towards defence spending. But while welfare has risen, defence spending has dropped, to only 20 per cent of US government spending last year.

Worawan suggests Thailand's new government increase tax rates or expand the tax base, in order to find more financial resources. Government tax revenue last year totalled Bt1.4 trillion.

However, politicians do not want to talk about unpopular issues like raising taxes - at least, not for the time being. On the contrary, they are promising to cut tax rates.

Acting TDRI president Ammar Siamwalla believes a gradual move towards becoming a welfare state is the most practical path for Thailand, and he supports the idea of increasing value-added tax (VAT), saying the current 7-per-cent VAT is too low. He also supports the introduction of property or inheritance taxes.

The Finance Ministry has long studied both of these revenue sources, but politicians have shied away from implementing them.

Bank of Thailand macroeconomist Songtham Pinto says that unless the government raises the VAT ceiling, it will face difficulty in raising indirect tax revenue. The effective tax collection rate from VAT is now 6.3 per cent. Moreover, customs duties are declining, because free-trade agreements are wiping out tariff duties on imports.

He sees room for raising both corporate and individual income tax. While the corporate tax limit is 30 per cent, the effective collection rate is about 13 per cent. The maximum individual income tax rate is 37 per cent, but because of deductible allowances, the effective collection rate is just 5 per cent.

Thailand's corporate and individual income tax is only 0.6 times the Kingdom's GDP, compared with an average of 2.3 times in the Asia-Pacific and 5.2 times in Organisation for Economic Cooperation and Development countries.

"We need to restructure the tax system," Songtham says. "Only then can we know how to finance expenses."

TDRI research director Somchai Jitsuchon says without an increase in corporate and individual income taxes, Thailand will need to impose inheritance taxes. While this would generate a large sum of money for the country, it would also be a means of redistributing income, because inheritance taxes would target everyone regardless their income.

It seems that with Thailand's swelling population of elderly citizens, the country will have to levy higher taxes.

In another paper presented to the TDRI's year-end conference, Thammasat University economist Mathana Phananiramai says an average person suffers a substantial shortfall in the ability of income to meet consumption expenses during childhood and old age.

However, when society is viewed as a whole, a high proportion of working-age people sees an aggregate surplus capable of covering a high percentage of aggregate deficit.

Mathana says in 2004, an average person's consumption costs exceeded the income he or she could generate up to the age of 24. From 25 to 57, the average person could maintain an income surplus.

The amount by which income fell short of consumption costs in children and young adults was made up by funds from family support and government social welfare at rates of 63 per cent and 27 per cent, respectively.

For the elderly, 74 per cent of the shortfall was covered by income from assets - including the sale of assets - and personal savings. Funds from other private sources covered the rest.

Mathana says Thailand has few assistance programmes for the elderly. She expects public assistance to play a greater role as the number of elderly jumps over the next 20 years.

She proposes more savings pools for workers on top of existing welfare schemes, social-security funds, provident funds and government pension funds.

She also suggests tax hikes to finance new schemes.

Among the political parties, the Democrats have promised to increase welfare payments for the elderly, from Bt300 a month to Bt500, on a quota basis. The plan is not universal welfare. In 2005, 400,000 elderly people received monthly payments from the government.

Ammar warns that when politicians promise to give more assistance to the elderly, they should also create an effective mechanism to make the welfare sustainable. It should also be universal, because of the difficulties of deciding who deserves assistance and who does not.

A bottom-up welfare system is an alternative path, he says.

Some communities have developed their own welfare schemes, and their success depends on devoted community leaders and the participation of villagers.

Knowledge about safe levels of consumption can also reduce medical bills and increase well-being.

Seree Prakarnseree, a retired medical doctor who specialised in cancer treatment, says an egg is a rich source of nutrition, better than expensive semi-prepared or ready-to-eat food seen in advertisements. Consumption of fresh foods and vegetables can also reduce the risk of cancer.

Wichit Chaitrong

 The Nation