• 
• 

Published on March 5, 2008

The Samak government has unveiled a tax-cut package as part of an overall attempt to push Thai economic growth to 6 per cent this year. The tax benefits will go to low-income earners, many of whom will get exemptions. Those in the middle class will get personal tax rebates. Companies will see lower income taxes. Property developers and home-buyers will also benefit from the package. Overall from these measures, the government will lose about Bt43 billion in tax revenues  to stimulate consumption and investment.

The tax cuts won't take effect until next year. But the package helps send out a feel-good factor for both consumers and companies to start spending their money now, because they will see the tax benefits in their pockets next year. If consumers and companies spend Bt30 billion this year out of more than Bt40 billion in tax benefits they will receive next year, they will help stimulate the economy with multiple effects.

The Bush Administration has undertaken a similar gimmick to boost consumption. By May, some 120 million Americans will receive cheques from the US government so that they can go out to spend money immediately.

If the economy still fails to respond to the tax-cut package, the Samak government will resort to further increasing its deficit spending in the middle of the year by another Bt80-Bt120 billion.

Who will gain the most from this tax-cut package? Some research houses have already identified the property sector as standing to benefit the most. Listed property firms will be revising their earnings next year upward between 14 per cent and more than 50 per cent.

The fiscal policy is just one of the tools to achieve economic growth. The other policies that demand equal attention are the foreign exchange policy and the monetary policy.

On the foreign exchange policy, the Bank of Thailand has already removed the capital controls originally designed to stem the baht's appreciation. The challenge is how it will be working with the Finance Ministry to manage the foreign exchange rates to reflect the Thai fundamentals. Since the beginning of this year the baht has appreciated sharply against the regional currencies. The baht climbed from Bt33.68 at the end of last year to Bt31.52 last Friday, the day when the Bank of Thailand announced that it would remove the capital controls. In total, the baht strengthened by about 6.4 per cent during the period, compared with an average of more than 3 per cent for the regional currencies.

What the authorities need to do now is to bring the baht back to the same level of the regional currencies in order to guard the competitiveness of Thai exports. But several research houses have predicted that the baht will soon climb to the Bt30/US dollar level due to the dollar weakness and the deteriorating fundamentals of the US economy. The baht will have to be managed with great effort during this particular period.

As for the monetary policy, the authorities are facing a dilemma from the upward price pressure and the downward trend of the US rates. Thai inflation hit 5.4 per cent in February, a 20-month record high. This has made the authorities reluctant to cut the rates to stimulate the economy in a way the government wants to see. But with the US recession underway, the US Fed might be forced to slash the short-term rates down to 1 per cent by the end of the year. The Thai rates can't afford to stay too wide against the US rates, otherwise this will induce further capital inflows, which will drive up the value of the baht.

All in all, it is not going to be a good year for the Samak government, which not only needs to put its political house in order but will have to make sure that it can get the economy moving ahead. 

The Nation