New rescue budget must be well spent

Prime Minister Abhisit Vejjajiva's government plans to increase the budget deficit to finance its expansionary fiscal policy and to cushion the impact from the current economic crisis. Finance Minister Korn Chatikavanij said he plans to boost public spending to a total of Bt180 billion, up by 80 per cent from the previous government's stimulus plan. The ministry is also considering raising the tax allowance for home-buyers in order to boost consumption as part of the plan to stimulate the teetering economy.

In its first week in office, the Abhisit government has announced a series of measures to increase consumer confidence, mitigate the effects of rising unemployment and tackle the economic crisis. The administration plans to follow a number of the populist policies initiated by previous governments to help lessen the effects of the current slump. For instance, the government said it might maintain most of the six-point economic assistance package initiated by former deputy prime minister Surapol Suebwonglee.

To weather the global financial crisis, Thailand's new government needs to issue these measures quickly to stimulate the local economy. The commercial banks and state-run banks should play a pivotal role in the recovery process by making available stimulus funds. The financial institutions should be encouraged to extend lifetime support to small- and medium-sized enterprises. The government's mega-projects, such as the planned mass transit systems, should be given the green light in the hope that they will promote domestic investment.

The supplementary budget has to be large enough to cure the economy. The previous government of Somchai Wongsawat approved an additional budget of Bt100 billion, which is expected to be injected into the economy in March. But the Abhisit government plans to seek the extra Bt80 billion for use on necessary programmes.

Economists all agree that the stimulus package is needed. Aekkachai Nitta-yagasetwat, dean of the Nida Business School, said that the government should spend even more. If it does not, the economy might contract by 0.4 per cent next year. If fiscal deficits were raised from Bt350 billion - including the supplementary Bt100 billion - to Bt600 billion, the economy could grow by 2 per cent next year.

But the more challenging issue is how the money will be spent. If the spending is executed effectively, it should be able to solve some of the economic problems. Well-spent money can contribute to improved physical and human resources that will pay long-term dividends while also creating and saving jobs. After all, the number of people who are likely to lose their jobs as a result of this financial crisis may top 1 million next year.

However, if the money is not spent effectively, the younger generation of Thais will have to be burdened by the money that their predecessors wasted through poor programmes. Therefore, the question of execution is key.

Some critics question Korn's plan to increase tax allowances for home-buyers and whether it will in fact reach the target group. At present, home-buyers can claim a deduction from their taxable income for interest payments not exceeding Bt100,000 each year. Korn plans to raise the allowance to Bt200,000. Based on the current interest rate, those who will be able to claim the deduction from their taxable allowances of Bt200,000 would have to borrow Bt4 million or more. Those who are able to borrow such a high amount are upper-income earners and they are not part of the majority of the middle-class demographic.

Except for the oil-excise tax subsidy, the government also plans to continue some of the six measures in the six-month economic assistance package initiated by former deputy prime Minister Surapong Suebwonglee. The exclusion of the oil-excise tax subsidy is to encourage consumers to have an awareness of energy efficiency.

However, the government should consider carefully whether to continue some measures under the six-measure package, such as the waivers on electricity and water charges and waivers on bus fares, because the amount of money spent might not be worth it in terms of the benefits the measures can produce.

The world economic crisis is likely to hit countries dearly. Therefore, the best response is a well-planned management of resources.

Given an expected decline in the government's revenue, the key question is whether every baht the government spends will keep people employed, create new jobs and provide a sufficient social safety net for those who are suffering most.

The best strategy is to sustain an economic recovery based on a realistic picture, instead of handing out benefits to people without a plan to get the money working effectively.

The economy might continue to spiral downward unless we strike at the cause of the slump.