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Prime Minister Abhisit Vejjajiva unveiled plans on Monday to stimulate the economy by spending more than Bt300 billion to avoid further recession. The plan is unavoidable and it is hoped it will boost the economic outlook. The latest figures indicate the Thai economy will barely grow this year due to the slump in domestic consumption, and the drop in exports and private investment. The lower-than-expected inflation rate of 0.4 per cent in December showed that Thai economy might also face the threat of deflation.

The Commerce Ministry estimated that this year's inflation rate will be between 0 to 1.2 per cent. The figure shows that we may see price decreases this year. Thus, the government will have no choice but to inject more money into the system. This is despite concerns over the sources of finance and the effect on the fiscal discipline of the government.

However, there are concerns over where the government will be able to find the money to finance its fiscal stimulus plan. Revenue collection is likely to be below the original expectation because of the sluggish economy. Therefore, it is highly likely that the government will have to borrow more to finance its plans.

The latest stimulus plan will push the government's fiscal discipline to the limit. The Finance Ministry is supposed to keep public debt at a rate of no more than 50 per cent of the GDP in order to maintain such discipline. After the latest economic revision, it is expected that the country's GDP this year will grow by only 3 per cent from the original forecast of 5.5 per cent. Based on the new figure, the ratio of public debt to GDP as of September this year would be around 40 per cent. Therefore, the government has room to borrow more to support its spending.

Although there is no law to force the government to maintain the ratio of public debt at certain level, it is usually maintained at an acceptable rate to ensure the credibility of the Thai fiscal stance.

Of the total Bt300 billion that the Abhisit government plans to spend, Bt100 billion will come from unused state budgets, Bt100 billion from the mid-year supplementary state budget for 2009, and another Bt100 billion from state-owned banks. The plan will result in a fiscal deficit in the next couple of years.

Finance Minister Korn Chatikavanij said that for fiscal year 2010, which starts in October, the government plans to have a combined deficit of Bt350 billion as part of a continued stimulus package.

Although the stimulus plan will certainly affect the government's fiscal stance, the administration has decided to bet on quick action to avoid deflation. However, if the plan fails to boost economic sentiment, it will pose a more severe threat to the economy in the long run.

The more serious question is how the government will spend the money to ensure it creates the multiple effect of energising a range of economic activities.

However, in spite of the good intention to use fiscal means to boost the economy, there are suspicions whether the government will be able to execute the plan effectively or at all. The previous, short-lived Somchai Wongsawat government announced a series of spending plans but didn't have a chance to realise them because of the political instability. Now, the Abhisit government is facing the same problem. People are already questioning the government's longevity and whether it will have time to carry out its plan.

The government will have to act fast and get prompt results. In turn, effective execution of the spending could bring about political stability, albeit in the short term.