Taxing its way out of trouble

Thai public finances are deteriorating in line with the country's economic weakness. The Abhisit government has been forced to trim the 2009-2010 budget from Bt1.9 trillion, as set by the Samak government, to Bt1.7 trillion. Still, the administration is facing a shortfall of Bt350 billion as total revenue income is expected to reach only Bt1.35 trillion. To keep the budget in shape, all the government agencies will have to cut spending by 7-10 per cent. It is time for belt tightening.

However, Korbsak Sabhavasu, the Deputy Prime Minister, has signalled that any spending cuts should not affect the core policy of the government on the social safety net. Spending for free, mandatory 15-year education, and financial aid to kamnans and village headmen will not be cut.

The Transport and Communication Ministry will suffer from the largest spending cut of almost 30 per cent, followed by the Agriculture Ministry at 21 per cent, and the Defence Ministry at 11 per cent. The Education Ministry will see a cut of only 1.4 per cent.

In spite of the sensitivity over military spending during this time of political turmoil, the government will slash the military budget by Bt20 billion, or 11 per cent. In other words, military spending will fall from about Bt170 billion to Bt151 billion. Each military agency has been instructed to look at ways to facilitate the cutback. Spending on training, welfare and foreign trips will be trimmed.

General Prawit Wongsuwan, the Defence Minister, sought to play down the cut in military spending in the upcoming budget. He said there are still further details to be worked out because military spending is a necessity. He said military spending is equivalent to 1.5 per cent of the gross domestic product. This ratio should be considered small, and there is further room to increase the military budget, he added.

Of the Bt20 billion cut in military spending, the Royal Thai Army will stand to see a reduction of about Bt10 billion, while the remaining half will be spread out among the Defence Ministry, the Royal Thai Airforce and the Royal Thai Navy.

The Abhisit government has embarked on a cutback on mandatory spending, which does not contribute to economic growth, and has tried to focus more on the stimulus side. Korn Chatikavanij, the Finance Minister, has already unveiled a spending plan of Bt800 billion over the next four years, focusing on infrastructure investment and job creation. This package will help create 1.6 to 2 million jobs over the next four years, during which time it will help add to economic growth by two percentage points each year.

 As public finances are drying up, the Abhisit government has fewer choices but to raise tax. The Cabinet on Wednesday approved an increase in excise taxes on all fuel products, cigarettes, liquor and beer, with immediate effect.

 Energy Minister Wannarat Charnnukul called for an urgent meeting with members of the National Energy Policy Committee on Wednesday afternoon, seeking their consensus to reduce the contribution to the Oil Fund to alleviate the public burden. The Cabinet also followed up by approving a Bt2 per litre increase in excise taxes on all fuel products. Without the cut in the contribution to the Oil Fund, the retail prices of all products would be Bt2 higher per litre.

If the government increases excise tax on petrol and diesel by Bt2 per litre each, this might affect the domestic economy more than lower oil consumption. Oil is one of the highest expenses in business operations, and operators will have to shoulder the burden of increased oil prices as a result.

The prices of cigarettes, liquor and beer will also rise with immediate effect from higher excise taxes to prop up the budget. Due to the higher excise tax, cigarette prices could rise by Bt3 per pack, while liquor and beer prices would be raised by Bt2-Bt3 per bottle.

Excise tax increase for tobacco, liquor and beer would generate around Bt12 billion in additional income over the next 12 months. Moreover, the government will also be asking the state enterprises to accelerate the transfer of their contributions to the government coffers.

All in all, the Abhisit government must manage its budget very carefully. It can't bank on any quick recovery of the global economy. US and European financial systems are in a shambles. It will take several years before Western banks return to good health. Without a banking system recovery, it is impossible for the global economy to recover.

Thailand's hopes of exporting its way out of the economic crisis is no longer a possibility. Domestic spending is the key. Yet we can't spend our way to prosperity. The government must keep its public finances in the best shape it can so that when the economic situation further deteriorates, Thailand will be one of the few countries in the world that has a strong government balance sheet.