Korn warns central bank on deflation

The central bank will have to weigh what is of greater concern, the threat of slower growth or inflation, Finance Minister Korn Chatikavanij said.

The minister also promised tax incentives to employers who agree to increase wages in line with a proposed 25-per-cent minimum-wage hike in two years.

"After the central bank's latest rate hike by a quarter percentage point, the bank may have to weigh the threat of deflation versus inflation," Korn told a business gathering at the Thai-Chinese Exim Association on Tuesday night.

The Bank of Thailand recently raised the policy interest rate to 2.75 per cent for fear of an inflation threat.

Korn, however, said that Thailand's inflation rate would not be as high as in many other countries in Asia and Europe.

It would be about 3 per cent here, compared with 8-9 per cent in many other countries.

Several countries such as the United States are facing a risk of stagflation - high unemployment and rising inflation - he said. People are facing high prices for food, fuel and other products. And because of many uncertainties, economic growth this year would be only 3.5 per cent, against Thailand's potential growth of 5 per cent, he said.

Korn said that if the Democrat Party could form the next government, the minimum wage would increase by 25 per cent over the next two years.

The government would offer tax breaks to businesses to help them cope with rising labour costs, he said.

For example, the government would allow a 300-per-cent tax allowance for employers' cost of rising labour, he said.

The corporate income tax of 30 per cent would also be cut.

The value-added tax rate of 7 per cent would also be reviewed, he said.

"Tax reform should take place in the first year of the next government, whichever party wins the election and forms the next government," he said.

He criticised the Pheu Thai Party's tax-cut proposal, saying it was not practical. Pheu Thai has promised to increase the minimum wage from Bt200 a day in Bangkok to Bt300 and would cut corporate tax from 30 per cent to 23 per cent.

Because of the considerable increase in labour cost, the tax cut offered by the Pheu Thai would not help employers offset their costs. The current profit margin is only 6 per |cent, and such a wage |hike would wipe out all profits, resulting in no tax payment, he argued.

In response to the BOT's worry about the possibility of rising public debt caused by populist policies, Korn insisted yesterday that the country's fiscal position would not deteriorate.

He said the government had taken into account the fiscal burden while framing its economic policies.

Currently, public debt is only 41 per cent of gross domestic product and it reduces every month, he claimed.