FPO draws up scenarios to keep economy on track

Economy April 11, 2014 00:00

By Erich Parpart
Somluck Srimale

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The Fiscal Policy Office (FPO) is trying to boost the country's economy after the expected slowdown in the first quarter due to political uncertainty.

After lowering its growth forecast for this year’s gross domestic product from 4.1 per cent to 2.6 per cent, the FPO believes that the Finance Ministry can inject money from the fiscal budget and raise funds to stimulate the economy instead of depending on exports alone.

This year, fiscal policy is based on an expected budget deficit of Bt250 billion, accounting for 1.9 per cent of GDP.

The budget ceiling is set at Bt2.525 trillion. The general budget, including expenditure and debt servicing, is Bt2.097 trillion, while the remaining Bt428 billion was set aside for investment.

The FPO expects to spend 92 per cent of the general budget this year, but now believes that less than 80 per cent of the investment budget will be used because of the limitations of the caretaker government.

"State spending is still one of the main engines driving the economy," said Somchai Sujjapongse, director-general of the FPO.

"The Finance Ministry, the Budget Bureau, and other government agencies have to work together to speed up their spending for this fiscal year."

In an interview with The Nation, Somchai said the FPO had focused on a number of factors to boost the economy. These include speeding up state spending in this fiscal year, boosting consumer spending by lowering taxes, and continuing to find sources of financing to invest in the national infrastructure.

On the second point, he said the process was already ongoing.

This includes the reduction of corporate and personal income-tax rates, keeping the value-added tax at 7 per cent instead of the previously expected increase to 10 per cent, and decreasing the tax on diesel fuel to Bt0.005 per litre.

The government believes that improving the national infrastructure is necessary to increase Thailand’s long-term competitiveness, and the Finance Ministry is considering four options to raise the needed funds. Each plan has its pros and cons.

The first option is to increase the budget deficit, which is still under the maximum allowance and under the public-debt ceiling.

The sustainable level for public debt is set at 60 per cent of GDP, and according to the Public Debt Management Office, as of February, government debt stood at 46.1 per cent.

The second option is to borrow foreign currency under Article 22 of the Public Debt Management Act. The advantage of this plan is that it would help stabilise the exchange rate for projects heavily reliant on imports.

However, such borrowing cannot exceed 10 per cent of the annual expenditure budget.

The third option is to let state enterprises borrow themselves or use the Finance Ministry to guarantee such loans under Article 27 of the Public Debt Management Act.

The loan guarantee amount cannot surpass 20 per cent of the annual budget. The downside is that state enterprises would not be able to proceed with different projects at the same time, since they would have to consider their ability to repay the loan.

The fourth option is to allow the private sector to invest in government projects through public-private partnerships. This path would allow the government to be efficient in laying down the budget plan and investment strategy, but the projects that would attract private firms would only be those with the highest financial return rates. Projects that are highly beneficial to the economy but have low rates of return would be shunned by the private sector.

As for the 2015 fiscal budget, the FPO believes that it will have to use funds left over from the 2014 budget for the time being because there is no permanent government to issue the budget for next year. However, the office has urged government agencies to make other preparations and plan their budgets well in advance so they are ready to make their spending proposals when the new government is finally installed.