Populist schemes boost consumption, but their cost on society questioned

Populist policies have contributed to domestic consumption but have been sharply criticised by some economists for resulting in waste of |taxpayers' money and rising public debt. The continuing rice-pledging scheme, rise in the minimum wage and cuts in personal income tax are expected to shore up consumption this year.

As the global economy remains fragile largely because of the slowdowns in the European Union, the United States and Japan, domestic demand contributed to Thailand's economic recovery in 2012. Research houses have estimated growth in gross domestic product at 4-5 per cent in 2012 and 2013.

"Private consumption is esti-mated to have expanded by 5.2 |per cent year on year in 2012, the highest in eight years," Somchai Sujjapongse, director-general of |the Fiscal Policy Office, said recently.

The question is whether high |consumption will continue as populist policies have cost taxpayers a lot.

The government's tax rebate for first-car buyers and the rice-pledging scheme have been viewed by critics as blunders.

"The government is stupid for implementing the rice-pledging scheme," outspoken economist Ammar Siamwalla said.

The first-car scheme is expected to result in about Bt90 billion of forgone revenue, an amount critics say should have been used to finance mass transit instead. The latest measure is a personal-income-tax cut announced by the government in December.

But of the government's various stimulus programmes, the paddy-pledging scheme is the costliest, according to a World Bank report released last month.

The predicted cost of the scheme is Bt376 billion for the 2011-12 harvest season, with losses estimated at Bt115 billion. The cost for the current harvest season is projected to be Bt432 billion, with losses estimated at Bt132 billion, Kirida Bhaopichitr, lead author of the report, told a recent news conference.

"That is the best-case scenario, in which we assume that the government is able to sell all of its rice stocks," she said.

The combined losses for the two harvest seasons are equivalent to 1 per cent of GDP, she added.

The costs cover the cost of pledging, milling, storage and administrative fees, but do not include spoilage and Bank for Agriculture and Agricultural Cooperatives interest.

Meanwhile, the price of Thailand's 5-per-cent broken-rice variety in the global market is expected to fall from the current US$550 per tonne to $520 next year, according to Kirida.

Historically, the government cannot negotiate to sell rice at higher than the market price, said Mathew Verghis, lead economist of the World Bank's office in Bangkok.

"The projection at the moment is that rice prices are not going to rise in the near future, although if there were a change such as a major drought in other rice-exporting nations, that could happen. But the other way to minimise the losses is to increase rice exports by simply selling at world prices to the market," he said.

The World Bank also urged the government to review all of its populist policies aimed at stimulating economic growth. The current set of stimulus programmes amounted to 5.4 per cent of GDP in 2012, and an estimated 2.46 per cent in 2013.

The measures include the first-car programme, tax exemptions for first-house buyers, the minimum-wage increase and a cut in corporate income tax.

Spending helped stimulate the domestic economy last year while the global economy was weakening, but this added to public debt, which will have increased from 45 per cent of GDP at the end of 2012 to almost 50 per cent in 2013, said the bank.

"Public debt is still sustainable, but state-run banks are shouldering some of the costs, weakening their balance sheets and resulting in contingent liabilities for the government," Kirida warned.

Some of these funds could be redirected to social programmes to help the poor and vulnerable, the bank suggested.

Spending on the rice-pledging scheme could be redirected to improving rice productivity and quality, and targeting low-income farmers, said the World Bank.

The average rice yield in Thailand is only 2,877 tonnes per hectare, which is the lowest among rice-producing countries. Vietnam and Myanmar achieve much higher yields at 4,834 tonnes and 3,757 tonnes respectively, according to Food and Agriculture Organisation figures.

Meanwhile Somchai said he did not foresee new populist scheme in 2013. "The minimum wage increase, tax cut and rice pledging scheme will continue to boost domestic consumption."