Reserve tumble doesn’t spell fiscal crisis
The dramatic fall in treasury reserves to 74.9 billion baht last December, the lowest in many years, does not indicate that Thailand is facing a fiscal crisis. However, it does not mean that the Thai government will be immune to fiscal traumas either. Factors that will affect the state’s fiscal stability are still out there looming.
During the past 20 years, different Thai governments have mostly run budget deficits. There were just a few years when the state ran balanced budgets. However, Thai governments most of the time have managed to maintain sufficient borrowing credit that enabled them to secure needed loans in the capital market to finance deficits. They have also never had any debt defaults.
Moreover, the current rate of public debt per gross domestic product (GDP), which is another key determiner of the country’s fiscal position, still stood at 44.6% in the third quarter of last year. The rate is still lower than the ceiling of 60% set by the Finance Ministry and is lower than the public debt in many other countries.
For the government, the sharp drop in treasury reserves is not sign that the state is going broke. Rather, it reflects the Finance Ministry’s plan to manage “cash on hand” more effectively. Treasury reserves usually comprise both loans and state savings. In an era when credit matters more than cash, the current government still has enough credit to secure more loans with reasonable interest rates from the capital market.
Even though fiscal instability is not taking place at the moment, its potential is high in the future if the current administration fails to reduce risks of exposure to fiscal crises stemming from increasing expenditures and losses in revenue streams.
The state’s regular expenditures have increased every year, especially retirement safety net expenses for the elderly: Government pensions, old-age allowances, and contributions to the Government Pension Fund, the Social Security Fund and the National Savings Fund. These expenditures for the elderly account for 2.1% of the GDP, or 270 billion baht in 2014. The Fiscal Policy Office estimates that these expenditures will increase to 680 billion baht a year or 3% of GDP by 2024.
Additionally, as Thailand will become an ageing society, spending on the elderly will be higher. In 2015, people aged 60 years and over accounted for 14% of the total population. By 2030, the percentage is estimated to be 25.2%. This means there will be a lower working population and a lower number of taxpayers.
Moreover, the state’s spending on health care, currently standing at 200 billion baht a year, has a tendency to rise. With increasing complaints on the quality of public health services, future governments are likely to allocate more budget to cover this line of expenditure to please voters and improve services. But it will also place a higher financial burden on the state’s coffers.
While higher expenditures are looming, the risk to the state of losing revenue streams is also on the horizon.
Several tax cut measures have partly lowered state revenues. The current administration has reduced the corporate income tax to 20% of net profit from 30% and lowered the top rate for individual taxpayers to 35% from 37%, while offering more tax-deductible items. These measures have resulted in a 32-billionbaht loss in personal income tax. Even though these measures may lower state revenues, they can bring about long-term tax revenue gains. What the government needs to do is to urgently use these
measures to incentivise those in the informal economy to enter the formal tax system and, at the same time, close tax loopholes. This should be one of the country’s major fiscal reforms to boost state revenues.
Eliminating fraud in tax agencies can help close tax loopholes. But numerous cases involving tax evasion or abuses of power by authorities to favour particular businesses have been shelved for a long time. Sadly, the facts surrounding these cases may have been forgotten over time.
For example, there has been slow progress in the investigation into alleged bribery payments totalling 3 billion baht made by a British alcoholic beverage giant, Diageo, to Thai officials from 20042008 to help it win favourable decisions from the Thai government in tax and customs disputes.
Another tax case involving a tax refund by Chevron Thailand Exploration and Production has also not progressed much. Chevron earlier claimed a tax refund for its domestic purchases of oil which was later shipped to petroleum rigs located more than 12 nautical miles offshore, based on an interpretation by the Customs Department that it was an export and thus entitled to excise tax exemption. But the Council of State later ruled against this interpretation, regarding it as a taxable coastal trade. This means Chevron has to pay more than 3 billion baht to the state. A 4-billion-baht tax refund fraud probe involving highranking officials of the Revenue Department has also not seen much progress.
In the end, whether or not Thailand will face a fiscal crisis will depend very much on its domestic economic recovery. Political unrest during the past decade has slowed down progress in economic growth which has been in the range of 2-3% during the past few years against the country’s real potential of 4-5% expansion. It has been a decade of economic losses.
The sharp drop in treasury reserves may not affect the government’s current fiscal position. However, these risk factors should serve as a reminder to the state that it has to act urgently to address the challenges, otherwise Thailand could encounter an economic crisis which is not triggered by a financial crisis like that which we saw in 1997, but by fiscal turmoil.
During the past 20 years, different Thai governments have mostly run budget deficits.