The Pheu Thai government has been warned that it should not push the limit of the budget deficit beyond 50% of gross domestic product (GDP) although by law it is permitted to go as far as 60% of the GDP.
The newly elected government should set a target for a balanced budget and public debt should by no means exceed 50% of GDP, said Narongchai Akrasanee, a former commerce minister and current member of the National Economic and Social Development Board (NESDB).
Dr Narongchai said many countries had set deficit budgets to ward off recession and promote growth amid the sluggish world economy.
“As for Thailand the public debt at around 41% of GDP is still manageable and the Ministry of Finance set a public debt framework within 60% of GDP but I think that the public debt of Thailand should not exceed 50% of GDP because the size of the government is small relative to the private sector’s,” he said at seminar held by the Fiscal Policy Research Institute Foundation last week.
The government’s revenue makes up a mere 20% of the country’s total revenue and of this portion, 80% is spent on fixed expenditures such as salaries and other routine expenses, leaving 20% for investment purposes, he pointed out.
Dr Narongchai said that if the government pushed the public debt beyond half of GDP, it would be burdened with higher interest and have less money to spend on development projects. When the investment budget falls below 20% of total expenditures, growth will stutter.
He added that the 11th plan aimed for sustainable growth and to achieve this, an investment of around 4 trillion baht is needed. Of the amount, 8% should be dedicated to projects that improve the quality of life and national resources and another 8% to water management. The remaining 84% should focus on logistics and infrastructure projects to enhance the country’s competitiveness and help pull it out of the middle-income trap that now threatens many developing economies.
He said that for the economy to grow by 5-6%, an investment budget of around 30% or 2 trillion baht will be needed in five years.
Since the central budget will not be sufficient to make it happen, other financial sources must be found such as infrastructure funds to raise money for the development project, he said.
Kanit Sangsubhan, director of the Policy Research Institute, said Thailand’s public debt was relatively low, particularly when the guarantees of state enterprises’ well-backed loans are excluded.
The real burden of government will therefore be direct borrowing and the Financial Institutions Development Fund’s (FIDF) burden, which now accounts for a combined 28% of GDP.
Dr Kanit said that solutions must be found to offset the anticipated smaller revenue as a result of the planned reduction of the corporate income tax and to shore up its revenue.
The government of Prime Minister Yingluck Shinawatra has said that they would lower the corporate income tax from 30% today to 23% in 2012 and 20% in 2013 to improve the private sector’s competitiveness.
“Therefore, we need to look at the whole tax structure to determine how to shore up the revenue. For example, one way might be to raise the VAT to 10% from 7%, as each percentage rise in VAT would bring in about 70-80 billion baht to the state coffers,” he said.