Fiscal stimulus
cutback in Thailand,
fatal mistake
or necessity?
By Jon Fernquest Why cut back on fiscal stimulus and government spending now?
The global economic downturn has not ended yet .
That is the question that many were asking when the government announced government spending cutbacks last week.
Fiscal
stimulus
was the main policy objective driving Thailand's fiscal year 2009
government budget (October 2008-September
2009) which saw significant increases in government spending.The budget for 2010, however, was cut last week.
Thailand is still far away from the legal limit on public debt.
Thailand's public debt at the end of February 2009 amounted to 3.59 trillion baht or 39.93 per cent of the gross domestic product (GDP). This is only a slight rise from the end of 2008 when it was 38%. The legal limit is 50%. (Read article).
Some even see the cutback in the 2010 as politically motivated (Read article).
A combination of factors, however, may soon push Thailand's public debt to levels near the 50% legal limit:
1. Government tax revenues may be lower than expected
2. So the government budget deficit may be higher than expected.
3. Government borrowing may increase more than expected. Large state-owned enterprises (SOEs) are also borrowing and this includes: Thai Airways, PTT (oil), Electricity Generation Authority of Thailand (EGAT), Export-Import Bank of Thailand (EXIM), and Krung Thai Bank(KTB). This will also help stimulate the economy.
4. The cost of debt will increase because the government credit rating has been downgraded recently (Read article).
(Source: RGEMonitor (subscription required) via Bangkok Pundit)
fiscal stimulus -
either increased government spending or tax cuts to get the economy
moving and growing again
a fatal mistake - making a big mistake, that causes a lot of damage
an objective - a goal to achieve
public debt - money the government has borrowed to pay for spending deficits (this accumulates each year into a large percentage)
Gross Domestic product (GDP) - a measure of economic activity in a country, the value of the country's output of goods and services. GDP is defined roughly as: GDP = Household Consumption + Business Investment + Change in Inventories + (Government Spending - Taxes) + (Exports - Imports) (See Economist Glossary)
government tax revenues - money that the government collects from people and businesses paying taxes
budget deficit, deficit - when you spend more than you receive (has to be financed or funded by borrowing)
an enterprise - a large company
a state owned enterprise (SOE) - a company owned and operated by the government
credit rating - a measure of credit worthiness, a measure of the risk of loaning to a borrower, a measure of how likely (See Wikipedia) การจัดอันดับความน่าเชื่อถือ
downgraded - reduced, lowered to a lower status or level
a fatal mistake - making a big mistake, that causes a lot of damage
an objective - a goal to achieve
public debt - money the government has borrowed to pay for spending deficits (this accumulates each year into a large percentage)
Gross Domestic product (GDP) - a measure of economic activity in a country, the value of the country's output of goods and services. GDP is defined roughly as: GDP = Household Consumption + Business Investment + Change in Inventories + (Government Spending - Taxes) + (Exports - Imports) (See Economist Glossary)
government tax revenues - money that the government collects from people and businesses paying taxes
budget deficit, deficit - when you spend more than you receive (has to be financed or funded by borrowing)
an enterprise - a large company
a state owned enterprise (SOE) - a company owned and operated by the government
credit rating - a measure of credit worthiness, a measure of the risk of loaning to a borrower, a measure of how likely (See Wikipedia) การจัดอันดับความน่าเชื่อถือ
downgraded - reduced, lowered to a lower status or level
Here's the analysis from yesterday's Bangkok Post business section:
TOO MUCH SPENDING?
When to pull back on fiscal stimulus is a critical question for the current administration.By Wichit Chantanusornsiri
27/04/2009
Prudent policy or excessive optimism? Economists and policymakers around the world are unanimous on the importance of spurring fiscal policy to help compensate for flagging consumer spending and investment.
But when is the right time to pull back on spending? Next year, according to the Abhisit Vejjajiva government. Cabinet ministers last week agreed to pare the fiscal 2010 budget from Oct 1 by 200 billion baht, with expenditures cut by 12.9% from the current year.
prudent - being
careful and using good judgement (See glossary)
excessive optimism - believes that future will be good, too much
unanimous - when a group of people all agree about something
spur - cause something to happen (See glossary)
spurring fiscal policy - causing government spending to increase
flagging - begin to lose energy and slow down
compensate for - do something to make situation better after losing something that was needed, make up for
compensate for flagging consumer spending - (government) spending to replace lost consumer spending
pull back on spending - reduce spending
pare - cut back on, reduce
excessive optimism - believes that future will be good, too much
unanimous - when a group of people all agree about something
spur - cause something to happen (See glossary)
spurring fiscal policy - causing government spending to increase
flagging - begin to lose energy and slow down
compensate for - do something to make situation better after losing something that was needed, make up for
compensate for flagging consumer spending - (government) spending to replace lost consumer spending
pull back on spending - reduce spending
pare - cut back on, reduce
The cutbacks were forced by data showing a sharp decline in government tax revenues as the economy has contracted faster than previously expected. Maintaining the 2010 budget at the target of 1.9 trillion baht set in February would have pushed public debt and borrowing needs sharply above previous forecasts, to the extent that legal amendments would be required to break existing limits on government borrowing.
Finance Minister Korn Chatikavanij said budget cutbacks were necessary in light of the "reality of falling revenues" and to help maintain the country's fiscal stability in the medium and long term.
contracted - became
smaller, shrunk
stability - a situation without sudden and unpredictable changes
fiscal stability - when government spending and the government budget is not subject to sudden and unpredictable changes
stability - a situation without sudden and unpredictable changes
fiscal stability - when government spending and the government budget is not subject to sudden and unpredictable changes
He said authorities could turn to off-budget spending or state-controlled financial institutions to push money into the economy in compensation for the budget cuts if necessary.
The government also remains hopeful that the global economy will bottom out and resume growth starting in the second half. And assuming political stability - a big question mark - the domestic economy can expect to pick up toward the end of the year as the impact of existing fiscal stimulus programmes begin to take effect.
But some economists wonder whether the government may be underestimating the importance of in the near term. keeping fiscal spending afloatEasing off on the accelerator too early could stall any recovery and lessen the impact of stimulus programmes implemented to date.
off-budget spending -
government spending that is not included officially in the budget
state-controlled financial institutions - banks owned by the government like BAAC and the Government Housing Bank
in compensation for the budget cuts - other forms of government spending to replace the budget cuts
bottom out - reach its lowest level or point
a big question mark - something that is very uncertain and unsure (a question that no one knows the answer to)
pick up - moving and growing faster
take effect - when the policies start to have an effect on the economy (improving the economy and moving economy towards recovery)
easing off the accelerator - when driving pressing the accelerator more lightly to slow down
recovery, economic recovery - an improvement in the economy
stall - when a process stops temporarliy due to problems
stall any recovery - when improvement in the economy is delayed (happens later than it would)
lessen the impact of - reduce the negative impact of an event
keeping fiscal spending afloat - maintain government spending at current or higher levels
state-controlled financial institutions - banks owned by the government like BAAC and the Government Housing Bank
in compensation for the budget cuts - other forms of government spending to replace the budget cuts
bottom out - reach its lowest level or point
a big question mark - something that is very uncertain and unsure (a question that no one knows the answer to)
pick up - moving and growing faster
take effect - when the policies start to have an effect on the economy (improving the economy and moving economy towards recovery)
easing off the accelerator - when driving pressing the accelerator more lightly to slow down
recovery, economic recovery - an improvement in the economy
stall - when a process stops temporarliy due to problems
stall any recovery - when improvement in the economy is delayed (happens later than it would)
lessen the impact of - reduce the negative impact of an event
keeping fiscal spending afloat - maintain government spending at current or higher levels
Pressures to cut budget
Teerana Bhongmakapat, the dean of Economics at Chulalongkorn University, said the government faced two pressures to cut the budget.First was the drop in tax revenues and the burden of rising public debt. Second was the uncertain political situation itself, which would dilute the impact of stimulus measures on improving investor and consumer confidence.
In any case, Dr Teerana believes the government should push forward with its megaproject plans to create new jobs now and benefit the economy in the long term.
The government plans to invest 1.56 trillion baht from 2010-12 to strengthen infrastructure and create as many as one million new jobs. "Cutting the budget by as much as this may have a psychological impact, as it says that the government is almost capitulating to how bad the economy really is."
burden - a
responsibility, a difficult thing that must be done, a heavy load to
carry (See glossary)
dilute - make some liquid less strong by mmixing water with it
dilute the impact - make the impact or effect less
psychological impact - the effect it has on public opinion and the way people think about the issue
capitulating - giving up, quitting
dilute - make some liquid less strong by mmixing water with it
dilute the impact - make the impact or effect less
psychological impact - the effect it has on public opinion and the way people think about the issue
capitulating - giving up, quitting
Using state funds efficiently
Vorapol Socatiyanurak, the vice-chairman of the National Economic and Social Advisory Council, said state spending would be the only growth driver in the near future.Given fiscal constraints, he said, the burden was on the government to ensure that funds were used as efficiently as possible for maximum benefit.
Dr Vorapol agreed that current borrowing limits did limit flexibility, particularly in an economic downturn.
The law restricts the government from borrowing no more than 20% of annual budget expenditures plus 80% of principal payments in any given year to cover a budget deficit.
Dr Vorapol said easing borrowing rules would give the government more flexibility for stimulus programmes.
Thailand's public debt, at 38% of GDP, is relatively low considering the size of the economy. The Finance Ministry estimates the debt could rise to 50% of GDP by the end of fiscal 2010, after factoring in an economic contraction this year and the need for more borrowing to offset lower tax revenues.
National Economic and Social
Advisory Council - (See website)
growth driver - something that causes the economy to grow (the state in bad economic times with reduced export demand)
a constraint - something that limits or controls on what you can do (See glossary)
fiscal constraints - limits on how much the government can spend and how much it can borrow to pay for this spending
limit flexibility, constrain - limiting or controling what someone can do
flexibility - being without limits or controls, being able to change what you do (opposite of having "constraints")
interest on a loan - the money paid to the lender for the use of the money borrowed
principal on a loan - the amount borrowed from a lender
principal payments - the regular payments made to pay back the amount borrowed (principal) , does not include interest payments
easing rules - making rules less strict, so people have more flexbility
factoring in - including something in the analysis
offset - reduce by moving in the opposite direction (See glossary)
borrowing to offset lower tax revenues - get the money to pay for government spending from borrowing money instead of taxes
growth driver - something that causes the economy to grow (the state in bad economic times with reduced export demand)
a constraint - something that limits or controls on what you can do (See glossary)
fiscal constraints - limits on how much the government can spend and how much it can borrow to pay for this spending
limit flexibility, constrain - limiting or controling what someone can do
flexibility - being without limits or controls, being able to change what you do (opposite of having "constraints")
interest on a loan - the money paid to the lender for the use of the money borrowed
principal on a loan - the amount borrowed from a lender
principal payments - the regular payments made to pay back the amount borrowed (principal) , does not include interest payments
easing rules - making rules less strict, so people have more flexbility
factoring in - including something in the analysis
offset - reduce by moving in the opposite direction (See glossary)
borrowing to offset lower tax revenues - get the money to pay for government spending from borrowing money instead of taxes
In any case, Dr Vorapol agrees that policymakers should not overlook the importance of new investment.
Projects to strengthen the tourism sector, IT development, agriculture and education systems are sorely needed to help the economy and also strengthen competitiveness in the future.
Pairoj Vongvipanond, an economist at Dhurakijpundit University, said that eliminating 200 billion baht would have relatively little impact if wasteful, unnecessary projects were targeted.
Budgets normally rise each year with little consideration for the value gained from spending, he said. "A crisis such as this, I think, actually offers an opportunity to improve efficiency in public spending," Dr Pairoj said.
He added that Thailand's deficit spending also was quite small relative to the size of the economy, estimated at nine trillion baht for next year.
sorely needed -
needed very much
targeted - chosen
deficit spending, a government deficit - when the government spends more than it receives in taxes and other income
targeted - chosen
deficit spending, a government deficit - when the government spends more than it receives in taxes and other income
(Source: Bangkok Post, business, 27/04/2009, TOO MUCH SPENDING?, Wichit Chantanusornsiri, link)
