Thailand’s Fiscal Sustainability Framework Appeases or Aggravates the Crisis?

The Thai cabinet resolution made on April 21st 2009, for government budget expenditure to be cut by 200 billion Baht in 2010, from a previous budget figure of 1.9 trillion Baht to a new sum of 1.7 trillion Baht, will reduce government expenditure by 1.835 trillion Baht in 2010 from its budget for 2009. The government explanation is that unless expenditure is cut, the more public debt must be borrowed, but that this will violate the Public Debt Management Act, BE 2548.

However, I disagree with the idea of cutting the 2010 budget, because doing so will aggravate the current shrinking economy. At the moment, every type of expenditure – private consumption, private investment and export – decreases, therefore companies receive no purchase orders. Consequently, their revenues decrease so severely that they must lay off employees to cut costs, or else go bankrupt.

Although it is necessary that the government increase expenditure by putting money back into circulation in the economy, the value of tax collection will decrease due to the crisis. Thus, loan seeking is an unavoidable choice now in order to compensate the gap between revenue and expenditure.

The current Fiscal Sustainability Framework must consist of three factors; 1) The Public debt/GDP ratio must be less than 50%; 2) The Debt service/Budget ratio must be less than 15% and; 3) The Capital expenditure/Budget ratio must be more than 25%.

The objective of this framework is to maintain fiscal stability, since excess public debt will lead to a paying-off problem in the future. However, I think that the Fiscal Sustainability Framework’s objectives must cover every aspect of economic stabilization – not just fiscal stabilization.

Due to the Fiscal Sustainability Framework, the government cannot seek more loans and therefore must cut expenditure in the budget year 2010. A decrease in government expenditure will aggravate the crisis, causing more unemployment and, thus, destabilizing the economy. In other words, the Fiscal Sustainability Framework, which helps to stabilize the economy by preventing profligate government behaviour, changes to be a “destabilizer” in time of crisis.

Therefore, to make the Fiscal Sustainability Framework cover every aspect of economic stability in crisis, I raise that a fourth factor should be added to the Fiscal Sustainability Framework, and that fourth factor is a “continual increase in expenditure.”

As for implementation, the government may amend the Public Debt Management Act BE 2548 by the following statement; “in the case that compliance to the act leads to a decrease in expenditure in the next consecutive budget year, the government may relax the Fiscal Sustainability Framework for a short period.” Such an amendment would unlock constraints to seek more loans in the case of emergency, as now.

It is so surprising that, generally, the government wants to increase expenditure, but why does the current Thai cabinet not push for an amendment to the Public Debt Management Act in order to enable loan seeking? I analyze that, at the moment, political stability is the factor that the government is most concerned with; embracing any sensitive issue for parliament will undermine its stability. Consequently, the government has chosen to cut the budget rather than amend the act, although the latter way may be more suitable for the current context.

In conclusion, though the government knows what should be done in principle, it cannot do so in practice because of political constraints. Thus, solving this as a political problem would not only help to unlock the government, but would also unlock the economic crisis.

Dr Kriengsak Chareonwongsak
Senior Fellow, Harvard Kennedy School , Harvard University
kriengsak@kriengsak.com, kriengsak.com, drdancando.com