The Oil Tax Increase: An Analysis of "Untimeliness"

A recent government act amendment was immediately put into effect. The tax ceiling for oil excise was increased from Bt5/litre to Bt10/litre, with actual tax on oil excise increased Bt2/litre on average. This amendment, a counterweight to target-missing government revenue, will boost government revenue by Bt50,000 million per year, though in order to maintain the current oil price level, the government will also use Bt2 /litre from the oil fund in order to subsidize oil prices for one month – reflecting their highly prioritized drive for revenue, due to budget lack. However, I find this decision to be untimely for the following reasons:

Misuse of oil fund savings
The objective of the oil fund is to stabilize local oil prices in the context of fluctuating and unpredictable world oil prices. To accomplish the objective, the oil fund collects fees from oil distributors when oil prices are low and subsidizes oil prices in case of oil price spikes. In other words, the oil fund acts to insulate the local economy and consumers from external shocks. Sometimes, the oil fund may also intervene in local oil prices to promote specific energy usage.

Nevertheless, I deem the current government decision to shore up local oil prices by the use of the oil fund, to be a mere compensation measure for stumbling government revenue. The government will use the oil fund to offset an increase in oil excise tax, not for global oil price fluctuation. Government intervention in the local oil market is not the primary objective of the oil fund.

Possibility of oil fund financial status deterioration
The government may try to pass the buck on to the oil fund for political reasons, knowing that an increase in oil excise tax will in turn lead to an increase in oil prices, which could harm government stability. Thanks to the oil fund, the government can delay an oil price increase long enough for the current cabinet to be free of criticism for high oil prices.

But then again, this measure could cause the oil fund to deteriorate. Oil fund savings now stand at Bt16,169 million. If for one month the oil fund compensates Bt2 of the oil excise tax increase with Bt2 from the oil fund, there will be a savings loss of as high as Bt 4,200 million, or 25% from the overall oil fund amount.

Moreover, some economic indicators are now seemingly positive. Thus, there are positive market expectations for the future economy, and oil demands are consequently expected to increase. This situation implies that oil hoarding will mushroom again and will force oil price increase. If oil prices really increase, the oil fund will have to subsidize oil prices again in order to stabilize local oil prices. The oil fund’s financial status will therefore be aggravated.

Inconsistency with economic stimulation policy
At this time, the government wants to stimulate the economy by relaxing its monetary policy through moves such as cutting its policy interest rate, deficit budget balance, and stimulating private consumption and investment (for example, its Bt2,000 cashier cheques).

An increase to oil excise tax thus runs contradictory to the direction of government, as a policy that will tighten the economy, causing the business sector to face the burden of higher costs of production, transportation and transaction, and consumers to bear raised living costs from higher oil and consumer product prices, which may reduce private consumption.

In my opinion, the government’s loan-seeking plan will already compensate a deficit budget. Therefore, it is actually unnecessary to increase the oil excise tax and to (mis)use the oil fund. If the government wants to increase the oil excise tax in order to restructure the current oil tax, it should do so at a timely juncture – when global oil prices have decreased, or at a time of economic expansion. Raising the tax rate now is considered utterly untimely.

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