Is Thailand Going Blindly Down The Same Path As Greece?

[webfact]

TELL IT AS IT IS

Is Thailand going blindly down the same path as Greece?

Pornpimol Kanchanalak

If one were to ask, "Are we there yet?" meaning are we approaching a similar dire economic situation as that facing Greece, the answer would be negative. Greece's public debt currently stands at 160 per cent of her GDP; ours is only 40 per cent.

But if one were to ask, "Is our economic behaviour, or rather policies, leading us towards a similar ruinous state of economic affairs as that of Greece?" the answer is "absolutely, yes". Perhaps, in three or four years time, maybe sooner.

This is like telling a 20-year-old kid who smokes that he will likely die of lung cancer soon; you are met with an incredulous glance. Try telling a 40-year-old heavy smoker the same thing, and your statement may have more credence.

Currently, the Thai government's revenue is Bt1.98 trillion, whereas the budget was set at Bt2.38 trillion, leaving a fiscal deficit of Bt400,000 billion. As of this Tuesday, the Cabinet unapologetically embraced the red ink bottle without any clear idea how to pay for everything, because the money is earmarked for not very productive investment. It is the case where tax money is not to be used in matters that generate high return.

There are three main fixed costs that are the main ingredients that could take us towards the Greek destiny. These are the populist policies, bulging public wages, and debt-servicing expenditure.

Populist policies are one of the platforms that got this government elected, so it cannot renege on these promises. But once these policies are in place, there is no wise or popular way that any government can rein in the subsequent populist policy expenditures. That would be perceived as a betrayal, which could cost politicians their seats. Reining this spending in would amount to political suicide.

Increased public sector wages is another easy means for politicians to win collaboration and the hearts and minds of their core constituents, who will go out and get more votes for them. Greasing the bureaucratic wheel also means politicians can get more mileage out of their projects and undertakings. This has been the strategic case with the last few governments.

Debt servicing is something everybody always wants to forget, but cannot avoid. Today, Thailand, under the Financial Institutions Development Fund (FIDF), is carrying a debt burden of Bt1.4 trillion from the 1997 financial crisis. To date, the Bank of Thailand (BOT) has paid down Bt200,000 billion, (the agreement reached in 2002 between the BOT and Ministry of Finance (MOF) called for the BOT to pay Bt1.39 trillion over 30 years and the MOF to pay for the interest, but the BOT's commitment was never materialised. To date, the MOF has paid up Bt600,000 billion and the rest remains on the balance sheet. Rain or shine, the chickens come home to roost, and eventually the hard question to eschew will have to be dealt with. This FIDF issue will be the subject of much analysis and commentary following Tuesday's Cabinet decision to transfer the burden of the FIDF to the BOT, to wipe the slate clean so the government can borrow anew.

The three fixed costs are enormous and they are to be paid for by tax revenue. Unfortunately, they coincide with the generous gestures of the government to lower taxes, which means less revenue. The decrease in corporate income tax alone was estimated to cost the government Bt150 billion in income. The government is hoping that the tax reduction will result in growth in corporate businesses that will then lead to more taxes to be collected by the government. But that is not a sure thing; especially when many industries are seriously contemplating moving their production base away from Thailand.

So the government is borrowing more money that does not generate economic growth. And it will keep borrowing to fund populist policies that are worthless in the sense that they do not in any meaningful way benefit the people in an economically sustainable manner. The borrowed money will not in any way be genuinely productive, just like we borrow money to make ends meet, not to invest in a business venture, whose return would be used to service our debt.

Given the government's mindset to ignore fiscal discipline, among other things, Thailand's debt burden of 3-4 per cent of GDP will likely continue to grow unabated. Worse yet, if the world economy shrinks further, and all signs indicate that it will, Thailand's economic livelihood that is so export-dependent will face added problems. The government then will have to make a painful decision, either that it increases taxes or decreases spending. One way to increase revenue is through the value added tax, which, unfortunately, is regressive - i.e the burden on the poor will be more than that on the wealthy. Decreased spending would risk voters' wrath.

Soon, the Greek analogy will no longer sound too far-fetched and the Greek tragedy will be the Thai tragedy.

Another interesting similarity between Thailand and Greece is noteworthy. To many observers, the current Greek fiscal crisis stemmed from deficits and accrued public debts by successive Greek governments. However, is it simply a question of successive economic mismanagement, or did the crisis have its root in the malfunctioning of the country's political system?

Over the last three decades, Greek politics has been marked by personality clashes, the patronage system, populism, bribery and corruption. Out the door went fiscal discipline. In came universal healthcare, growing public sector wages and hiring increases, pensions, and innumerable fringe benefits. The public became so addicted to these candies to the point that any attempt to halt or slow down these extravagances were eventually annulled.

If it sounds familiar to us, it's because we in Thailand are embarking on the same ship as the Greeks did, and it's called the Titanic.

So enjoy the ride for as long as you can, tomorrow is yet to come. This is how the thinking of the powers-that-be goes these days.

By the time the ship sinks, we the majority of the people will pay heftily for the sins of the few, who may already have long debarked the liner, with bags full of treasure.

-- The Nation 2012-01-12

[mogandave]

Cutting corporate taxes when they should have been raised was craziness, but (hopefully) all the added revenue from increasing the minimum wage increasing in public sector wages and benefits will get Thailand back on a more fiscally responsible course.

[Jingthing]

So who's going to bail out Thailand? Singapore?

[abcz9]

did you know that greece spent most of there ball out money on gun and tanks and in march they need another ball out of 80 billuion of which it has ordered new helicopters from the u s a and bombs from germany.

[BusyBee123]

The three fixed costs are enormous and they are to be paid for by tax revenue. Unfortunately, they coincide with the generous gestures of the government to lower taxes, which means less revenue. The decrease in corporate income tax alone was estimated to cost the government Bt150 billion in income. The government is hoping that the tax reduction will result in growth in corporate businesses that will then lead to more taxes to be collected by the government. But that is not a sure thing; especially when many industries are seriously contemplating moving their production base away from Thailand'

name the industries leaving and add the ones investing rather than this ridiculous self serving diatribe against the government. I for one am happy corporation tax has also been reduced in the uk it means we pay less and can afford to keep all our employees in work as well as look at expansion, i'd rather keep it within the business than give it to the government to pay for some pussy financial advisors, academics or think tanks who have never been in business at ground level letting them know they should spend less i'll tell them that for free.

[nong38]

As usual think about it tomorrow, when I wont be here and someone else gets the unlucky job of sorting things out.

Its easy to spend other peoples money.

[DP25]

Unbelievable that a movement constantly deriding their opponents for being the rich elite manages to slash corporate income taxes for the rich without so much as a peep. Not one of the supposed champions of the poor so much as says a word about the constant hand outs to the rich perpetrated by this government at the expense of the comman man.

And they're not done, they are cutting corporate tax again next year. The primary lasting effect of this government is lowering tax on corporations from 30% to only 20%. Not a coincidence that certain foreign publications so heavily propgandize for Thaksin when they are given such juicy plums as this.

The government is hoping that the tax reduction will result in growth in corporate businesses that will then lead to more taxes to be collected by the government.

No, what they are hoping for is that they will as individuals make more money. The government is made up of corporate elite and they are lowering income tax on themselves.

Edited January 12, 2012 by DP25

[theblether]

Cutting corporation tax is very clever, it adds a great incentive for companies to not relocate after the floods and aids maximising employment opportunities.

[whybother]

Cutting corporate taxes when they should have been raised was craziness, but (hopefully) all the added revenue from increasing the minimum wage increasing in public sector wages and benefits will get Thailand back on a more fiscally responsible course.

Those that get paid minimum wage will be under the tax threshold, so there will be no increase in tax revenue from them.

[waza]

The three fixed costs are enormous and they are to be paid for by tax revenue. Unfortunately, they coincide with the generous gestures of the government to lower taxes, which means less revenue. The decrease in corporate income tax alone was estimated to cost the government Bt150 billion in income. The government is hoping that the tax reduction will result in growth in corporate businesses that will then lead to more taxes to be collected by the government. But that is not a sure thing; especially when many industries are seriously contemplating moving their production base away from Thailand'

name the industries leaving and add the ones investing rather than this ridiculous self serving diatribe against the government. I for one am happy corporation tax has also been reduced in the uk it means we pay less and can afford to keep all our employees in work as well as look at expansion, i'd rather keep it within the business than give it to the government to pay for some pussy financial advisors, academics or think tanks who have never been in business at ground level letting them know they should spend less i'll tell them that for free.

What company is in the business of employing people? They are all in the business of making money. Decreasing business taxes only moves their profit margin and increases the burdon on individual tax payer to pick up the slack. Robbing the poor to subsidise businesses isnt a good business plan.

[mogandave]

Cutting corporation tax is very clever, it adds a great incentive for companies to not relocate after the floods and aids maximising employment opportunities.

No, it's just another handout for the greedy rich. Thailand would be better off without all the big corporations gutting the economy and throwing peanuts to the peasants.

[DP25]

Cutting corporate taxes when they should have been raised was craziness, but (hopefully) all the added revenue from increasing the minimum wage increasing in public sector wages and benefits will get Thailand back on a more fiscally responsible course.

That doesn't bring in additional revenue because people making the new minimum wage in the handful of provinces it is to be applied still do not make near enough to pay income tax. And the vast majority of Thais are not registered to pay income tax anyway and work in the grey economy and pay no income tax even if they make enough.

[geriatrickid]

So who's going to bail out Thailand? Singapore?

China. Or rather, they'll just buy up assets.

[mogandave]

Cutting corporate taxes when they should have been raised was craziness, but (hopefully) all the added revenue from increasing the minimum wage increasing in public sector wages and benefits will get Thailand back on a more fiscally responsible course.

Those that get paid minimum wage will be under the tax threshold, so there will be no increase in tax revenue from them.

That’s funny. Minimum wage earners do not pay income taxes, but they certainly do pay taxes, and their spending stimulates the economy. Millions of people that suddenly have a 30% increase in income will affect the economy in a much broader, more effective way than would a few greedy directors buying new cars with their new wind-fall tax cut.

[geriatrickid]

Cutting corporate taxes when they should have been raised was craziness, but (hopefully) all the added revenue from increasing the minimum wage increasing in public sector wages and benefits will get Thailand back on a more fiscally responsible course.

Those that get paid minimum wage will be under the tax threshold, so there will be no increase in tax revenue from them.

Ahh, I was unaware that they would be exempt from the VAT and other taxes built into the product pipeline. This is disappointing to learn as the slight increase in wages will most likely result in increased consumer spending. Without the collection of the VAT that's a lot of tax money left on the table.

When was the decision made to exempt VAT and how will it be implemented? I missed this taz waiver I think you are indicating will be effected.

If the VAT will be uncollected, will the same be done with the CIT? How will companies account for it?

Gosh, you really raise an interesting point. Your must have intimate knowledge of accounting and tax sources in Thailand.

BTW, did you know that the VAT rate is due to rise to 10% in October 2012? Well, yes, I guess you did, since you have porovided such an acute analysis of the tax base in Thailand. Do you suppose that before they came up with the waiver of VAT tax that you indicate will occur, a few economists took into consideration the impat of the additional 3% tax rate for VAT actually increasing the monies collected by VAT?

[whybother]

Cutting corporate taxes when they should have been raised was craziness, but (hopefully) all the added revenue from increasing the minimum wage increasing in public sector wages and benefits will get Thailand back on a more fiscally responsible course.

Those that get paid minimum wage will be under the tax threshold, so there will be no increase in tax revenue from them.

Ahh, I was unaware that they would be exempt from the VAT and other taxes built into the product pipeline. This is disappointing to learn as the slight increase in wages will most likely result in increased consumer spending. Without the collection of the VAT that's a lot of tax money left on the table.

When was the decision made to exempt VAT and how will it be implemented? I missed this taz waiver I think you are indicating will be effected.

If the VAT will be uncollected, will the same be done with the CIT? How will companies account for it?

Gosh, you really raise an interesting point. Your must have intimate knowledge of accounting and tax sources in Thailand.

BTW, did you know that the VAT rate is due to rise to 10% in October 2012? Well, yes, I guess you did, since you have porovided such an acute analysis of the tax base in Thailand. Do you suppose that before they came up with the waiver of VAT tax that you indicate will occur, a few economists took into consideration the impat of the additional 3% tax rate for VAT actually increasing the monies collected by VAT?

You wasted all that space to say "but they still pay VAT"?

[theblether]

Cutting corporation tax is very clever, it adds a great incentive for companies to not relocate after the floods and aids maximising employment opportunities.

No, it's just another handout for the greedy rich. Thailand would be better off without all the big corporations gutting the economy and throwing peanuts to the peasants.

No its not, its a valid economic stimulator.

Thailand has to get its act together right now in connection with the post flood reality of shaken investor confidence.

You give away yourself when you talk about the greedy rich, does that mean that every single corporate entity from every single investor country currently trading in Thailand represents the greedy rich? Nonsense.

[soundman]

So who's going to bail out Thailand? Singapore?

"bail out"

Buy

[OzMick]

Cutting corporate taxes when they should have been raised was craziness, but (hopefully) all the added revenue from increasing the minimum wage increasing in public sector wages and benefits will get Thailand back on a more fiscally responsible course.

Those that get paid minimum wage will be under the tax threshold, so there will be no increase in tax revenue from them.

Ahh, I was unaware that they would be exempt from the VAT and other taxes built into the product pipeline. This is disappointing to learn as the slight increase in wages will most likely result in increased consumer spending. Without the collection of the VAT that's a lot of tax money left on the table.

When was the decision made to exempt VAT and how will it be implemented? I missed this taz waiver I think you are indicating will be effected.

If the VAT will be uncollected, will the same be done with the CIT? How will companies account for it?

Gosh, you really raise an interesting point. Your must have intimate knowledge of accounting and tax sources in Thailand.

BTW, did you know that the VAT rate is due to rise to 10% in October 2012? Well, yes, I guess you did, since you have porovided such an acute analysis of the tax base in Thailand. Do you suppose that before they came up with the waiver of VAT tax that you indicate will occur, a few economists took into consideration the impat of the additional 3% tax rate for VAT actually increasing the monies collected by VAT?

You wasted all that space to say "but they still pay VAT"?

When we move from micro- to macro-economics you will realise that a big increase in the minimum wage will lead to a VAT increase, and also to inflation and depreciation of the Baht. VAT will increase THB collection, but each Baht is worth less, and the debt is in more usable currencies. Whether the increased Baht revenue will increase ability to pay debt is a moot point, but economic theory suggests the way to boost income is to increase productivity, not just pay yourself more..

[SomTumTiger]

I gotta hand it to you, GK. You certainly do have a talent for trivializin' the momentous and complicatin' the obvious. You ever considered runnin' for Congress? (borrowed and name modified from Gettysburg - the movie) lol

[phiphidon]

Would we be reading this same article if the Democrats had retained their posts and had fully instigated their populist investment package "Investing from Strength to Strength 2012 Project" ?. The one where they started spending 1.43 Trillion Baht in 2009 as long term investment in the Economy (a large part of which went on that long term moneymaker for the BJP, the dust free roads project). The one that Abhisit admitted would bring about a public debt to GDP ratio of 58-59% by 2012 and hopefully drop below 50% in 2016?

The Nation has previous with comparing Thailands financial situation to Greece, see

http://asiancorrespo...-thailand-debt/

Edited January 12, 2012 by phiphidon

[tragickingdom]

Why not comparing Thailand to the UK or the US? Let us be clear. Europe is just a distraction created by the UK and the US for their money printing habit. As soon as investors and the crooked rating agencies that are paid for by banks come down to earth they realize that Europe is doing the right thing. Refusing to print money.

The Thai situation is of course not comparable wit that of Greece. Greece was great in one thing: Publishing Fraudulent figures. Whatever they may say from the crooked Thai governments in the last 30 years, they have not resorted to fraudulent economic data.

The fact that 1.2 trillion baht is transferred to the banks is quite logic. Chuan bailed out the banks. The Thai people do not need to support the shareholders like in the West. Shareholders are robbing the public blind, while the tax payer may fit the bill when the banks are in need of capital. The fact that the opposition is complaining is predictable. They are the banks shareholders, the royalist are even the owners of the SCB bank.

It is funny that people without any economic knowledge are making these kinds of comparisons. The Thai government is doing the right thing. Banks are responsible for their own mess, even when it dates back till 1997.

Moreover the Thai public debt is so low that it is in no comparison to that of Greece. It is not even as bad as the sick man of Europe when it comes to deficits and debt to GNP Britain. Not to speak of the absurd deficits that the Americans are running o the Japanese.

Stop quoting academics. Academics are notoriously untrustworthy and one sided in Thailand.

[Moruya]

Thailand is not going down the Greece road - it's going down the Thailand road. Greece's shackling to the Euro and ECB policy makes a large difference.

I haven't read the fineprint on the ASEAN EC but it will affect goods and labour for sure and will come fully into operation under this administration should they manage to complete the term.

For sure increasing the cost of labour is likely to have an impact on goods. How this would impact a car manufacturer should it decide to migrate from the flood plains to Indonesia or Vietnam for cheaper labour will be interesting as I believe the import duty will be zero across the zone putting Thailand at a disadvantage. I'm not sure who the main importers are of Thai rice but with import duties being chopped or abolished the premium Hom Mali may find it's market restricted to the West and the lesser grades of paddy will come under serious competition from Vietnam.

Thailand will very quickly get to the stage where it's (true) national debt has doubled given the PTP spend policy. Interest payments will also double and I don't see how it will balance the books given the rate of progress on existing loans since 1997. If the currency continues to drop then THB deposits may move overseas to prevent erosion and for better interest rates.

[whybother]

Why not comparing Thailand to the UK or the US? Let us be clear. Europe is just a distraction created by the UK and the US for their money printing habit. As soon as investors and the crooked rating agencies that are paid for by banks come down to earth they realize that Europe is doing the right thing. Refusing to print money.

The Thai situation is of course not comparable wit that of Greece. Greece was great in one thing: Publishing Fraudulent figures. Whatever they may say from the crooked Thai governments in the last 30 years, they have not resorted to fraudulent economic data.

The fact that 1.2 trillion baht is transferred to the banks is quite logic. Chuan bailed out the banks. The Thai people do not need to support the shareholders like in the West. Shareholders are robbing the public blind, while the tax payer may fit the bill when the banks are in need of capital. The fact that the opposition is complaining is predictable. They are the banks shareholders, the royalist are even the owners of the SCB bank.

It is funny that people without any economic knowledge are making these kinds of comparisons. The Thai government is doing the right thing. Banks are responsible for their own mess, even when it dates back till 1997.

Moreover the Thai public debt is so low that it is in no comparison to that of Greece. It is not even as bad as the sick man of Europe when it comes to deficits and debt to GNP Britain. Not to speak of the absurd deficits that the Americans are running o the Japanese.

Stop quoting academics. Academics are notoriously untrustworthy and one sided in Thailand.

The debt isn't being transferred to "the banks". It's being transferred to the Bank of Thailand. The BOT doesn't have shareholders (or, if you like, it's shareholders are the people). The government didn't bail out the BOT in 1997. "It is funny that people without any economic knowledge are making these kinds of comparisons."

[khrab]

So who's going to bail out Thailand? Singapore?

Germany, who else?

[Moruya]

So who's going to bail out Thailand? Singapore?

Germany, who else?

They'll take a few planes as collateral (apparently).

[jitenshaman]

Greece didn't have cute young women luring millions of investors.

[rotary]

All these countries need to be responsible and STOP printing money like crazy, stop spending money beyond their means, and get the finances in order just like a normal person. How do they think they can "spend" their way out of a financial mess? Mant countries are trying this with the USA leading the pack. Thailand needs to be responsible in their economy. I am afraid Thailand is starting to travel the USA road of crazy spending with no regard for the future. Think about this.........when is the last time you have seen a worn US$100 bill?? 90% of the time all $100 bills are fresh from the printing presses and it shows in that 1/4% interest rate that banks want to pay for time deposits. Austerity is the only way forward for the future and stop that crazy spending and borrow tactics.

[lungmi]

So who's going to bail out Thailand? Singapore?

Germany, who else?

No, they bail out Greece in the moment.

[pepi2005]

So who's going to bail out Thailand? Singapore?

Cambodia, if it goes on like it currently does.