Thailand Economics - Public Finance

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Public Finance

By the mid-1980s, government revenues averaged around 14 percent of GDP and consumption averaged around 13 percent, leaving a public savings net of interest payments of 1 percent of GDP. This was low compared with an average savings of 7 percent for the lower middle-income countries and 10 percent for the upper middle-income countries.

The financing of public expenditures caused a major imbalance because of high deficit and low public savings. Although not a new problem, increases in public expenditure needed to be matched by increases in revenues. Efforts were made to tackle the problem, and the public capital expenditures annual growth rate had dropped from 64.7 percent in 1980 to 8.5 percent in 1982 and 7.4 percent by the mid-1980s. The problem remained serious, however, because of political unwillingness to raise public revenue to the required level. In fact, the central government managed to finance only its public current expenditures with its revenues. Almost all capital expenditures, which averaged around 3.5 percent of GDP by the mid-1980s, were financed with borrowed funds, and often even some of the current expenditures had been financed with borrowed funds, thus increasing the debt-servicing burden.

Total revenue averaged around 13 percent of GDP in the 1970s and remained at the same level in the mid-1980s. In view of the disappointing revenue level, a new tax package was instituted in 1984-85 to raise revenues, including an increase in the tax rates on interest earnings from 10 percent to 12.5 percent, a reduction in the standard deduction for self-employed persons, the introduction of an estate tax, the abolition of preferential rates for companies listed on the stock exchange, the abolition of tax exemptions for selected state enterprises, streamlined exemptions and deductions for business taxes, and other measures. The resulting gains in revenue were, however, partially offset by measures to simplify the personal and corporate tax system. No effort had been made to reduce legal exemptions and illegal evasions. The net revenue effect of the package was therefore negligible.

Some experts concluded that a broader tax base, less complicated tax structure, and lower tax rates needed to be considered in the tax reform. Also, contributions and taxes paid by the state-owned enterprises should be increased because they had dropped from 41 percent of profit in the late 1970s to only 23 percent by the mid-1980s.

The Ministry of Finance required state enterprises to make specific improvements in their financial condition as a prerequisite for obtaining guarantees for borrowing. The measures included financing 25 percent of new investment from the state enterprises' own resources, forwarding at least 30 percent of their profits to the treasury, privatizing commercial enterprises, introducing corporate-planning systems, and limiting debt financing. Such measures did not lessen the burden of state enterprises on the budget, and their capital expenditure financed by the government had stayed at the same average annual rate of 3.5 percent of GDP in the 1970s and mid-1980s. It was noteworthy, however, that their performance had improved, with savings rising from 0.2 percent of GDP during the Fourth Economic Development Plan period (1977-81) to 1.4 percent of GDP by the mid-1980s.

With approximately 68 state-owned enterprises, Thailand had fewer than the average in other Southeast Asian countries, such as the Philippines, with 264. Nevertheless, the government was very concerned with their performance. The largest ones in terms of assets were in public utilities, transport and communication, financial institutions, and petroleum. The smaller ones were in manufacturing, agriculture, commerce, and services. The state enterprises did not represent the entire extent of public ownership in the economy; in the mid-1980s, the government received 75 percent of the shares of 24 troubled finance companies in order to rescue them from bankruptcy. In addition, the Ministry of Finance held minority shares in eighty-eight other private firms. All state enterprises were attached to a parent ministry or to the Office of the Prime Minister, and there were five core agencies and two committees to supervise their activities. Some experts suggested that, in order to improve the efficiency of state enterprises, the enterprises needed to be more decentralized and exposed to free market competition.

The government spent approximately US$16 billion during the period from 1982 to 1985 (see table 6, Appendix). In real terms, this represented an increase of about 52 percent over public expenditures from 1977 to 1981, the fourth plan period. Because an increasing percentage of the budget was devoted to recurring obligations, fewer funds were available for capital investment. Close to 70 percent of current expenditure was used for wages, salaries, interest costs, and defense. Investment in energy, transport, and communication had taken nearly 64 percent of total capital expenditure by the mid-1980s. Agriculture received a fairly constant proportion of about 15 percent of total public capital expenditure, and industry dropped from 1.3 percent to 0.9 percent between the end of the 1970s and the mid-1980s. Education, health, and welfare together continued to receive about 12 percent throughout the same period.

Library of Congress Country Studies

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