Wednesday, December 17, 2008

Risk of B100bn tax revenue shortfall

Government revenues for fiscal 2009 could fall 100 billion baht below targets as a result of the slowing economy, warns caretaker finance minister Suchart Thada-Thamrongvech.

The 2009 budget to next Sept 30, has a revenue target of 1.58 trillion baht against spending of 1.835 trillion.

But Dr Suchart, in his last days in office, warned that the incoming government would face greater challenges in fiscal policy as the sharp slowdown in economic activity hurts tax revenues.

''We estimate that revenues for the fiscal year could fall to just 1.48 trillion baht, with the shortfall mostly coming from the Revenue Department,'' he said.

Tax revenues, particularly value-added taxes, have dropped as consumers cut spending due to the slowing global economy. Corporate and personal income tax revenues are also expected to decline as well as company profits fall and bonus and salary increases decrease.

Economic growth next year is projected by some analysts to drop to less than 2% from over 4% this year as a result of slowing exports and weak tourism revenues.

Dr Suchart said economic growth in the first quarter could fall to just 0.5% to 1%.

A decline in tax revenues could potentially push the budget deficit to as high as 350 billion baht from 249.5 billion as set under the current budget act.

''If the new government wants to further increase spending, it may have room to increase the deficit by another 40 to 50 billion baht, depending on how one makes the calculations,'' Dr Suchart said.

Current law restricts new borrowing to cover a revenue shortfall at no more than 20% of expenditures for a given year. Under the 2009 budget, borrowing to finance deficit spending is limited at 430 billion baht.

Dr Suchart noted that another option would be for the new government to borrow overseas to support economic and social development programmes, with the law allowing new offshore borrowing at no more than 10% of budget expenditures.

In any case, he said expanded fiscal spending was critical to offset declining private investment and spending, and suggested that the current guideline fixing public set at no more than 50% of gross domestic product should be reconsidered given the current economic crisis.

Public debt now stands at 38% of GDP, a relatively low level considering Thailand's economic peers.

Dr Suchart added that he disagreed with calls by the private sector to cut VAT to just 3% from 7% now, saying that current rates were already relatively low compared with other countries.

In principle, income taxes should be structured to not penalise workers, with low income or corporate taxes offset by higher consumption taxes.

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