The Fiscal Policy Role in Recession Economy and Issues to be Considered Roongthip Jindapol Visiting Scholar, PRI, Ministry of Finance, Japan 24 July

Transcription

1 The Fiscal Policy Role in Recession Economy and Issues to be Considered Roongthip Jindapol Visiting Scholar, PRI, Ministry of Finance, Japan 24 July

2 Outlines I. Thailand s Fiscal Policy Role in Recession Economy II. Thailand s Current Issues to be considered Public Debt Fiscal Sustainability Framework Quasi-Fiscal Activities Fiscal Risk III. Japanese s Fiscal Policy Role in Recession Economy IV. Japanese s Current Issues to be considered Fiscal Consolidation Quasi-Fiscal Activities V. Thailand s Policy Implication 2

3 Fiscal Policies and Measures during crisis (July March 1998) Problems - Net international reserves were depleted dramatically. - Rapidly decline confidence in Thai baht currency - High current account deficit Expenditures - Cut the budget expenditures Revenues - Increased VAT from 7% to 10% - Increased import duties on luxury goods - Increased gasoline excise tax 1 baht per litter 3

4 Thai GDP % (5.0) (0.6) (0.2) 1997 Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 Q4 (1.4) (1.6) (4.2) (7.1) (7.2) (10.0) (10.5) (15.0) (13.9) (13.9) (20.0) GDP 4

5 Fiscal Policy after crisis (April ) Problems Expenditures Debt - international reserve still decreased and less public confident on Thai baht currency - Adjusted fiscal policy from tighten to expansion fiscal policy - Withdrew loans from international agencies ; IBRD, JBIC, to increase international reserve and spent expenditures to stimulate economy 5

6 Fiscal Policy after crisis (April ) Problems - Weak and ailing financial institutions and problems of Financial Institutions Development Fund (FIDF) Debt - Borrowed long term debt 500 billion baht to finance FIDF loss and solved problems in short term financial market which FIDF created significant distortions in financial market. 6

7 Fiscal Policy after crisis (April ) Problems Expenditures Debt - To resolved high interest rate. - Issued government bonds 500 billion baht to restructure FIDF debt from short term loans to long term debt to solved FIDF s problems in financial market. 7

8 Fiscal Policy after crisis (April ) Problems - To solved high inflation rate Revenues - Reduced tax rate to decrease goods and service price for instance by temporary cut VAT rate from 10 percent to 7 percent 8

9 Fiscal Policy after crisis (April ) Problems - Capital outflow and shortage of liquidity. Debt - Borrowed external loans to inject liquidity to economy and allocated to special financial institutions to lend to people. 9

10 Fiscal Policy after crisis (April ) Problems - Reduced adverse the social effects from the crisis. Expenditures - Increased expenditures to reduce social impact and the most vulnerable segments of society. - Issued social investment project to alleviate unemployment problem 10

11 Fiscal Policy after crisis (April ) Problems Expenditures - Reduced adverse the social effects from the crisis. - Provided additional fund in the amount of 2,000 million baht to the Fund for Farmers' Assistance - Expanded the Education Loan Fund and relaxed the Fund s s lending criteria and increased budget and loans to provide scholarships for students with unemployed poor parents 11

12 Fiscal Policy after crisis (April ) Problems - Reduced adverse the social effects from the crisis. Debt - Borrowed external loans through the Social Sector Program Loan to reduce social impact in labor market, social welfare, education and public health. - Loans to adjust structure in agricultural sector 12

13 Fiscal Policy after crisis (April ) Problems - Economy recovery still was possible downsides risks and Thai people still didn t t have confidence in economic Revenues -Exemption of the personal income tax for the first 50,000 baht. - Extending the period of VAT reduction from 10 percent to 7 percent - Exemption of VAT rate of 1.5 percent on the sales of businesses with revenue exceeding 0.6 million baht but not exceeding 1.2 million baht per year 13

14 Fiscal Policy after crisis (April ) Problems - Economy recovery still was possible downsides risks and Thai people still had not had confidence in their economic Debt - External borrowing from OECF, JEXIM and IRBD under the Emergency Decree authorizing the Ministry of Finance to borrow external loans to revive economy B.E (A.D. 1998) 14

15 Issued Bonds to Solve FIDF Losses FIDF I 23 May 98 FIDF II 31 Oct. 00 FIDF III 23 Jun 02 Amount/ Kinds of Bond 500/Govern. Bond 112/ FIDF Bond (gov.. fully guaranteed) 780/Govern. Bond In billion THB Responsibility Govern. will responsible to pay interest expense and BOT will be amortized principal amount. 15

16 Interest obligation to govern. budget of FIDF bonds In billion THB FY FIDF1 FIDF2 FIDF Total Source : Fiscal Policy Office 16

17 Actual Total Debt of FIDF In billion THB Government Bond to raise an administer loans for FIDF ,026 1,091 Debt of FIDF Total debt related to FIDF Total public debt related to FIDF/GDP ,140 1,206 1,364 1,428 1, Source : Public Debt Management Office 17

18 Factor to Increase Government Domestic Debt 18

19 Loan for FIDF and Loan for Financial Sector Restructuring and Total Govern. Domestic Debt to GDP Govern. Bonds for FIDF Govern. Bonds for FIDF/GDP (%) 2006 In billion THB Total Govern. Domestic debt Total Government Domestic Debt/GDP (%) , , ,

20 Domestic Borrowing for Financing FY Proposed Domestic Borrowing Budget Deficit Proposed Domestic Borrowing / GDP (FY) (%) Actual Domestic Borrowing Billion THB Actual Domestic Borrowing / GDP (FY) (%) Total

21 Principal Outstanding for External Debt as of Sep. 30, 2006 In Million US$ Agencies Direct Government Loans Debt Guaranteed Total 1. IBRD ADB JBIC 2, , , Financial Market 1, , Others , Total 4, , , Source : Budget in brief FY 2007, Bureau of the Budget 21

22 Government Domestic and External Debt 2,000,000 Million Baht 1,800,000 1,600, , , ,561 1,400, , ,842 1,200,000 1,000, , , , ,733 1,508,576 1,614,649 1,797, , ,279 1,293,881 1,279, , , , , , , , , Government Domestic Debt Government External Debt 22

23 Public Debt at the end of 30 Sep million baht 3,400, ,277,498 3,300, ,233, ,200,000 3,126,555 3,100, ,000,000 2,934,431 2,943, ,930, ,900,000 2,804, ,800, ,700,000 2,600, ,500, FY Public Debt Oustanding Public Debt to Nominal GDP (%) percent of GDP 23

24 Central Government Revenue million baht 1,600,000 1,400,000 1,200,000 1,000, , , , p Revenue Revenue/GDP (%) p percent Source : Fiscal Policy Office 24

25 Government Expenditures million baht 1,800,000 1,600,000 1,400,000 1,200,000 1,000, , , , Source : Fiscal Policy Office p 2008p Expenditures expenditure /GDP (%) percent

26 Budget Structure FY In million THB Budget structure FY 2007 FY 2008 Amount +/-% Amount +/-% 1. Expenditures 1,566, ,660, (% of GDP) Current expenditures 1,135, ,209, (% of total budget) Capital expenditures 374, , (% of total budget) Principal repayment 55, , (% of total budget) Receipts 1,566, ,660, (% of GDP) Revenues 1,420, ,495, Domestic borrowing 146, , Gross Domestic Products 8,399, ,070, Source : Budget in brief FY , Bureau of the Budget 26

27 Fiscal Sustainability Framework Debt/GDP (%) Debt Service/Budget (%) First year of running budget surplus policy Capital Expenditures to Total Budget Nov Fiscalization of FIDF2 Bond (Jun. 02) Apr Current

28 Macro Economic Assumption Real economic growth rate will 5.0 percent in year Inflation rate 2.5 percent in year Interest rate to finance budget deficit 5% in FY

29 Forecast Fiscal sustainability framework FY FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Public Debt/GDP Ratio Debt Service/Budget Capital Expenditures to Total Budget Source : Fiscal Policy Office 29

30 Cash Balance 50,000 Million baht % (50,000) (1.00) (100,000) (150,000) (2.00) (200,000) FY Cash Balance Cash Balance/GDP (FY) (%) (3.00) 30

31 Primary Balance and Debt/GDP Ratio 200,000 million baht , ,000 50, % Debt/GDP Ratio (50,000) (100,000) Primary Fiscal Balance Primary Fiscal Balance/ GDP (FY) (%) 0.0 (0.5) (1.0) (1.5) GDP Growth interest rate

32 Quasi-fiscal activities QFAs are carried out on behalf of the government by central bank, public financial institutions, and nonfinancial public enterprises In other word, the quasi fiscal is the method that has nature as fiscal policy, but the money doesn t t come from the budget. QFAs can have significant implications for public policy and the general government financial position, but these fiscal effects are not usually reflected in fiscal reports for the general government. 32

33 Thailand s s Quasi-fiscal activities The government has introduced quasi-fiscal activities through special financial institutions. For example, special financial institutions (SFIs( SFIs) providing loans to SMEs at below-market rates or poorly secured. SFIs guaranteed a loan to SMEs. SFIs providing subsidy lending to lower income people or particular groups to buy their houses. SFIs providing loans to lower income people to run their business with the poorly secured. 33

34 Outstanding QFAs In billion baht CY Outstanding funding provided through quasi- fiscal activities Percentage of GDP Percentage of annual Budget Gross Domestic Product 5,917 6,490 7,088 7,816 Annual Budget 1,000 1,164 1,250 1,360 Source : Fiscal Policy Office 34

35 Thai Government Fiscal Risk Matrix Liabilities Explicit (Government liability is recognized by law or contract) Implicit (A moral obligation of the government that mainly reflects public expectations and pressures by interest group) Direct (Obligation in any event) Contingent (obligation if a particular event occurs) 35

36 Direct Explicit Liabilities Sovereign borrowing (foreign and domestic loans contacted and securities issued by central government) Budgetary expenditures Expenditures legally binding in the long term (civil service salaries, civil service pensions) 36

37 Direct Implicit Liabilities Future benefits/payment of the Social Security Fund provide to numbers Future health care financing by National Health Security Office 37

38 Contingent Explicit Liabilities Government guarantees on borrowing/debt by SOEs and public entities Mega projects which central government may receive future burden (Airport Rail Link) State insurance schemes (deposit insurance, flood insurance, crop insurance) 38

39 Contingent Implicit Liabilities Default of SOEs,, public entity on non -guaranteed debt/obligations Support to Special Financial Institution for covering losses due to run quasi fiscal activities by the direction of government Default of central Bank on its obligations (Foreign exchange contracts, currency defense, BOP) Environmental recovery, disaster relief Obligations of FIDF and future recapitalization needs in the banking sector Losses, non-guaranteed obligations, arrears and deferred maintenance of SOEs (losses of State Railway of Thailand, deferred railway track rehabitation) Future possible commitments and obligations of sub-national government Liabilities of extra budgetary funds 39

40 Japanese Real GDP percent GDP in 1990s = 1.4 percent In 1994, GDP had negative growth (0.0) (1.0) (2.0) (3.0) (2.4) (2.1) Source : IMF 40

41 Economic Stimulate Packages Unit : trillion yen Package Announced Date Total Packages Packages /GDP Supplementary Budget 1992 August April September February April September January December April November November October Total Source : Ho-Chul Lee, PRI,

42 Tax Cutting Programs Unit : trillion yen Apr-93 Feb-94 Apr-98 Nov-98 Estimated size Source : Ho-Chul Lee, PRI,

43 Targets for advancing fiscal consolidation Phase II FY 2007 to early 2010s achieve a surplus in primary balance of central and local governments in FY 2011 Required amount : 16.5 trillion yen Expenditures reductions : trillion yen the gap amount will be supplemented through tax reform Phase III (early 2010s to mid-2010s) Prevent a divergence in the ratio of debts to GDP and reduce the ratio in a stable manner Source: Budget Bureau, Ministry of Finance, Japan 43

44 Transition Scenario and expenditure cut by 14.3 trillion yen Debt to GDP ratio Nominal GDP growth rate -nominal interest rate (%) Primary surplus/deficit to GDP ratio Debt to GDP ratio Source: Budget Bureau, Ministry of Finance, Japan

45 Outstanding QFAs Measures Financial Institutions In billion yen FY 2003 FY 2004 FY 2005 Loan to SMEs JASME 7,594 7,500 7,058.4 Small Business Credit Insurance Programs JASME 31, , ,130.3 Special Insurance for Midsize Enterprises JASME Source: JASME Annual Report

46 Comparison of fiscal policy and fiscal position Japan Employed fiscal deficit during recession and economic slowdown Issued JGBs and FILP Bonds Cut tax rate and tax revenues Run quasi-fiscal activities through SFIs Have targets for advancing fiscal consolidation Thailand Employed fiscal deficit during recession and economic slowdown Borrowed external loans to stimulate and revive economy Cut tax rate and tax revenues Run quasi-fiscal activities through SFIs Have fiscal sustainability framework 46

47 Comparison of fiscal policy and fiscal position Japan Have plan to achieve primary balance by FY 2011 Debt service ratio equal to 25.3 percent in FY 2007 Central and local government debt to GDP equal to percent in FY 2007 Have fiscal councils to make recommendations about fiscal policy. Thailand Had plan to achieve fiscal balance within FY 2005 onwards but have been cancelled. Debt service ratio equal to 11.3 percent in FY 2007 Public debt to GDP ratio equal to 41.5 percent in FY 2007 Have Economic Committee to make recommendations about fiscal policy. 47

48 Challenges and Policies Implication for Thai Government Maintain sustained economic growth and economic stabilization Ensure fiscal sustainability framework Keep public debt declining trend Introduce limited deposit insurance to decrease contingent implicit liability Identify and analyze fiscal risks which are possible financial pressure on central government and include contingent explicit liabilities in government financial statement Avoid fiscal indiscipline by moving fiscal activities off budget Set up the fiscal councils to conduct fiscal policy 48