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Populist pledges could lead to fiscal crisis

If implemented, the political parties’ election campaign promises, and their populist policies in particular, could drag the country into a fiscal crisis in the next three to four years while also boosting inflation, according to Rangsit University’s Economic and Business Research Centre for Reform.

Speaking at a seminar yesterday on “Analysis on Economic Policy Campaigns of Thai Political Parties”, Anusorn Tamajai, the centre’s director, indicated that if the populist projects were implemented once the new government took office, a fiscal crisis could follow as almost all of them – such as the mega-projects for double-track rail systems – would require a huge amount of investment.

Based on the centre’s analysis, despite good signs of democratic development in terms of campaign rivalry, the main political parties are seen to be avoiding campaigning on tax restructuring and the potential sources of state revenue to finance their populist projects.

“The Democrat Party’s policy campaign focuses on development for quality of life, while Pheu Thai emphasises a number of mega-projects. Both parties are campaigning on mega-projects like double-track rail systems. However, there is much less detail on how to mobilise funds for the proposed investment,” Anusorn said.

Most political parties are promising lower tax rates but they do not propose any tax reform, which raises a question about the sources of state revenue, said Witayakorn Chiengkul, dean of the College of Social Innovation at Rangsit University.

To stabilise the country’s fiscal position, both tax increases and reductions should be introduced, he said.

Besides, the proposed increase in the minimum wage promised by several parties could boost inflation to a higher degree than a normal rise in wages and cause companies to shift to the hiring of more workers from neighbouring countries, he said.

The current minimum wage stands at Bt220 per day in Bangkok, while the country’s highest level is Bt221 in Phuket.

If the minimum wage is raised as promised, it will push up the costs of operators, especially in labour-intensive industries, which could fuel inflation, said Pannee Charamporn, assistant professor at the university’s faculty of economics. Thailand has a number of crucial labour-intensive industries, notably textiles, electronics and agriculture.

May’s year-on-year headline inflation rose to 4.19 per cent, while the core figure, excluding raw-food and energy prices, increased to 2.48 per cent.

Inflation is a major concern for the economy and seminar participants agreed that inflation expectations were well anchored. However, the Bank of Thailand remains alert to the risks and said it would take appropriate action to ensure that inflation converges on the target.

In parallel with the campaign promises for a rise in minimum wages, a concrete plan for improving workers’ productivity should also be formulated for serious implementation, Pannee said.

“None of the parties speaks about concrete plans to increase labour productivity clearly,” she added.

During 2000-07, productivity grew at an annual rate of 3 per cent, compared with 9.2 per cent in China, 5.3 per cent in Vietnam and 5.1 per cent in India, according to Siam Commercial Bank and the Labour Ministry.

If minimum wages are hiked while productivity remains low, Thailand may lose its cost competitiveness, which could encourage some companies to move their production bases overseas, or cause layoffs, Pannee warned.

The general election takes place on July 3.

Source: Bangkok Post

ThaiVest Editorial Team