Financial Planning and Control in Thailand - Case Study Example

Financial Planning and Control Table of Contents 2 Introduction 3 Budget Forecast 3 The forecast of the budget for the fiscal year and 2013 has been done using the method of Simple Annual Growth Rate. Here the growth rate over the last 19 years from the fiscal year 1990 to 2008 for the various heads has been calculated to find out the growth rate for the future fiscal periods. The growth rate of the revenue is calculated as 16.48% and for the Expense as 28.05%. This shows that the rise in the budgeted expenditure is more than the rise in the budgeted revenue resulting in a budget deficit in the coming years. For reducing this deficit the government can either raise its tax base or curb the public expenditure. 3 Analysis of the fiscal changes 9 Government debt 10 Government Plans 11 Conclusion 13 Reference 14 Introduction The economy of Thailand went through a rocky phase in the beginning of 2009. Its performance has improved in the last term. This has been possible due to the upswing in manufacturing production, rebound in the financial market, rise in tourist numbers etc. However it will take nearly 2-3 years more for the Thai economy to reach the potential growth stage (World Bank, 2009). Budget Forecast The forecast of the budget for the fiscal year 2011, 2012 and 2013 has been done using the method of Simple Annual Growth Rate. Here the growth rate over the last 19 years from the fiscal year 1990 to 2008 for the various heads has been calculated to find out the growth rate for the future fiscal periods. The growth rate of the revenue is calculated as 16.48% and for the Expense as 28.05%. This shows that the rise in the budgeted expenditure is more than the rise in the budgeted revenue resulting in a budget deficit in the coming years. For reducing this deficit the government can either raise its tax base or curb the public expenditure. There has been a rise in the government revenue in the year 2008 as compared to the year 2007. Despite the rise in the revenue there is a deficit in the budget. So it has to borrow approximately 36953 million baht to manage its budget deficit. The budgeted expenditure of the government in the year 2010 is 1700000 million baht. There has been a decrease of nearly 12.9 percent in this amount as compared to 2009. With estimated revenue of 1350000 million baht there is a budget deficit of 350000 million baht for this year. The routine expenditure of the government in this year of 1436389.9 million baht marks an increase of 1.8 percent over the fiscal budget of 2009. This expenditure accounts for 84.5 percent of the total budget. The capital budget in the year 2010 is 50.5 percent less as compared to the previous year. There has also been a decline of 20 percent in the “payment of loan principal” in 2010 as compared to 2009 (Fiscal Policy Office-b, n.d.). Budget Forecast for the years 2011, 2012 and 2013- Millions of Baht/ Year Ending September 30 Analysis of Fiscal Budget 2009-10 Public finance relates to the payment made for the activities of the government which also includes activities for designing as well as administration. Public finance is mainly concerned with the financial aspects of government or public bodies. This mainly relates to the activities pursued by the government and the means of financing those activities. Owing to the financial crisis this is presently under stress (Massachusetts Institute of Technology, 2009; Blinder, 1974). The economy of Thailand witnessed a strong growth in the export volume in 2007. Besides this the public spending played an important role in boosting the economy when the private spending slowed down. In this fiscal year there was an expansion in the fiscal policy with the government achieving the record of highest disbursement of 1.57 trillion baht (Ministry of Finance, 2007). In the year 2008 there was an escalation in public expenditure for supporting the domestic demand. There was an increased public investment in the infrastructure projects. In this year the current account surplus was forecasted to fall to 3.3 percent of GDP. This is mainly because of the lower trade surplus due to a fall in the export value growth and rise in the import value growth. The adverse economic situation slowed down the economic development of the country in the year 2009 as is evident from the Gross Domestic product (GDP) deficit in the first half of the year. Due to this the budget allocation and tax collection policy of the government have changed to a certain extent. In the annual budget of 2010 the deficit budget policy of the government has been extended to 3.8 percent of GDP (Thamrongthanyawong, n.d.). The national budget of Thailand for the year 2010 has been kept at 1.7 trillion baht. This has been effective from October 2009 and will continue till September 2010. Out of this budget of 1.7 trillion baht, nearly 84.5 percent i.e. 1.4 trillion baht has been set aside for the regular spending. Approximately 12.5 percent of the total budget i.e. 212 billion baht has been set aside for investment and roughly 50.9 billion baht comprising 3 percent of the budget has been kept for debt repayment The government has designed eight strategies for allocating budget. An amount of 144.6 billion baht has been allocated for boosting the confidence in the country and stimulating the national economy. An amount of 173 billion baht is for national security, 506.6 billion baht has been set aside for social development and improving the standard of living of the locals. An amount of 158.7 billion baht has been kept aside for economic management, 29.7 billion baht has been kept for natural resource, land and environment management, 12 billion baht is for research, technology and innovation, 7.4 billion baht has been allocated for international economy and foreign affairs, another 241 billion baht has been kept aside for good governance. (The Government Public Relations Department, 2009). In this year’s budget an amount of 245.5 million baht is kept for the small tourist companies that passed through troubled times during the recent downturn. Thai government has also approved for a scheme of price intervention in farm crops like maize, oil palm and tapioca in 2009-10 crop season. In this regard the government has to spend nearly 25-75 billion baht. A budget of approximately 5-7 billion baht comprising 1.57 billion baht “to buy-back farmer’s debt” and 4.14 billion baht “for occupational training” has also been approved. The government has also unveiled a plan for Public-private –partnership (PPP) for procuring funds for public services and infrastructure projects. Various stimulus packages have been implemented and budgeted expenditure raised in the earlier years to combat inflation in 2008 and recession in 2009. In 2009 the central government earmarked and gave a subsidy of nearly 29000 million baht that was budgeted for mitigating local problems like roads, waste, project launch and training etc. This was cut down by 28000 million baht from the 2009 budgeted amount of 57000 million baht to 29000 million baht for 2010 leading to a scale-down in the public services. Analysis of the fiscal changes For stimulating the economy the government of the country has approved a package of tax relief of 40 billion baht. This includes a tax allowance of nearly 300000 baht for people acquiring a new house in this year. Certain property tax breaks for the companies have also been announced. There has also been an extension in the amount of tax allowance of nearly 100000 baht annually. This covers the interest payments on mortgage. Tax breaks relating to the property sector is expected to cost the government an amount of nearly 36.5 billion baht as lost revenue. The small and medium scale enterprises of all the sectors with income less than 1 million baht will be given tax exemptions. The amount of exemption was previously 60000 baht. The tax related measures are a part of the stimulus package of 300 billion baht. The small as well as medium private businesses will be extended soft loans of five years tenure in lieu of an agreement of avoidance of lay-off. Apart from the announcements made for businesses, the government has also announced for the free supply of electricity and water for poor besides subsidizing the public transport. To assist the export business in the country the Bank of Thailand (BOT) reduced the policy rate by nearly 175 basis points to 2.0%. The monetary policy of the bank is expected to remain accommodative (Asean Affairs, 2009; Reuter, 2009). Government debt The public debt of Thailand has increased over the last few years. This mainly consists of government debt, Financial Institutions Development Fund (FIDF) debt and non-financial public enterprise (NFPE) debt. The current data of public debt includes the debt of NFPE. This has overstated the country’s fiscal burden, as the debt of state enterprise is a constituent of the fiscal burden only in the event of default by the state enterprise. Some of the policies of the government need future funding or are perpetual in nature but some funding are even now not recognized as a part of government debt. Some of the initiatives of the government can create demands on the budgets or can become contingent liabilities. The initiatives that are to be financed by the budget include village fund. This is a revolving fund under which each urban community or village is entitled to a one time availability of 1 million baht for local investment and other ancillary occupations. The scheme of universal health insurance, a part of the budget initiative, is for extending health care facilities at low cost to 45 million people. Under the education reform, education is to be made compulsory till nine years along with free education facilities for a period of 12 years. Besides this there are various government initiatives that have created concerns relating to the future spending. However the improvement in the methods of budgeting will facilitate the implementation of the fiscal policies without impacting fiscal stability. For improving the fiscal position the government plans to improve the taxes. In this regard the government aims at introducing measures to increase the tax base and improve tax collection efforts. For this reason the revenue of the government had increased substantially in 2001-02. This was mainly due to better tax administration and reduced government expenditure in the second part of the fiscal year resulting “in an actual cash deficit of 2.2 percent of GDP” which is less than the estimated 3.2 percent. To improve the fiscal position the government focused on implementing the method of zero-based budgeting together with performance based budgeting which is expected to yield effective spending and efficient allocation. Another way of improving the fiscal position is through corporatization of the state enterprises in the country. By this the competence of the state enterprises is expected to improve resulting in higher amount of profits for the shareholders. As a part of the “civil service reforms” an assessment of the outcome and performance will facilitate better budget allocation. At present the public debt position as well as the fiscal position of the country is strong. This has mainly been possible due to the improvement in the revenues and expenses. There has been a rise in the amount of taxes collected. Along with this, the corporatization of the state enterprises is expected to improve the revenue generation of the government. As per the conclusions drawn by BOT, the public debt of the country is sustainable even during extreme circumstances. The amount of public debt reached high levels of 55 percent of GDP in the fiscal year 2001-02 and then it has taken a declining trend. There was a sharp decline in this amount in 2006-07 as compared to 2005-06. This was mainly due to the debt repayment by the government that was due for the fiscal year 2006-07. Along with this there was an improvement in the debt level of FIDF due to its expected income in the forthcoming years (Rattakul, n.d.). Government Plans Due to the global financial crisis there has been a sharp decline in the export, production and private spending. The government plans to stimulate investment and consumption through Thai Khemkhaeng programme. This is expected to yield high economic and social impact. Most of the investments will happen between 2010 and 2012 at an approximate rate of 5 percent of the GDP each year. Such investments will create employment opportunities and make the private sector more confident and encourage private spending. The number of new jobs created is expected to increase by nearly 1.5 million in the coming three years. During this time the ratio of public debt to GDP is expected to increase slightly and reach a level of approximately 58 percent in the year 2012. Under this scheme there are plans of major achievements in nearly seven areas. This includes, increase in the agricultural land area from 24.5 to 25.6 million rai and bring down the number of people facing flooding difficulties from 400000 to 40000. An increase of 83 percent to 100 percent is expected in the area of paved rural roads with a reduction of transportation logistics cost from the present 19 percent to 16 percent. A plan to improve the education quality by reducing the illiteracy level to zero and enhance ‘the student to computer ratio’ is also there. Plans are there for improved hospital services and higher number of availability of beds. Efforts will also be directed towards an increase in the household income from 64000 baht to 120000 baht in the selected areas of five southern regions. The total amount of investment in this scheme is approximated to be 1.44 trillion baht that includes the “shovel-ready projects” of nearly 1.06 trillion baht. An amount of 200 billion baht has been approved by the cabinet for the project spending. The projects will be implemented by several ministries like Ministry of Education, Ministry of Agriculture and Co-operative, Communication Ministry (Fiscal Policy Office-a, n.d.). Conclusion In line with the various countries in the world the government of Thailand has announced for stimulus packages to aid the economy to come out of the global financial crisis. Besides announcing the tax exemptions for businesses the government has also initiated a number of relief programs for the poor. In an economic environment that is coping with the pressure of collapse of business giants this kind of policy measure is needed to inject confidence in the system. With the shutdown of businesses there will be a rise in the level of unemployment. An increased investment in the infrastructure projects together with a rise in the government spending will solve the unemployment problems in the country. Announcing tax breaks on the purchase of new homes there will bring some relief to the property markets that have been affected the most by the global financial fiasco. Reference World Bank. 2009. Thailand Economic Monitor November 2009. Available at: http://siteresources.worldbank.org/THAILANDEXTN/Resources/Nov2009TEMppt.pdf [Accessed on March 22, 2010]. Thamrongthanyawong, S. No Date. Effects of Global Economic Crisis upon Thai Local Government. Available at: http://unpan1.un.org/intradoc/groups/public/documents/UNGC/UNPAN036624.pdf [Accessed on March 22, 2010]. The Government Public Relations Department. 2009. National Budget for 2010 Set at 1.7 Trillion Baht. Available at: http://thailand.prd.go.th/view_inside.php?id=4266 [Accessed on March 22, 2010]. Ministry of Finance. 2007. Thailand’s Economic Outlook 2007and 2008 (As of November 2007). Available at: http://www2.mof.go.th/economic_report_detail.php?id=2 [Accessed on March 23, 2010]. Asean Affairs. 2009. News. Available at: http://www.aseanaffairs.com/thailand_tax_relief_package_to_boost_economy [Accessed on March 23, 2010]. Rattakul, Y. No Date. Thailand’s recent public debt issues. Available at: http://www.bis.org/publ/bppdf/bispap20x.pdf [Accessed on March 23, 2010]. Fiscal Policy Office-b. No date. Fiscal Policies. Economic Policies. Available at: http://www.fpo.go.th/eng/FiscalPolicies.php [Accessed on March 23, 2010]. Fiscal Policy Office-a. No Date. Government’s ‘Thai Khemkhaeng’ plan has a lot of potential. Available at: http://www.fpo.go.th/eng/content.php?action=view§ion=3100000000&id=22254 [Accessed on March 23, 2010]. Reuter. 2009. Thai parliament passes 2009/2010 budget. Available at: http://in.reuters.com/article/specialEvents4/idINSP45383620090829 [Accessed on March 23, 2010]. Massachusetts Institute of Technology. 2009. 11.902 Advanced Urban Public Finance: Collective Action and Provisions of Local Public Goods. Available at: . http://ocw.mit.edu/OcwWeb/Urban-Studies-and-Planning/11-902Spring-2009/CourseHome/ [Accessed on March 23, 2010]. Blinder, S.A. 1974. The Economics of public finance. Atlantic Publishers & Distri. 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