1 Fiscal Sustainability, Inflation Targets and the Appropriate Policy Mixed

2 Outline 1. Public Debt and Fiscal Risk Assessment 2. Fiscal Model 4. Fiscal Sustainability 3. Policy Coordination 5. Conclusion

3 Debt of the public: Not debt of the government or any particular person Public Debt Debt burden borne by the public (taxpayers) Debt incurred and accumulated by governments over time

4 Thailand’s Public Debt % of GDP 52. 3% % (2,869 Bil. Baht) 11.5 (614 ) 17.6 (942 ) 24.5 (1,3 13) 14. 0% 19 96

, Public debt + Off- budget expenses 53.52, Public debt (as of Mar 2002) - 20 Bil. B. annually Education reform - 24 Bil. B. annually Universal health insurance (30 Baht) - FIDF 2+3 = 892 Bil. B. (Less 615 Bil. B. already included in public debt.) FIDF debt 49.22, Total - 2 Bil. B. annually Reserve fund for GPF Off-budget expenses (within next 5 yrs) % of GDP Bil. Baht Less Low-risk state enterprise debt Public Debt and Fiscal Risk Assessment

6 Potential Liabilities  Thai Asset Management Corporation (TAMC)  Decentralization Excluded Liabilities  Financial state enterprise debt  Blanket guarantee of creditors and depositors  Extra-budgetary funds  Social security fund  Local government

7 Outline 1. Public Debt and Fiscal Risk Assessment 2. Fiscal Model 4. Fiscal Sustainability 3. Policy Coordination 5. Conclusion

8 Domestic demand GDP growth Debt/GDP Government spending Monetary policy DINT  GDP growth Inflation GAP  PP RP  GDP  Output gap TAX  PB  Tax revenue Budget deficit RB  DEBT  Bond yield Debt interest C , I  RD3M  MLR  Market rates GDP  CINFEX  Expectations C , I  Domestic demand GG Debt Dynamics

9 PUBLIC DEBT Central government domestic debt Debt(t) Central government foreign debt State enterprise debt Debt(t-1) RevenueInterest Tax revenue __ GDP Bond yield RP14D Expenditure Fed Funds  if budget surplus  if budget deficit Modelling Debt

10 Monetary Policy Reaction Function RP14D Equilibrium rateInflation gap Output gapInflation  14-day repurchase rate is monetary policy instrument.  *[Actual GDP – Potential GDP]  *[Actual inflation - Target ]  Monetary policy responds to deviations of GDP from potential and inflation from target.  Weights ( ,  ) applied on gaps determine how strong interest rate adjusts to output and inflation deviations.

11 Monetary Policy Reaction Function % Monetary policy behaves broadly in line with policy rule.

12 Fiscal Policy Reaction Function  Tax rates (VAT, personal income tax) are fiscal policy instruments.  Fiscal policy responds to deviations of debt (Debt/GDP) from debt target, in terms of direction and speed.  Tax-smoothing parameters ( ,  ) determine the rate at which tax rate changes. TAX  *[Debt(t) – Target]  *{[Debt(t) – Target] - [Debt(t-1) – Target(t-1)]}

13 Outline 1. Public Debt and Fiscal Risk Assessment 2. Fiscal Model 4. Fiscal Sustainability 3. Policy Coordination 5. Conclusion

14 Macroeconomic Stability Monetary Policy RP14D Price Stability TAX, G Fiscal Sustainability Fiscal Policy Sustainable Growth Coordination between Monetary and Fiscal Policy

15 Coordination between Monetary and Fiscal Policy (VAT and RP14D) % % Debt stays above target. Monetary policy tighter and VAT rate increases from 7% to 11%.

16 Coordination between Monetary and Fiscal Policy (VAT and RP14D) % Larger impact on inflation. Real GDP Growth Core Inflation

17 Coordination between Monetary and Fiscal Policy (Personal Income Tax and RP14D) % % Debt reduced to target. Monetary policy stance remains easy, while personal income tax rate doubles.

18 Coordination between Monetary and Fiscal Policy (Personal Income Tax and RP14D) % Stronger effect on real GDP growth. Real GDP Growth Core Inflation

19 Macroeconomic Policy Sustainable Growth Consistency Commitment Clarity Coordination Cooperation Economic Stability Coordination between Monetary and Fiscal Policy

20 Outline 1. Public Debt and Fiscal Risk Assessment 2. Fiscal Model 4. Fiscal Sustainability 3. Policy Coordination 5. Conclusion

21 VATPersonnel Budget Growth < 5% Off- Budget Expenses Case 1 – Base 10 %  - Case 210 %  Case 310 % -- Case 47%  - Scenarios for Long- term Projections

22 Public Debt % of GDP Peak 60.9% in 2005 Peak 65.7% in 2005

23 Interest Payments : Total Expenditure % Peak 12% in 2007 Peak 13.6% in 2007

24 Debt Services : Total Expenditure % Peak 14.9% in 2007 Peak 16.5% in 2007

25 Public Debt In the past 20 years and in the next 30 years 52. 3% % % % % of GDP

% % % % Debt Service and Interest Payments In the past 30 years and in the next 30 years % of Total Expenditure

27 Fiscal Sustainability Slower economic growth? Higher interest rates? Economy reaches potential in medium term Low interest rate environment

28  Fiscal consolidation to accommodate private sector recovery. Fiscal Sustainability  Reform the public sector and keep personnel budget growth below 5%.  Increase VAT rate back to 10% and introduce other tax reforms.  Increase efficiency in budgeting e.g. multi-year budgeting plan.  Debt management strategy should be in line with bond market development plans.  Closer coordination between government and state enterprises in debt management plans.

29 Outline 1. Public Debt and Fiscal Risk Assessment 2. Fiscal Model 4. Fiscal Sustainability 3. Policy Coordination 5. Conclusion

30 Monetary Policy Price StabilityFiscal Sustainability Fiscal Policy Sustainable Growth Economic Stability Coordination between Monetary and Fiscal Policy