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Cash breaks unlikely to spur growth

Release2016-12-28

NONARIT BISONYABUT
KANTAPHON AMORNRAT

In its bid to invigorate the stagnant economy by the end of the year, the government recently offered a cash handout scheme for low-income earners and a year-end shopping tax break.

Even though both initiatives have their merits, it is questionable whether they will result in a significant economic boost as expected.

Unarguably, from an equity standpoint, the cash-handout measure can decrease social inequality and support those in need and who usually receive few opportunities like this. With additional cash from the government, the poor can afford to pay for things they had not planned for.

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Photo: Bangkok Post on Wednesday, December 28, 2016

Economics teaches that low-income households spend a larger portion of their additional income than affluent households.

This finding favours an argument to give additional cash to the poor to increase overall consumption in the economy.

Similarly, the shopping tax break encourages more spending on domestic goods and services that aims to boost the economy over the course of two weeks before the New Year holiday.

The government believes that additional consumption driven by this plan will lift gross domestic product (GDP) by up to 0.2%.

However, it is still debatable whether both plans can actually reach their targets of increasing household consumption and stimulating the economy as many crucial elements may have been overlooked.

Although low-income earners tend to not put money they receive from the government into savings, it is still unclear how they will spend it.

Given that many poor people are heavily indebted, their first priority could be to repay debt, rather than shop for goods and services. As a result, the cash handout may not help generate growth in household consumption as the government envisioned.

The tax break scheme, which was also implemented last year, has gained high public attention since the announcement last month.

Realising the government will offer a tax cut for shopping, consumers might put their retail plans on hold or move them forward to take advantage of the benefit.

Therefore it is hard to judge the level of consumption as a result of the tax break. Both the cash handout and the tax break represent an absence of strategic planning by the government. They are short-sighted policies that lack careful thought on potential and actual benefits and longer-term economic effects.

The cash handout scheme runs into difficulty when deciding on eligible recipients.  Under the programme, each of 3.1 million individuals, whose annual income is less than 30,000 baht, is entitled to a 3,000-baht cash handout. About 2.3 million people who earn more, in the range of 30,000-100,000 baht a year, get 1,500 baht each.

According to the National Statistics Organisation (NSO), people who live under the poverty line, who should be eligible to the cash handout, are those who earn less than 2,644 baht per month or 31,728 baht per year. Taking the NSO definition into account, the second group of recipients, about 2.3 million people, are not defined as poor.

Therefore, they might not fit the rationale of the programme and should not be eligible for the cash handout. The government could have saved more than 3.45 billion baht if the programme excluded this group of people.

In practice, the cash handout scheme may see non-eligible people, immigrants and middle-income earners, on the list of recipients. This would most likely be as a result of the government’s approach that lets individuals register for the scheme by themselves through certain banks. This self-registration process requires only a few documents, while the screening process is pretty loose.

However, compiling the list of those eligible for the tax break is not a problem as it will be based on a current list of 4 million taxpayers. This means the tax benefit will go to a group of middle- and high-income earners who account for just 7% of the population.

More importantly, it is still uncertain whether the two schemes will bring about long-term economic growth.  The current situation of household debt in Thailand, which is on the rise, has already generated some concerns about economic growth in the near future.

Thus, the government’s efforts to increase household consumption could worsen indebtedness among the poor. The government’s schemes also face criticism as they are just populist policies.

This kind of rebuke can affect the people’s perception of social programmes of a similar nature and, consequently, discourage future governments and policy-makers from proposing any necessary cash handouts or in-kind programmes that will actually address poverty and inequality issues in Thailand.

Undeniably, the government has good motives for implementing both the cash handout and tax break schemes. Without careful assessment, the project’s impacts to the economy and society would potentially be much smaller than what the government had expected.

The government should rethink and revamp these and other measures it has introduced to stimulate the sluggish economy.


 

Nonarit Bisonyabut is a research fellow and Kantaphon Amornrat is a researcher at the Thailand Development Research Institute (TDRI). Policy analyses from the TDRI appear in the Bangkok Post on alternate Wednesdays.

First published:  Bangkok Post on Wednesday, December 28, 2016