1 Fiscal Sustainability, Inflation Targets and the Appropriate Policy Mixed

1

Fiscal Sustainability, Inflation Targets and the Appropriate Policy Mixed

2

Outline

1. Public Debt and Fiscal Risk Assessment2. 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

010203040506070

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002 (M

ar)

Government Debt State Enterprise Debt

FIDF Debt Public Debt : GDP

Thailand’s Public Debt

% of GDP

5

2.3

%1987

53.5%(2,869

Bil. Baht)11.

5(614)17.6

(942)24.5

(1,313)

1

4 .0

%1996

5

629.340,4

3. Public debt + Off-budget expenses

53.52,8691. Public debt (as of Mar 2002)

- 20 Bil. B. annually 1710 32.3 Education reform

- 24 Bil. B. annually23.1422.2 Universal health insurance 30(Baht)

- FIDF 2+3 = 892 Bil. B . (Less 615

Bil. B . already included in public debt.)

5.227721. FIDF debt

492.2,671 4. Total

- 2 Bil. B. annually 02.132.4 Reserve fund for GPF

94.535 2. Off-budget expenses (within next 5 yrs)

% of GDP

Bil. Baht

137.73

3

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 Assessment2. Fiscal Model

4 . Fiscal Sustainability

3 . Policy Coordination

5. Conclusion

8

Domestic demand

GDP growth

Debt/GDP

Governmentspending

Monetary policy

DINTGDP growth

InflationGAP

P

RP

GDP

Output gap

TAX PBTax revenue Budget deficit

RB

DEBT

Bond yield

Debt interest

C, I

RD3M

MLR

Market rates

GDP

CINFEXExpectations

C, I

Domestic demand

G

Debt Dynamics

9

PUBLIC DEBT

Central government domestic debt

Debt(t)

Central government foreign debt

State enterprise debt

Debt(t-1)

Revenue Interest

Tax revenue

_ _

GDP

Bond yield

RP14D

Expenditure

Fed Funds

if budget surplus

if budget deficit

Modelling Debt

10

Monetary Policy Reaction Function

RP14D

Equilibrium rate Inflation gapOutput 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

0

4

8

12

16

20

24

1995 1996 1997 1998 1999 2000 2001

RP14DRP14D (Estimated)

%

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 Assessment2. 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)

.535

.540

.545

.550

.555

.560

.565

.570

2002:01 2002:03 2003:01 2003:03 2004:011.6

2.0

2.4

2.8

3.2

.08

.09

.10

.11

.12

.13

2002:01 2002:03 2003:01 2003:03 2004:01

RP14D (LHS)RVAT (RHS)

Debt/GDP% % %

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)

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2002:01 2002:03 2003:01 2003:03 2004:01

CINFLATCINFLAT (Baseline)

2.0

2.4

2.8

3.2

3.6

4.0

4.4

4.8

2002:01 2002:03 2003:01 2003:03 2004:01

YGROWTHYGROWTH (Baseline)

% %

Larger impact on inflation.

Real GDP Growth Core Inflation

17

Coordination between Monetary and Fiscal Policy(Personal Income Tax and RP14D)

.51

.52

.53

.54

.55

.56

.57

2002:01 2002:03 2003:01 2003:03 2004:010.8

1.2

1.6

2.0

2.4

2.8

.02

.03

.04

.05

.06

2002:01 2002:03 2003:01 2003:03 2004:01

RH (RHS)RP14D (LHS)

Debt/GDP %% %

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)

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2002:01 2002:03 2003:01 2003:03 2004:01

CINFLAT (Baseline)CINFLAT

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2002:01 2002:03 2003:01 2003:03 2004:01

YGROWTH (Baseline)YGROWTH

%%

Stronger effect on real GDP growth.

Real GDP Growth Core Inflation

19

Macroeconomic Policy

Sustainable Growth

Consistency

CommitmentClarity

Coordination

Cooperation

Economic Stability

Coordination between Monetary and Fiscal Policy

20

Outline

1. Public Debt and Fiscal Risk Assessment2. Fiscal Model

4 . Fiscal Sustainability

3 . Policy Coordination

5. Conclusion

21

VAT Personnel Budget

Growth < 5%

Off-BudgetExpense

s

Case 1 – Base

10% -

Case 2 10% Case 3 10% - -Case 4 7% -

Scenarios for Long-term Projections

22

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

20

20

20

22

20

24

20

26

20

28

20

30

20

32

Case 1 VAT10% + Personnel BudgetCase 2 VAT10% + Personnel Budget + Off-budget ExpensesCase 3 VAT10% + No Personnel BudgetCase 4 VAT7% + Personnel Budget

Public Debt% of GDP

Peak 60.9 %

in 2005

Peak 65.7 %

in 2005

23

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

20

20

20

22

20

24

20

26

20

28

20

30

20

32

Case 1 VAT10% + Personnel BudgetCase 2 VAT10% + Personnel Budget + Off-budget ExpensesCase 3 VAT10% + No Personnel BudgetCase 4 VAT7% + Personnel Budget

Interest Payments : Total

Expenditure%

Peak 12 %

in 2007

Peak 136. %in 2007

24

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

20

20

20

22

20

24

20

26

20

28

20

30

20

32

Case 1 VAT10% + Personnel BudgetCase 2 VAT10% + Personnel Budget + Off-budget ExpensesCase 3 VAT10% + No Personnel BudgetCase 4 VAT7% + Personnel Budget

Debt Services : Total Expenditure%

Peak 14 .9 %in 2007

Peak 165. %in 2007

25

0

10

20

30

40

50

60

70

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

2022

2025

2028

2031

Public Debt Government Debt

Public DebtIn the past 20 years and in the next 30

years 5

2.3

%1987

3

5.8

%1987

4

0.8% 2006

6 0.9 % 2005

% of GDP

26

0

5

10

15

20

25

30

1972

1977

1982

1987

1992

1997

2002

2007

2012

2017

2022

2027

2032

Debt Services Interest Payments

2

4.7%19871

7% 1988

1

2%

2007

1

4.9%

2007

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 potentialin medium term

Low interest rateenvironment

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 Assessment2. Fiscal Model

4 . Fiscal Sustainability

3 . Policy Coordination

5. Conclusion

30

Monetary Policy

Price Stability Fiscal Sustainability

Fiscal Policy

Sustainable Growth

Economic Stability

Coordination between Monetary and Fiscal Policy