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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