Assessing the Pro-Poorness of Government Fiscal Policy in Thailand

Hyun H. Son

International Poverty Centre

Fiscal Policy

Growth Distribution

Poverty

General Framework

Fiscal Policy: Revenue

Fiscal Policy

Revenue raising

Taxes Charges for government services

Indirect tax Income tax Property taxCorporate tax

Prices Distribution

Fiscal Policy: Expenditure

Fiscal Policy

Government Expenditure

Infrastructure

Welfare programs

Economic services

Growth Distribution

Introduction

• This paper examines the impact of fiscal policy on poverty through changes in distribution.

• This does not take into account the impact of fiscal policy on growth.

• This study captures only first order effects.

Poverty Measures

z

dxxfxzP0

)(,

z

xzP x)(z,

2

1

0

: Headcount ratio

: Poverty gap

: Severity of poverty

A class of additive separable poverty measures:

Growth Elasticity of Poverty

z L p, ,

- Growth elasticity of poverty: the elasticity of with respect to when L(p) remains constant.

z

dxxfx

Px

0

1

- Growth elasticity of poverty for FGT measures:

1

which is always negative.

< 0

Growth Elasticity of Income Components

m

ii xgx

1

)(

- x is the disposable income and gi(x) is the ith income received by an individual with disposable income x.

- For FGT, the ith income component elasticity is defined as

z

ii dxxfxgz

xz

z0

1

)()(1

m

ii

1

- if all income components grow at the same rate of 1%, then the total poverty will change by

Pro-poor Index of the Income Components

ii

ii

= Income effect + Distribution effect

-If the distribution effect is negative (positive), the redistribution effect of the ith income component reduces (increases) poverty, implying that the ith income component is pro-poor (anti-poor)

- Pro-Poor Index for ith income component is:

i

ii

Indirect Taxes and Subsidies

- Indirect taxes and subsidies have direct impacts on prices.

k

iii xSxqpx

1

)()(

- Elasticity of poverty with respect to pi is

z

ii

ii dxxfxv

x

Pp

p 0

1

Pro-Poor Index for Prices

- Elasticity of poverty with respect to pi can be decomposed into

)(

iii

iii

qpqp

= Income effect + Inequality effect

-Inequality effect: whether an increase in pi hurts the poor proportionally more than the non-poor. -If inequality effect > 0, the increase in pi hurts the poor proportionally more than the non-poor

Pro-Poor Index for Prices

i

ii s

Pro-Poor Index for price is defined as

- If the index is greater (less) than 1, an increase in pi

hurts the poor more (less) than the non-poor. - If the index is greater than 1, then the ith commodity should be subsidized so that the poor benefit more relative to the non-poor.- If the index is less than 1, taxing the ith commodity will hurt the rich more than the poor.

-The index can be used as a tool to improve the tax or subsidy schemes to maximize poverty reduction.

Fiscal Structure in Thailand

-Thailand’s fiscal system is highly centralized.

-Centralized fiscal system contributes to the unequal distribution of public services, e.g. public infrastructure, education, health, etc.

 Different types of government revenue

Distribution ofRevenue (%)

   

Taxes on income, profits, & capital gains 29.34

Taxes on property 0.70

Taxes on goods & services 48.10

General taxes on goods & services 26.88

(including value-added taxes & sales taxes)

Excises 20.81

Taxes on international trade & transactions 9.02

Customs & other import duties 9.02

Taxes on exports 0.00

Other taxes 0.44

Total Tax revenue 87.61

   

Grants from foreign governments 0.61

Other revenue 11.78

Total Non-tax revenue 12.39

Total revenue 100.00

Expenditure by FunctionDistribution of

expenditure

   

General public services 10.2

Defense affairs & services 8.5

Public order and safety 5.1

Housing and community amenities 3.9

Health affairs & services 6.8

Education affairs & services 19.0

Social security & welfare 3.2

Recreation, culture and religion 1.3

Agriculture, forestry, & fishery affairs 5.8

Fuel & energy 0.2

Mining, manufacturing, & construction 0.4

Transport & communication 13.1

Other economic services 22.5

   

Total Government expenditure 100.0

Income componentsPercentShare

Poverty gap ratio

Poverty Elasticity Pro-Poor index

Wage and salary 42.1 -0.684 0.60

Entrepreneurial income 19.2 -0.190 0.36

Farm income 10.8 -0.449 1.54

Land rent from farming 0.2 -0.003 0.64

Interest and dividends 1.1 -0.005 0.16

Remittances 6.5 -0.182 1.03

Pensions and annuities 1.3 -0.001 0.02

Home produced food 4.0 -0.506 4.71

Owner occupied home 9.8 -0.494 1.86

Food received free 1.0 -0.055 2.12

Rent received free 0.5 -0.013 1.05

       

Total money income 82.0 -1.519 0.68

Total in-kind income 18.6 -1.194 2.36

       

Taxes -0.6 0.001 0.08

Income tax -0.60 0.001 0.04

House and land tax -0.02 0.001 1.18

Total current disposable income 100.0 -2.71 1.00

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Pro-Poor Index for income components (Poverty Gap Ratio)

Pro-Poor index for prices (poverty gap ratio)

0.00

0.50

1.00

1.50

2.00

2.50

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