THAILAND READIES POST-ELECTION THAKSIN-LIKE SPENDING BINGE

UNCLAS SECTION 01 OF 03 BANGKOK 006241 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/MLS AND EB TREASURY FOR OASIA COMMERCE FOR EAP/MAC/OKSA STATE PASS TO USTR E.O. 12958: N/A TAGS: EFIN EINV ETRD PGOV TH SUBJECT: THAILAND READIES POST-ELECTION THAKSIN-LIKE SPENDING BINGE TO BOOST GROWTH REF: a) Bangkok 5584 b) Chiang Mai 187 BANGKOK 00006241 001.2 OF 003 ¶1. (SBU) Summary: Thailand's major political parties have all made campaign promises of large spending increases both on traditional programs for infrastructure development and on "populist" programs. Economic advisers in all parties believe that a substantial fiscal boost is necessary for economic growth. Government economists and private sector analysts agree that there is sufficient "fiscal space" to embark on such an expansion, which could raise the government budget deficit from its current 1.8 percent of GDP to 3 percent by 2009. Deposed Prime Minister Thaksin's populist policies generated broad support for him and his party, and many officials admit that these popular programs have generally been effective and have not bankrupted the country. While various factors will influence the way people vote, the common voter's perception that Thaksin "gave back" to the people some of the spoils of power has had a substantial impact on all parties' economic and social platforms. End Summary. POLITICAL PARTIES PLAN SPENDING INCREASES -------------- ¶2. (U) With the approach of the December 23 elections, both government and private sector economists expect public spending to increase no matter who forms the next government, as all major parties have pledged to increase spending both on major infrastructure projects and continue populist programs. The World Bank estimates that public investment spending for FY2008, already set under the current government's budget, will rise 11 percent from FY2007. However, FY2009 is expected to see an even more significant fiscal boost if the ruling political parties enact the spending programs they have promised in their campaigns this year. ¶3. (SBU) The Democrat Party, thought by many to be the most likely to form the core of a new coalition government, has outlined spending plans to include USD 2.9 billion in agricultural irrigation projects, USD 7.4 billion in subway and skytrain infrastructure projects, and a USD 5.9 billion extension and renovation of Thailand's railway system. Democrat proposals include a "populist" Village Sufficiency Fund, similar to Thaksin's Million Baht Village Fund. ¶4. (U) The rival People Power's Party (PPP) has not hidden its roots in Thaksin's former Thai Rak Thai party and has resolved to continue the same policies pursued under his leadership because "they worked before, and will do so again," in the words of Secretary General Surapong Suebwonglee. Former Bank of Thailand Governor Vijit Supinit, now an adviser to the smaller Puea Pandin party, says that the next government should expand spending markedly if it wants to see GDP growth in excess of 5 percent, which he said would still be too slow for an economy of Thailand's size. "The government should not fear implementing populism - in fact, it is necessary and effective to spread wealth to the grass roots level," he says. Vijit believes the budget deficit could increase from 1.8 percent to 3 percent of GDP without adverse consequences. ¶5. (SBU) Former Finance Minister and current advisor to the Chart Thai party Pridiyathorn Devakula similarly predicted to Econoffs that the post-election government would focus on fiscal expansion, no matter which party led the ruling coalition. "Investment projects were held up after the coup," he said, "due to indecision, political uncertainty, and a range of regulatory obstacles on environmental and land use issues." Pridiyathorn said the existence of a new elected government, even if it only survives 12-18 months as some observers predict, would clear the air and allow bureaucrats to push through much-needed infrastructure projects at the behest of the Cabinet. ¶6. (SBU) Pridiyathorn added that he believes there is room in the government budget to expand spending, largely due to the past year's efforts to clean up the off-budget obligations incurred from the programs of Prime Minister Thaksin. Pridiyathorn, who was installed as Finance Minister shortly after the 2006 coup and resigned in February 2007 due to policy differences with the CNS and Prime Minister Surayud, said a focus on fiscal expansion is needed to offset a predicted slowdown in exports caused by the sub-prime mortgage crisis in the United States. "FISCAL SPACE" FOR AN EXPANSION -------------- ¶7. (SBU) In a meeting with Econoff at the Ministry of Finance's Fiscal Policy Office (FPO),government economists agreed that the BANGKOK 00006241 002.2 OF 003 new government would have significant "fiscal space" to embark on a spending expansion, thanks to the current government's "cleaning up" of most fiscal obligations incurred during the Thaksin era. The FPO's calculations showed that the current public debt-to-GDP ratio stood at 37.7 percent at the end of FY2007, down from a peak of 58 percent in 2000. (Public debt is comprised of three components: government debt, non-financial public enterprise debt, and debt incurred by the Financial Institutions Development Fund - FIDF - which was set up to recapitalize failed banks in the wake of the 1997 financial crisis.) Debt service as a percentage of the government budget was down to 11.3 percent in 2007 compared to 13.2 percent in 2003. ¶8. (SBU) The FPO economists said that the government ran a "balanced" budget in 2005 and 2006 due to increased revenues and the fact that many of Thaksin's "populist" programs were operated outside the regular budget. The post-coup government has run deficits in the FY2007 budget (of USD 4.2 billion) and FY2008 budget (of USD 4.8 billion) partly due to reduced government revenues that accompanied an economic slowdown, but also because Thaksin's populist program obligations were brought back on the government's open books. POPULIST PROGRAMS CHANGE THE FACE OF THAI POLITICS -------------- -------------- ¶9. (SBU) Much of the staying power of Thaksin's popularity comes from the populist programs he expanded and implemented. In the view of many villagers we have talked to in Central and Northeast Thailand over the past two months, Thaksin was the first Bangkok politician willing go "give back" to the common people some of the spoils that come from holding political power. While academics and Bangkok elites are often disparaging of populism as encouraging inefficiency and undermining public morals, the programs, while imperfect, have proven affordable. The programs remain very popular at the grassroots level and all the parties are clamoring they will continue them. The key programs are as follows: (1) Commodity Price Subsidies - Price supports for agricultural commodities were greatly expanded by Thaksin as a means to stimulate domestic demand. Last year, the price floor set by the government (before the coup) was so far above world rice prices that nearly all domestic production was sold to the government, which accumulated some 5 million tons in warehouses. The FPO calculated that USD 500 million was needed to pay back the Bank for Agriculture and Agricultural Cooperatives (BAAC) for the rice price support alone. Over USD 200 million was also used to cover a similar program for rubber. This year, the market price for long-grain fragrant rice has risen dramatically (spurred by poor weather in other producing countries). Virtually no Thai farmer is selling rice to the government, and the government has been able to sell off some three million tons from stockpiles. Farmers, unsurprisingly, like the high price supports, and believe they are necessary to compensate for the rising costs of inputs, such as fertilizer. The willingness to continue to maintain high commodity price supports will be the key test of the commitment of the next government to populism. (2) The Million Baht Village Fund - Thaksin allocated every Thai village or urban community a million baht (approximately 30,000 USD at current exchange rates) to begin a rotating fund for villagers to administer among themselves for local investment projects. In some villages, a committee scrutinizes loan proposals and tries to allocate funds where they will do the most good, usually to begin animal husbandry side businesses or help underwrite crop expenditures. In other villages, the politics of giving money to some families and not others has proven too difficult so the fund is allocated equally among all village households. All loans from the fund are to be repaid within a year, so money is available for the next round of loans. Some villages report that funds are largely repaid on time. Others admit that loans are sometimes "squandered" on consumer goods and have to be repaid with higher-interest loans from local moneymen, increasing rural household debt. In particularly successful villages, the local branch of the BAAC has added another million to the pot, so two million baht is loaned out each year. The FPO told us that the government's initial USD 2 billion expenditure has now been cleared from the books. (3) Universal 30-Baht Health Care Coverage - Thaksin dismantled the national public health budget which had been organized by functional need and divided it up on a per capita basis, so that local hospitals were given an allocation based solely on the number of residents in their districts. Patients were required to pay a flat fee of 30 baht (under 1 USD) per visit (which was reduced to zero by BANGKOK 00006241 003.2 OF 003 the interim government). We visited local hospitals across six provinces and found that they had largely recovered from the budgetary chaos of the transition and now are generally able to maintain operations adequately. Some hospital directors say that service has deteriorated and bemoan the stress that free care has brought - average patient visits per year, at least in one province, have doubled to 2.5 - but others believe the increased exposure to medical professionals provides opportunity for more preventative care education and is a net plus for public health. The government's per capita allocation has been increased significantly in the last three years, rescuing many hospitals from debt, and generating some sense of optimism among hospital administrators. All hospital directors, however, agreed that there is little money for capital improvements or new equipment purchases, which if not rectified will degrade services as the years go by. Some directors have begun serious fund-raising efforts and/or side businesses, such as spas, to supplement hospital income. Villagers complained about the longer waits they now must endure to see a doctor, but the guarantee against financially-crippling medical expenses that previously came with serious illness or accident is greatly appreciated. (4) Teacher Salary Subsidies - Thailand's policy elites have long been concerned about the paucity of resources going into education and the resulting poor quality of many of the nation's schools. Thus, Thaksin's championing of more money for education was initially widely supported. The mechanism by which he sought to implement that initiative, raising teacher salaries, however, has been seen by some as a cynical effort to buy teachers' votes. While the program was supposed to provide financial incentives for improved teaching in the classroom, our visits to provincial teacher credit cooperatives revealed that, in practice, the cynicism may be justified. We did find one province which requires additional training courses and teachers now have to submit a research paper to demonstrate their credentials which, perversely, often proves a distraction from classroom teaching. In practice, however, the supplements are generally allocated on the basis of years in service, and allocated to all school administrators and teachers with the necessary time-in-grade. From the teachers' perspective, the salary supplements are long overdue. A beginning teacher with a college degree earns only about USD 200 per month. The supplements cost the government nearly USD 300 million per year, and are now part of the budget for the Ministry of Education. ¶10. (SBU) Comment: The interim government has been given little credit for the fiscal responsibility it has demonstrated by getting Thaksin's off-the-book populism programs back in the budget where they can be properly accounted for and seem to be affordable, at least for now. But there is no doubt that Thaksin's introduction of nationwide popular policies, as opposed to narrow pork-barrel payoffs to win personal loyalty, as a means of winning votes has created a sea change in Thai politics. The election on December 23 will in part be a measure of the extent that common voters believe that anyone but those who carry Thaksin's legacy can be trusted to "give back" to the people as he is perceived to have done through his populist policies. Boyce