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

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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

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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