Abstract
This Selected Issues report on Thailand discusses the rapid growth years of the country before and after the 1997 balance-of-payments crisis. The report discusses development of the crisis and the steps taken to normalize the situation; credit growth before and after the crisis; public debt dynamics in the aftermath of the crisis; export performance before and after the crisis; and an analysis of the role of fiscal policy that led to the 1997 crisis. The report also highlights weaknesses that were threatening the sustainability of Thailand's economic growth.
V. Measuring Fiscal Stimulus in Thailand1
90. This section analyzes the role of fiscal policy in the years leading up to the 1997 crisis, and the subsequent policy response. The focus in this chapter is on macroeconomic aggregates, and the extent to which expenditure and revenue policies helped to cushion the impact of the crisis on demand and output.
91. The fiscal stance and fiscal impulse are useful and simple indicators of the impact of fiscal policy on aggregate demand. These aim to provide a measure of fiscal policy adjusted for changes induced by cyclical or transitory movements in economic activity. A positive value for the fiscal stance indicates that fiscal policy is exerting an expansionary impact on the economy and that the deficit, therefore, is larger than what would arise solely from the cyclical or transitory change in economic activity. Similarly, a negative value indicates that fiscal policy is exerting a contractionary impact. The fiscal impulse, which measures the change in the fiscal stance, indicates the direction and amount of new fiscal stimulus. In what follows, it does not matter whether the change in the deficit is discretionary (the direct result of policy decisions) or non-discretionary (due to the operation of automatic stabilizers). Largely as a by-product of their simplicity, these indicators should not be viewed as a providing a comprehensive assessment of fiscal policy, but rather as a more-or-less objective means of gaining insights into the evolution of fiscal policy.
92. Methodological considerations suggest that the fiscal impulse is a more useful indicator than the fiscal stance. While a technical discussion of the methodology is provided at the end of this section, the basics are summarized below.2 The fiscal stance compares the actual balance to a neutral balance, which is the balance adjusted for the impact of cyclical or transitory changes in economic activity. The neutral balance assumes that (neutral) revenue is a fixed share of actual nominal GDP and that (neutral) expenditure is a fixed share of potential nominal GDP. The fiscal stance, therefore, crucially depends on the assumptions about the neutral balance, and therefore is more akin to an index that shows the stance relative to a base year. The fiscal impulse is much less susceptible to this problem since it measures the change in the fiscal stance and would, for the most part, not be impacted by a change in the base year. Finally, the revenue and expenditure impulses are measured as the change in the revenue and expenditure stance respectively (e.g., the difference between actual expenditure and neutral expenditure) such that a positive value indicates an expansionary impulse.
93. The analysis below looks at both the consolidated public sector and the central government. The central government is defined to include the extrabudgetary funds, but not the costs of financial sector restructuring. Since the central government is the level primarily responsible for macroeconomic management, developments at this level are key for understanding the stance of fiscal policy. However, the activities of the rest of the public sector—local governments, non-financial public enterprises (PEs), and interest costs of financial sector restructuring (principal costs are excluded)—also influence aggregate demand, and are therefore also of interest. Nonetheless, the activities at these levels of government are usually not intended as tools of demand management. For the public sector, the revenue and expenditure impulses are measured on an aggregate—rather than a consolidated—basis. This means, for example, that transfers from the central to the local governments are counted both as central government expenditure and as local government revenue.
A. Pre-Crisis Period
94. Even though the central government ran a surplus during the pre-crisis period, the impulse analysis suggests that fiscal policy was mildly expansionary (Figure 1). Taking the pre-crisis period to be 1991/92 to 1995/96, the central government ran a surplus in all of these years, which on average was 2½ percent of GDP. Nonetheless, the impulse during this period averaged ½ percent of GDP and was positive in each year except 1994/95. The impulse is mostly explained by an expenditure impulse, which in turn was due mainly to rising expenditure (from 15½percent of GDP in 1991/92 to 17 percent in 1995/96). Thus, even though the deficit was only modestly smaller in 1995/96 than in 1991/92, the analysis suggests that the fiscal stance was around 1 percent of GDP more expansionary. This added to the economic overheating resulting from the higher rate of investment growth during the pre-crisis years.
Thailand: Fiscal Impulse, 1991/92-1998/99 1/
Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A005
Source: Thai authorities; and staff estimates.1/ Central government excludes costs of financial sector restructuring.Thailand: Fiscal Impulse, 1991/92-1998/99 1/
Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A005
Source: Thai authorities; and staff estimates.1/ Central government excludes costs of financial sector restructuring.Thailand: Fiscal Impulse, 1991/92-1998/99 1/
Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A005
Source: Thai authorities; and staff estimates.1/ Central government excludes costs of financial sector restructuring.95. The fiscal impulse and stance of the aggregate public sector is qualitatively similar to that of the central government. Again, although the public sector balance was in surplus throughout the 1991/92-1995/96 period, the impulse was on average expansionary and just slightly less expansionary than that of the central government. The difference is due to the PE sector, which averaged a negative impulse during this period of around 0.2 percent of GDP, which is explained by a more contractionary stance during 1993/94-1995/96. This, in turn, is related to the decline in PE capital expenditure from more than 4 percent of GDP in the early 1990s, to 3 percent of GDP in 1995/96. Finally, the local governments, which ran modest surpluses throughout this period, are relatively small, and contributed very little to changes in the fiscal stance.
96. The pronounced decline in the overall balance of the central government in 1996/97 translated into a significant expansionary fiscal impulse. While the overall balance declined by 3.3 percentage points of GDP relative to 1995/96, the impulse was a somewhat smaller 2½ percent of GDP as the neutral balance declined by 0.7 percent of GDP. The expenditure impulse was double that of the revenue impulse and was largely due to a surge in capital expenditure, which rose by almost 2 percent of GDP. On the revenue side, there were declines as a share of GDP for most revenue categories, but the decline in trade taxes was especially large (0.6 percent of GDP less than in 1995/96).
97. For the aggregate public sector, the fiscal impulse was even stronger in 1996/97. The overall balance fell from a surplus of 2½ percent of GDP in 1995/96 to a deficit of over 2½ percent of GDP, with the additional decline related to a deterioration in the PE balance and the emergence of financial sector restructuring costs.3 The PE balance fell by 1½ percentage points of GDP from 1995/96, divided about equally between increases in capital expenditure and declines in retained income. Interest costs of financial sector restructuring amounted to around ½ percent of GDP, but while these contribute to the measured aggregate public sector impulse, their expansionary effects are different from more traditional expenditure stimuli. Interest payments (in general) would not be expansionary to the extent that the recipients of the interest would have been able to receive a similar return by investing in a different type of asset.
B. Reponse to the Crisis
98. Despite the widening of the central government deficit, the fiscal impulse was actually contractionary in 1997/98, reflecting a shortfall in public spending relative to budgeted levels. The large decline in economic activity causes the neutral balance to deteriorate by more than the actual balance. Thus the 1½ percentage point increase in the deficit actually coincided with a contractionary impulse of ½ percent of GDP. This is, in turn, due to a strong contractionary expenditure impulse (3 percent of GDP) that followed from the reduction in central government expenditure (again in the acquisition of fixed assets) at a time when neutral expenditure was increasing sharply. Despite the increase in the VAT rate to 10 percent (from 7 percent), which contributed to an increase of ½ percentage points in VAT revenue, the revenue impulse was expansionary as other components of tax revenue—especially corporate income tax receipts, which fell by 1½ percent of GDP—were off sharply.
99. The aggregate public sector impulse was slightly positive owing to the pickup in financial sector restructuring costs. While interest payments associated with financial sector restructuring increased by nearly 2 percent compared to 1996/97, this was partially offset by negative impulses at the PE and local government level. After years of running near balanced budgets, the local governments incurred a more sizeable surplus of ½ percent of GDP. The surplus, in turn, translated into an equal sized contractionary fiscal impulse, which is largely explained by a contractionary expenditure impulse (actual expenditure declined by a more modest ¼ percent of GDP). The PE sector also exerted a contractionary impulse of similar magnitude, led by an increase in retained income. Capital expenditure was actually higher, but nonetheless grew by less than neutral expenditure and thus contributed to the negative impulse. Overall, therefore, the aggregate public sector impulse excluding the interest costs of financial sector restructuring was quite contractionary.
100. The outturn in 1998/99 is complicated by missing data, but the preliminary indication is that there was a net expansionary impulse. At the central government level, the impulse is slightly positive (¼ percent of GDP), but this figure is likely to be revised downward as the data for the extrabudgetary funds is incorporated. These funds, for which data are not yet available, are typically in surplus, but the current estimates assume for simplicity that they were in balance for 1998/99. Similarly, the local government outturn is not yet reported and also assumed to be in balance, which implies a fiscal impulse of around ½ percent of GDP given the large local government surplus in 1997/98. The PE sector contributed an expansionary impulse of a similar magnitude as retained income was 0.7 percent of GDP lower than in 1997/98. Finally, a decline in interest costs of financial sector restructuring contributes a contractionary impulse, leaving the aggregate public sector with an estimate expansionary impulse of ½ percent of GDP.
Methodological note
101. The first steps in calculating the fiscal impulse are to determine the level of neutral revenue and expenditure. For the above analysis 1991/92 is chosen as the base year and it is assumed that the balance in this year was neutral. Neutral revenue is then defined to be rY(t), where r is the GDP share of revenue in 1991/92 and Y(t) is actual nominal GDP in year t. In contrast, neutral expenditure is defined to be gP(t), where g is expenditure in 1991/92 as a share of potential nominal GDP and P(t) is potential nominal GDP in period t. Although actual and potential GDP were similar in 1991/92, there were not identical so g is defined as a share of potential rather than actual GDP in the base year to ensure that the fiscal stance in the base year is zero. The fiscal stance in period t, S(t)t is then calculated as the difference between the neutral and the actual balance, or [rY(t) – gP(t)] – [T(t) – G(t)] where T(t) and G(t) are revenue and expenditure in period t respectively.
102. The fiscal impulse is calculated as the change in the fiscal stance. Formally, the fiscal impulse in period t, I(t), is defined as: I(t) = [S(t)/Y(t)] – [S(t-l)/Y(t-1)]. Similarly, the revenue impulse is defined as [(rY(t) – T(t))/Y(t)] – [(rY(t-I) – T(t-I))IY(t-l)] and the expenditure impulse as [(G(t) – gP(t))lY(t)] – [(G(t-l) – gP(t-l))/Y(t-l))].
Thailand: Fiscal Impulse, 1991/92 to 1998/99
Excludes interest and principal costs of financial sector restructuring.
Thailand: Fiscal Impulse, 1991/92 to 1998/99
| 1991/92 | 1992/93 | 1993/94 | 1994/95 | 1995/96 | 1996/97 | 1997/98 | 1998/99 | Average 1991/92-95/96 | ||
|---|---|---|---|---|---|---|---|---|---|---|
| (In percent of GDP) | ||||||||||
| Central government (incl, extrabudgetary) 1/ | ||||||||||
| Actual balance | 2.7 | 2.1 | 1.7 | 3.0 | 2.4 | -0.9 | -2.4 | -2.9 | 2.4 | |
| Neutral balance | 2.7 | 2.9 | 3.2 | 3.4 | 3.5 | 2.8 | 0.7 | 0.4 | 3.1 | |
| Fiscal stance | 0.0 | 0.8 | 1.4 | 0.4 | 1.1 | 3.7 | 3.1 | 3.3 | 0.8 | |
| Impulse (change in fiscal stance) | 2.2 | 0.8 | 0.6 | -1.0 | 0.6 | 2.6 | -0.6 | 0.2 | 0.6 | |
| Revenue impulse | 1.1 | 0.0 | -0.5 | -0.6 | -0.1 | 0.9 | 2.4 | 1.1 | 0.0 | |
| Expenditure Impulse | 1.0 | 0.9 | 1.0 | -0.4 | 0.7 | 1.8 | -3.0 | -0.9 | 0.7 | |
| Non-financial public enterprises | ||||||||||
| Actual balance | -1.3 | -1.3 | -0.4 | -0.4 | 0.1 | -1.3 | -1.4 | -2.0 | -0.6 | |
| Neutral balance | -1.3 | -1.2 | -1.2 | -1.1 | -1.1 | -1.3 | -1.9 | -1.9 | -1.2 | |
| Fiscal stance | 0.0 | 0.0 | -0.8 | -0.7 | -1.2 | 0.0 | -0.5 | 0.0 | -0.5 | |
| Impulse (change in fiscal stance) | 0.4 | 0.0 | -0.8 | 0.1 | -0.5 | 1.3 | -0.5 | 0.5 | -0.2 | |
| Revenue impulse | 0.1 | 0.2 | -0.2 | -0.2 | 0.1 | 0.7 | -0.4 | 0.7 | 0.0 | |
| Expenditure Impulse | 0.3 | -0.2 | -0.6 | 0.3 | -0.6 | 0.6 | -0.2 | -0.2 | -0.2 | |
| Local governments | ||||||||||
| Actual balance | 0.0 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.6 | 0.0 | 0.1 | |
| Neutral balance | 0.0 | 0.0 | 0.0 | 0.1 | 0.1 | 0.0 | -0.2 | -0.2 | 0.0 | |
| Fiscal stance | 0.0 | -0.1 | 0.0 | 0.0 | -0.1 | -0.1 | -0.7 | -0.2 | 0.0 | |
| Impulse (change in fiscal stance) | 0.1 | -0.1 | 0.0 | 0.0 | -0.1 | 0.0 | -0.6 | 0.5 | 0.0 | |
| Revenue impulse | 0.0 | 0.0 | 0.0 | 0.1 | -0.5 | -0.2 | -0.1 | 0.0 | -0.1 | |
| Expenditure Impulse | 0.1 | -0.1 | 0.1 | 0.0 | 0.4 | 0.1 | -0.5 | 0.5 | 0.1 | |
| Interest cost of financial sector restructuring (- is cost) | ||||||||||
| Actual balance | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | -0.6 | -2.5 | -1.7 | 0.0 | |
| Neutral balance | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |
| Fiscal stance | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.6 | 2.5 | 1.7 | 0.0 | |
| Impulse (change in fiscal stance) | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.5 | 1.9 | -0.8 | 0.0 | |
| Revenue impulse | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |
| Expenditure Impulse | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.5 | 1.9 | -0.8 | 0.0 | |
| Aggregate Public Sector | ||||||||||
| Actual balance | 1.4 | 0.9 | 1.4 | 2.6 | 2.6 | -2.7 | -5.8 | -6.6 | 1.8 | |
| Neutral balance | 1.4 | 1.7 | 2.0 | 2.4 | 2.5 | 1.6 | -1.4 | -1.7 | 2.0 | |
| Fiscal stance | 0.0 | 0.8 | 0.6 | -0.3 | -0.2 | 4.2 | 4.4 | 4.8 | 0.2 | |
| Impulse (change in fiscal stance) | 2.7 | 0.8 | -0.2 | -0.9 | 0.1 | 4.4 | 0.2 | 0.5 | 0.5 | |
| Revenue impulse | 1.2 | 0.2 | -0.7 | -0.7 | -0.5 | 1.4 | 1.8 | 1.8 | -0.1 | |
| Expenditure impulse | 1.5 | 0.6 | 0.5 | -0.1 | 0.6 | 3.0 | -1.7 | -1.3 | 0.6 | |
Excludes interest and principal costs of financial sector restructuring.
Thailand: Fiscal Impulse, 1991/92 to 1998/99
| 1991/92 | 1992/93 | 1993/94 | 1994/95 | 1995/96 | 1996/97 | 1997/98 | 1998/99 | Average 1991/92-95/96 | ||
|---|---|---|---|---|---|---|---|---|---|---|
| (In percent of GDP) | ||||||||||
| Central government (incl, extrabudgetary) 1/ | ||||||||||
| Actual balance | 2.7 | 2.1 | 1.7 | 3.0 | 2.4 | -0.9 | -2.4 | -2.9 | 2.4 | |
| Neutral balance | 2.7 | 2.9 | 3.2 | 3.4 | 3.5 | 2.8 | 0.7 | 0.4 | 3.1 | |
| Fiscal stance | 0.0 | 0.8 | 1.4 | 0.4 | 1.1 | 3.7 | 3.1 | 3.3 | 0.8 | |
| Impulse (change in fiscal stance) | 2.2 | 0.8 | 0.6 | -1.0 | 0.6 | 2.6 | -0.6 | 0.2 | 0.6 | |
| Revenue impulse | 1.1 | 0.0 | -0.5 | -0.6 | -0.1 | 0.9 | 2.4 | 1.1 | 0.0 | |
| Expenditure Impulse | 1.0 | 0.9 | 1.0 | -0.4 | 0.7 | 1.8 | -3.0 | -0.9 | 0.7 | |
| Non-financial public enterprises | ||||||||||
| Actual balance | -1.3 | -1.3 | -0.4 | -0.4 | 0.1 | -1.3 | -1.4 | -2.0 | -0.6 | |
| Neutral balance | -1.3 | -1.2 | -1.2 | -1.1 | -1.1 | -1.3 | -1.9 | -1.9 | -1.2 | |
| Fiscal stance | 0.0 | 0.0 | -0.8 | -0.7 | -1.2 | 0.0 | -0.5 | 0.0 | -0.5 | |
| Impulse (change in fiscal stance) | 0.4 | 0.0 | -0.8 | 0.1 | -0.5 | 1.3 | -0.5 | 0.5 | -0.2 | |
| Revenue impulse | 0.1 | 0.2 | -0.2 | -0.2 | 0.1 | 0.7 | -0.4 | 0.7 | 0.0 | |
| Expenditure Impulse | 0.3 | -0.2 | -0.6 | 0.3 | -0.6 | 0.6 | -0.2 | -0.2 | -0.2 | |
| Local governments | ||||||||||
| Actual balance | 0.0 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.6 | 0.0 | 0.1 | |
| Neutral balance | 0.0 | 0.0 | 0.0 | 0.1 | 0.1 | 0.0 | -0.2 | -0.2 | 0.0 | |
| Fiscal stance | 0.0 | -0.1 | 0.0 | 0.0 | -0.1 | -0.1 | -0.7 | -0.2 | 0.0 | |
| Impulse (change in fiscal stance) | 0.1 | -0.1 | 0.0 | 0.0 | -0.1 | 0.0 | -0.6 | 0.5 | 0.0 | |
| Revenue impulse | 0.0 | 0.0 | 0.0 | 0.1 | -0.5 | -0.2 | -0.1 | 0.0 | -0.1 | |
| Expenditure Impulse | 0.1 | -0.1 | 0.1 | 0.0 | 0.4 | 0.1 | -0.5 | 0.5 | 0.1 | |
| Interest cost of financial sector restructuring (- is cost) | ||||||||||
| Actual balance | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | -0.6 | -2.5 | -1.7 | 0.0 | |
| Neutral balance | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |
| Fiscal stance | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.6 | 2.5 | 1.7 | 0.0 | |
| Impulse (change in fiscal stance) | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.5 | 1.9 | -0.8 | 0.0 | |
| Revenue impulse | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |
| Expenditure Impulse | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.5 | 1.9 | -0.8 | 0.0 | |
| Aggregate Public Sector | ||||||||||
| Actual balance | 1.4 | 0.9 | 1.4 | 2.6 | 2.6 | -2.7 | -5.8 | -6.6 | 1.8 | |
| Neutral balance | 1.4 | 1.7 | 2.0 | 2.4 | 2.5 | 1.6 | -1.4 | -1.7 | 2.0 | |
| Fiscal stance | 0.0 | 0.8 | 0.6 | -0.3 | -0.2 | 4.2 | 4.4 | 4.8 | 0.2 | |
| Impulse (change in fiscal stance) | 2.7 | 0.8 | -0.2 | -0.9 | 0.1 | 4.4 | 0.2 | 0.5 | 0.5 | |
| Revenue impulse | 1.2 | 0.2 | -0.7 | -0.7 | -0.5 | 1.4 | 1.8 | 1.8 | -0.1 | |
| Expenditure impulse | 1.5 | 0.6 | 0.5 | -0.1 | 0.6 | 3.0 | -1.7 | -1.3 | 0.6 | |
Excludes interest and principal costs of financial sector restructuring.
Prepared by Steven Barnett (FAD).
Also, see Heller, Haas, and Mansur, “A Review of the Fiscal Impulse Measure,” Occasional Paper, 44, IMF, 1986.
Since financial sector restructuring costs were zero in the base year, all financial sector restructuring-costs are considered to be an expenditure impulse.
