DEFICIT to rise on tax measures

The budget deficit for this year could rise to Bt430 billion, Finance Minister Suchart Thadathamrongvech said, even as he was urged to cut value-added tax to 4 per cent.

Suchart yesterday said the government would next month announce a tax package to shore up the economy, which would increase total budget deficit to Bt430 billion.

The tax restructuring would involve cutting and raising taxes, he said at a seminar organised by the Government Pension Fund (GPF).

The Finance Ministry has been considering cutting corporate income tax and personal income tax. The ministry would also increase excise taxes on some luxury items and oil to make up for the loss of revenue from the income tax cuts, Suchart said.

The tax cuts, however, would widen budget deficits beyond the expected Bt350 billion, or 3.5 per cent of GDP, he said. The cut would follow a mid-year budget increase of Bt100 billion, announced earlier. The government may also provide tax incentives for firms retaining their labour force, he added.

Supavud Saicheua, managing director of the Phatra Securities, suggested the Finance Ministry should cut VAT from 7 per cent to 4 per cent. However, Suchart did not agree.

 The cut would improve consumption and invite private investment, Supavud said.

 Supavud argued that a cut in VAT would be the best option. He did not think government could do much about increasing its spending, because political uncertainty has disrupted the administration. Therefore, little money would be injected into the economy.

He said cutting corporate income or personal income tax would not stimulate the economy much, but it may encourage more savings.

"VAT cut would be the best option and it should be temporary, for only one year," he said.

The current VAT rate of 7 per cent is relatively low compared with consumption tax rates in other countries.

He also suggested that the Bank of Thailand should lower policy rate by 1.5 percentage point from the current rate of 3.75 per cent.

He said the government needs to take action because it could not rely on export earnings due to the sharp slowdown of the world economy next year.

Deputy central bank governor Atchana Waiquamdee said there is room to cut policy rate, but interest rate cut would be less effective in boosting the economy.

She said a study by the International Monetary Fund suggested that an economic recession caused by a credit crunch lasts longer.

 Michael Spenser, chief economist at Asia Deutsche Bank, predicted that Thai economic growth would be only 2.5 per cent next year. But despite the low growth, the country would escape deflation. Other countries in Asia would be much more affected by the global credit crunch. "Hong Kong, Singapore, South Korea and Taiwan will be in deflation by mid-2009," he said. The US economy is expected to bottom out by mid-next year but recovery would be slow, taking about three years to go back to normal growth.

Asian currencies would recover by mid-next year due largely to a fall in oil prices which would improve trade balance. Capital outflow is expected to reverse too due to quicker fall of inflation and rise in real interest rate.

Meanwhile Visit Tantisunthorn, secretary-general of the GPF said the fund would investment more in real estate and private equity while it has recently reduced investment in stock markets.