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Tarrin fails to inspire the middle class

 

MARCH 31, 1999 -- Vatchara Charoonsantikul and Thanong Khanthong lament the plight of the ''forgotten'' Thai middle-class.

Over dinner more than a month ago, Tarrin Nimmanahaeminda mused about the forgotten Thai middle-class and how he might help them since politically they had been the largest power base of the Democrat Party.

Tarrin admitted that the two to three million typical middle-class Thais had been hard hit and left out by the economic crisis through a combination of falling pay cheques, no year-end bonuses and job losses. Virtually not a single government programme had ever been designed to lend the middle-class some sort of support. He was about to unveil a bold economic stimulus package to breathe new life into the sagging economy and would like very much to incorporate some tax relief features in the package to help out the middle-class.

Since the crisis erupted in 1997, all participants in the economy, except the middle-class, had cried out and received help from the government. Bankers threatened that if their banks failed, so would Thailand as a whole. Foreign creditors succeeded in demanding a legislative guarantee for their poorly-judged dollar loans to Thai banks. Depositors threatened to bring down the banks by withdrawing their money if the government did not guarantee their deposits 100 per cent. Debtors wanted debt forgiveness. In the end, the cost of the government's financial system bail-out will reach 35 per cent the country's total economic output.

Exporters wanted the government to let the baht fall so they could sell their goods more competitively. Industrialists and businessmen wanted lower interest rates and lower taxes. Through the Financial Sector Restructuring Authority's auctions of distressed assets, some corporate owners or debtors have been able to negotiate for a 50 per cent reduction of their debts. The balance would be picked up by Thai taxpayers.

The poor would also get some help through job creation from the augmented budget deficit spending and from the Bt53 billion in foreign loans provided mainly by the Miyazawa initiative and the World Bank.

The lion's share would be consumed and nothing would be left for the middle-class.

But how could the middle-class be saved? That was a tough question. Tarrin knew that he would like to put more money into the hands of the Thai middle-class, which would not only alleviate their economic problems but would also help stimulate the economy through their increased spending.

Tarrin drew up a rough picture of a typical Thai middle-class person suffering from the economic crisis. He was a salary earner who, wishing to live a more independent life, had borrowed some Bt150,000-200,000 from a bank to build his own room adjacent to his parents' house. Then came the crisis, which cost him his job. He is now living in debt, and his future is bleak.

Subsequently, Dr Pisit Lee-ahtam, Tarrin's deputy, gave some hints during the intervals between interviews at measures to put more money into the hands of the middle-class, who had not benefitted from any government support programme. There were leaks last week that Tarrin might go for a 2 per cent across-the-board cut in personal income tax to help the middle-class, who mostly rely on their pay cheques.

In the end, Tarrin has opted for a balancing mix for his economic stimulus package by trying to spread out the benefits evenly to all participants in the economic process. Value-added tax (VAT) will be cut from 10 per cent to 7 per cent for two years. By doing this, Tarrin not only aims to lower business costs, but also intends to help the poor. The Thailand Development Research Institute has found that cutting VAT will stimulate economic growth by 0.2 per cent and represents the best method of income distribution since it will indirectly benefit the pockets of low-income earners.

Such earners, who make up to Bt50,000 a year, will be exempted from the 5 per cent tax deductible at source, giving them Bt2,500 more in their pockets. Industrialists will be happy to see their electricity bills falling to Bt0.3261 per unit for the period from April to June 1999, compared to the present level of Bt0.5071 per unit. This cut is made possible by a reduction in excise tax. The price of cooking gas will be cut to Bt7.3434, a reduction of almost Bt1 a kilo, to help out Thai households in general.

Unfortunately, there is nothing in the economic stimulus package to specifically help out the middle-class, over and above the extra take-home amount of slightly more than Bt200 a month, or Bt2,500 a year, arising from Tarrin's decision to exempt the first Bt50,000 a year portion of income from the 5 per cent income tax rate. For instance, those who earn Bt120,000 a year will still be paying tax at 10 per cent, but the first Bt50,000 will be exempt from tax, which is equivalent to an annual tax saving of Bt2,500. All other income tax rates remain unchanged.

Tarrin has looked at the Japanese model for his inspiration for a tax-break for the middle-class. In Japan, the government handed out 20,000 yen in coupons to its people in the hope that they would go out and spend money to boost the economy.

The Bt2,500 tax-break will not give the Thai middle-class a lot more money in their pockets, and they can only hope that the overall economic stimulus package will perform magic by building up momentum for a Thai economic recovery.

 

 

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