Any relatively new finance minister, such as Pichai Chunhavajira, comes into office facing a crowded agenda: Maintain good relations with the central bank, ensure strong revenue collections and pursue fiscally responsible policies, manage customs and excise. Keep an eye on inflation, which reached 1.54% in May but eased to 0.62% in June, and meet the joint monetary policy target agreed with the Bank of Thailand. Improve access to finance.
Despite this long list of imperatives -- in reality because of it -- Mr Pichai as both finance minister and deputy prime minister really has only one principal task: to promote economic growth.
While the World Bank has forecast that Thailand's growth will rise from 1.9% in 2023 to 2.4% in 2024, growth fell in the fourth quarter last year. Thailand continues to lag behind other Asean nations, including Malaysia, which grew at 4.2% in the first quarter; the Philippines, with expected growth of 6.0% thanks to higher domestic demand and exports; and Indonesia, with projected growth of 5.1%, just under the government's target.
In short, Thailand must -- and can -- do better. The statistics for its Asean competitors show that a focus on growth works. The key is to adopt policies that deliver growth as the overriding priority.
None of this diminishes Thailand's significant successes in poverty reduction, manufacturing and improving healthcare. Those are real accomplishments that many developing countries would do well to emulate. But a focus on growth led to those dramatic reductions in poverty and can now propel Thailand out of tepid growth following the pandemic.
Fiscal stimulus, an important part of the government's economic policy, can improve domestic demand and thus give a temporary boost, but it remains an open question whether it will truly lead to a foundation for broader, sustainable economic growth. Fiscal stimulus is challenging, too, at a time when public borrowing is rising -- up 9.4% for the first eight months of fiscal 2024.
The government's desire to encourage Thais to spend money in their local communities is understandable. But it forces difficult choices about the sustainability of public borrowing. Growth, in contrast, increases revenues and gives greater fiscal space to policymakers for the reforms in education and rural development that will lead to even greater poverty reduction.
INVESTMENT AND EMPLOYMENT
Think, then, of a simple formula: Investment leads to employment, which leads to taxation, which leads to development. Increases in tax revenues -- a concern of any finance ministry -- depend on profitable businesses employing workers and investors, domestic or foreign.
Too often, discussions on tax policy miss the most important element: how to design a tax system to promote economic growth that will drive revenue growth.
Consider excise taxes. The Excise Department faces challenges. Decreased auto sales have led to a decline in revenue, while illicit cigarettes and e-cigarettes affected tobacco tax collection. Interestingly, taxes on beverages, golf courses and nighttime entertainment venues increased by 10% during the first eight months of fiscal 2024, despite accounting for only 6% of total tax revenue. The proposed single-rate tax system for cigarettes, however, never came to fruition. Excise taxes should be designed to promote economic growth.
Or consider private investment. Even before the pandemic, Thailand faced a sharp decline in private investment, from over 40% before the Asian financial crisis of the 1990s to 16.9% in 2019. This must be reversed. If private investment is declining, something is already wrong, as capital goes where it can seek the highest returns.
Policies that attract foreign direct investment in a highly competitive region are essential. Now, as Thailand along with its Asian competitors prepares for the adoption of a minimum international effective corporate tax rate of 15%, it must work even harder to promote investment in a way consistent with these dramatic changes to the international tax system.
Or consider the digital economy. Thailand has made strong progress, but fully embracing the digital economy will require further reforms. These changes will increase productivity, an area in which Thailand has remained relatively flat. But this will also require treating both domestic and foreign digital enterprises equally.
The OECD's VAT Digital Toolkit for Asia-Pacific outlines how digital purchases of low-value imported goods should be treated to reduce tax complexity, encourage digital commerce and generate tax revenue. Thai companies can compete well in the digital economy, but the rules must be fair for all competitors.
Technological advances in themselves do not replace the need for countries to focus on growth as an economic imperative. Greater adoption of AI, for instance, may improve productivity, but that alone will not produce sustainable, broad-based growth. Instead, growth opens the way for greater adoption of new technologies, for instance in agriculture or manufacturing, that build further growth.
Excessive regulation can impede growth. Particularly with the adoption of the minimum international corporate tax rate, nations should be careful with regulation on foreign investment. For example, a recent UN proposal would change the time required for a business's "permanent establishment" (PE) in a country from 183 days to 30 days. This would strongly discourage investors to explore opportunities in a new country.
And while the UN rightly pushes the energy transition, its tax committee seeks to extend the rules on PE to cover renewable energy as well as extraction. Why would the UN want to discourage investment in renewables? But that is exactly what the provision would do.
BREAKING THE 'ZERO-SUM LINK'
Sadly, Thailand has not been alone recently in de-emphasising growth as the premier objective of economic policy. Describing current economic debates in the US, Glenn Hubbard, a former chairman of the US Council of Economic Advisors, wrote that "[a] society without growth requires someone to be worse off for you to be better off. Growth breaks that zero-sum link".
This reminder of basic economics is essential to understanding why growth, rather than simply increasing revenues, must be the objective of fiscal policy. The best policies promote "win-win" outcomes for both government and the private sector as opposed to "zero sum" outcomes that aim for maximising revenue -- and will likely miss.
Fortunately, Mr Pichai's background in private business and with the Stock Exchange and the Bank of Thailand prepares him well for a focus on growth. This is the time to seize the opportunity and recover the levels of growth that Thailand once enjoyed.
Thailand should not be satisfied with an economy that mostly avoids downturns but misses a real opportunity for growth. Instead, focus single mindedly and with urgency on policies that will once again deliver high levels of growth.
Daniel Witt is the founder and president of the International Tax and Investment Center, Washington, DC. He has been working on tax issues in Asean since 2005.
