Thailand - A study of public finance (Vol. 1 of 4) : Main report

Report No. 574-TH A Study of Public Finances W i ..;, in Thailand (In Four Volumes) Volume 1: The Main Report October 31, 1974 East Asia and Pacific Department Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS Currency Unit - Baht US $1.00 = B20.00 ; 1.00 = US $0.05 $ 1.00 million uS $5o,000 $ 1.00 billion US $50 million Note: The Baht was maintained at a parity of $ 20.8 = US$1.00 until July 1973 when it was revalued to ; 20.0 = US$1.00, An average exchange rate of $ 20.L = US$1.00 has been used for 1 973 in this report.  FOREWORD This report is based on the finding of a Public Finance Study Mission that visited Thailand from January 10 to February 8, 1974. The Mission consisted of Oktay Yenal (Chief), Kazuko Artus (Fiscal Economist), Karl Stichenwirth (Public Enterprises), Kenneth Hubbell (Local Finance and Regional Development), James Theberge (Industrial Incentives), and was assisted by Lawrence Hinkle (Country Economist) and Bernard Schmutz (Resident Economist). Woo Sik Kee contributed to the analysis of taxation. Ubolwann Binmahmood was secretary to the Mission. The report was updated and revised after discussions of the draft with the Government. The Mission gratefully acknowledges the assistance of the Thai Working Group under the chairmanship of Dr. Amnuay Viravan and later Mr. Nukul Prachuabmoh. The members of the Working Group contributed substantially to the preparation of the report and commented on an earlier draft. Naturally, they bear no responsibility for the contents, interpretations and the con- clusions of the report.   TABLE OF CONTENTS Page No. I. INTRODUCTION ......... ........................... 1 Structure of the Public Sector ..... ............. 2 II. RESOURCE NEED AND RESOURCE AVAILABILITY .......... 5 Public Expenditure ............ e ................. 5 Public Revenue .................................. 17 Public Sector Deficit and Financing .... ......... 20 III. TAXATION POLICY ................................. 26 Personal Income Tax ............................. 32 Employment Income ............................. 32 Personal Income from Businesses and Professions ............... .................. 34 Dividends and Interest ......... .. ............. 37 Capital Gains Tax ............................... 38 Corporation Income Tax .......................... 39 Taxes on Goods and Services ..................... 45 Business Tax .................................. 46 Excise Tax ........ ............................ 54 Land and Property Tax ....... .................... 56 Taxation of Rice Exports ...... .................. 59 Rice Premium .......... ........................ 60 Other Taxes and Controls on Rice Marketing .... 64 Government Policy ............. ................ 65 Fiscal Incentives for Industrial and Export Promotion ......... ............................ 67 Industrial Promotion .......... .. .............. 67 Export Promotion Budget . . 72 Conclusions ................ ................... 73 IV. STATE ENTERPRISES ............................... 75 Pricing Policies ................................ 77 State Railways ............... ................. 78 Metropolitan Water Works ........ .. ............ 78 Power Sector ................ .................. 79  TABLE OF CONTENTS (Cont'd) Taxation of State Enterprises ...................81 Remittences to the Goverrment ..... .............. 81 V. REGIONAL DEVELOPMENT AND LOCAL FINANCE .... ...... 83 Local Government Expenditure ..... ............... 83 Local Government Revenue ...... .................. 84 Local Government Taxes ...... .................... 87 Locally Levied Taxes ...... .................... 87 Surcharge Taxes ........ ....................... 88 Shared Taxes ......... ......................... 90 Suggestions for Improving Local Finance .... ..... 90 VI. ADMINISTRATION AND ORGANIZATION ..... ............ 93 Planning and Budgeting .......................... 93 Budgeting for Local Development ...... ........... 98 Tax Administration .............................. 101 Public Borrowing ................................ 102 VII. CONCLUSIONS AND RECOMENDATIONS ..... ............ 105 ANNEXES A. THE PUBLIC SECTOR IN THAILAND (Volume II) B. PUBLIC SECTOR ACCOUNTS (Volume ITI) C. QUANTITATIVE EXAMINATION OF PULBLIC FINANCES (Volume II) D. STATE ENTERPRISES (Volume III) E. LOCAL GOVERNMENT ADMINISTRATION AND FINANCE (Volume IV)  I. INTRODUCTION 1. This report examines developments in public sector expenditures in Thailand and analyzes the problems that may arise in the management of the government's economic activities in the next five years. The study focuses on structural issues. Developments in the immediate future are included only where they throw light on the prospect for the medium term. 2. The issues for the public sector are discussed under three major topics: resource needs and availabilities, fiscal policy, and financial organization and management. Corresponding to these, the basic questions to which answers are sought are the following: what will the expenditure needs of the public sector be in the next five years, and how can these "best" be financed? How can the efficiency in this sector be improved? In what ways can the benefits of the public services and the burden of financing these be "more equitably" distributed? 3. These questions have not received explicit attention in the devel- opment plans or other government programs. The public finance section of the Third Five Year Development Plan (1972-1976) is concerned only with a loosely defined "developmental" component of the public sector activities. This con- cept includes most of capital expenditures and some of current expenditures, but is not clearly related to either, the actual classification of individual expenditures being determined on an ad hoc item by item basis. The government sector is treated in the framework of national accounting concepts which are not translatable to fiscal categories. Nor does the government - which is a transitory government until the elections - have a public sector expenditure program extending beyond the next year. 4. This review has not arisen out of any acute crisis either in the economy in general or in the sphere of public finance developments. Over the past decade, Thailand's economic performance has been credible in almost all respects. Growth achieved was respectable; until last year prices were extremely stable; and the distribution of benefits from growth, though far from satisfactory, has very recently improved. There are signs though that the situation may be deteriorating in the fiscal area. Cash deficit has ex- panded rapidly from the mid-1960's to FY1971/72. The ratio of public expendi- ture to GDP which had exceeded 21 percent in FY1970/71 and FY1971/72 is esti- mated to fall below 19 percent in FY1973/74. The decline in the ratio is attributable to real declines in capital expenditures. The present system of public finances does not seem to be elastic enough to respond to the increasing needs of the economy. 5. A summary description of the public sector structure in Thailand is followed by examination of future expenditure needs and financing prospects for the public sector. Since the Five Year Plan is outdated -and does not set targets for fiscal magnitudes in any case - and since no other public sector plans or programs covering the next five years exist, information for  2- this discussion had to be derived from historical trends and the partial pro- grams of some public agencies. Probable public sector expenditure require- ments are described and compared with future financing prospects. The dis- cussion concludes with an overview of the financing requirements of the pub- lic sector in the medium term. 6. The three chapters following this survey are concerned with major issues in fiscal policy. The chapter on taxation reviews the three important types of taxes - income taxes, commodity taxes and property taxes - and offers recommendations for improving the structure of taxation in Thailand. The taxation of rice as it relates to the agriculture sector and the fiscal incen- tives for the promotion of industry and exports are discussed separately in this chapter. The chapter on state enterprises reviews their future financing needs and prospects and examines the pricing policies and taxation issues of the most important entities. The chapter on local finances concentrates on fiscal policies at the local government level and makes recommendations on intra-governmental financial arrangements. 7. The last chapter is devoted to a discussion of the organizational and administrative issues in Thai public finances. Topics stressed in this section are: planning and budgeting, budgeting at the local level, debt management and tax administration. Conclusions and recommendations are sum- marized at the end of the report. Structure of the Public Sector 8. The public finance system in Thailand is hlighly centralized, reflec- ting the structure of public administration in the country. The central gov- ernment accounts for a predominant share in the consolidated revenue and expendi- ture of the public sector, as shown by Tables 1 and 2. Over the last decade, the central government has consistently accounted for about 90 percent of the consolidated revenue and about 84 percent of the consolidated expenditure of the public sector. However, the impact of the central government on the allocation of expenditure is larger than this suggests since the forms of transfers to local governments and to state enterprises determine, to a large extent, the ultimate use of these funds. 9. The central government is the principal supplier of public services in the country. It is exclusively responsible for defense, police services, industrial promotion, irrigation and land settlement. It furnishes the bulk of social services, although local governments also participate in this area. In education, municipal governments are responsible for primary schools within their precincts, but the central government is responsible for all other serv- ices including the supervision of private and municipal schools. In health care also local government participation is limited, and most public health care services are provided by the central government hospitals and health centers.  -3- TABLE 1: PERCENTAGE SHARE OF PUBLIC SECTOR REVENUE FY1966/67 - FYfl972/73 Average Central Government Current Revenue 81.5 Extrabudgetary Treasury Receipts 3.5 Foreign Grant Receipts 4.9 Central Government Revenue Local Government Revenue 1/ 4.8 State Enterprise Operating Surpluses 2/ 5.14 Consolidated Total 100.0 1/ Net of transfers from the central government. 2/ Net of contributions to central government budget. Source: Tables B-1 and B-2 of Annex B. TABLE 2: PERCENTAGE SHARE OF PUBLIC SECTOR EXPENDITURE FY1965/66 - FnY972/73 Average Central Government Total Expenditure 90.0 Less: Transfers to the Rest of Public Sector -5.6 Central Government Direct Expenditure Local Government Ebcpenditure 5.5 State Enterprise Gross Fixed Capital Expenditure 10.1 Consolidated Total 100.0 Source: Tables B-1 and B-2 of Annex B.  -4- 10. The central government is directly responsible for the construction and maintenance of highways, water supply in non-metropolitan areas, postal service, and international telephone service. Other public utilities - electricity, metropolitan water supply, TV broadcasting, domestic telephone service, air transportation, port administration, railway services and housing are provided by state enterprises, but the central government controls their pricing and investment policies. State enterprises are defined as establish- ments in which the government holds more than half of the equity. The legal forms range from enterprises established by specific act (e.g., Electricity Generating Authority of Thailand) or by Royal Decree (e.g., Express Transit Organization) or under the commercial (e.g., Thai Tobacco Monopoly). State enterprises are discussed more extensively in Annex D. 11. Local administration is conducted by two types of agency. There are, firstly, branches of the central government in the provinces referred to as the "provincial administration." The primary unit under this system is the province (changwat). At present there are 71 such territorial units, each under the administrative control of a governor who is appointed by the central government (by the Undersecretary of the Ministry of Interior in the case of non-metropolitan provinces, and by the Cabinet in the case of the Bangkok Metropolis). Secondly, there are the institutions of "local self- governments" which exist in four forms: the Bangkok Metropolitan Government, provincial government, municipal government and sanitary district government. These agencies are concerned more with the provision of social and community services than with general administration per se. The weight of local govern- ments in the Thai public finance is very low. Their total current revenue accounts for only about 5 percent of the consolidated revenues of the public sector.  -5- II. RESOURCE NEED AND AVAILABILITY Public Expendi-ture 12. Details of the Thai public sector accounts are given in Annex B. According to these figures, the ratio of public expenditure to GDP increased from 16.7 percent in FY1965/66 to more than 21 percent in FY1970/71 and FY1971/ 72. 1/ The ratio declined in FY1972/73 to 19.6 percent, and the estimates for FY1973/74 show a further decline to less than 19 percent. The principal factor causing the steady rise in the ratio in the period from the mid-1960's to the early 1970's was a rapid increase in the expenditures of the central government. The decline in FY1972/73 and FY1973/74 reflects a slowdown in the rate of increase in central government current expenditure and real re- ductions in the capital expenditures of central and local governments. 13. The patern of public expenditure also showed deviations from the trend. Up to FY1970/71, the shares of expenditures were increasing for edu- cation, irrigation, security (defense and police) and interest payments. In FY1971J72, the expenditure share for education and interest payments continued to increase but that for irrigation declined and the share for security re- mained unchanged. In PY1972/73 and FY1973/74, the expenditure shares for most social services (including education) and economic services declined, while the increase in the share of interest payments continued. 1/ "Public expenditure" refers to the consolidated total of central and local government expenditures and state enterprise expenditure for gross investment in fixed assets. The definitions of terms used here are con- sistent with those in the public sector accounts of Annex B. They differ a little from the definitions used in the IBRD Economic Reports, which adopt the Bank of Thailand terminology. See Annex B for the differences.  TABLE 3: PUBLIC SECTOR ACCOUNTS 1] (Millions of Baht) (Estimates) F'Y1966 FY1967 FY1968 ipY1969 FY19'70 I Y1971 FY1972 FY1973 FY19'74 Expenditure 16,222 19,331 22,743 26,059 26,923 30,580 33,290 37,106 44,804 Current 10,540 12,733 T177 9,3 17,590 i9>2 21,928 2 1,8 Capital 5,796./2 6,777L2 8,322 9,550 9,525 11,122 11,515 12,608 13,616 Unidentified Transfers -- 20 -- -_ -_ -- -- __ - Adjustment -114 - 199 -144 -1'73 -193 -171 -152 _1'(0 _ Revenue n.a. 10 552 19 913 22 144 22 727 24 146 25,195 2966 39,585 Current n.a. 1__ 5211 23,795 2,0 37,97 Tax Revenue (Central &; Local Govts,) 533 1'7, 947 T 6 20,074 26286 3 Non-Tax Revenue (Central & Local Govts.) (13.533 Jl5,378 t17,105 1,643 1,761 1,869 2,421 82, t37,125 State Enterprise Opera-ting Surpluses n.a. 1,180 1,146 979 1,180 1,153 1,300 1,759 853 Foreign Grants 891 1,016 1,274 1,464 1,022 1,165 892 857 807 Net Extrabudgetary T'reasury Receipts 286 978 388 573 817 1,570 508 758 800 Deficit n.a. 767 2,872 3899 4 240 6 445 7 813 7,314 5,401 Expenditure less Revenue n.a. r - (9 2,830 3,15 ,466 5,219 Adjustment for Time-Lags 25 -12 42 -16 44 11 -282 -132 182 Financed by: Net Foreign Borrowing 129 132 43 -.165 -11 188 490 1,209 1,969 Net Domestic Borrowing (Non-Monetary Authority) 2,339 1_737 1,480 407 672 ,894 6,843 544 2 74 Non-Bank Public 'v9 -152 171 73 8T1 7 191 39 Government Savings Bank 871 1,108 611 496 l435 766 1,4Y55 2,212 ?,079 Commercial Banks 1,419 '781 698 -162 156 2,120 5,197 2,563 381 Other Sources n.a. -i1,102 1,349 3,657 3 579 3,363 480 961 728 Bank of Thailand 1(1 -5320 351 3,7 73 3.5 2, 1h 1745 0 Exchange Equalization Fund -40 5 77 -32 15 191 244 -370 --- Counterpart Fund 141 -78 -64 -1_4 -120 51 -94 -32 3 Coin Issue 80 54 101 61 55 138 17 121 151 Cash Balances n.a. -(63 884 -131 224 816 139 _294 534 Memorandum: GDP in Current Market Prices 97,100 1(06,560 114, 650 125,620 134,100 142,990 156$ 460 189,300 23c, 600 See Section II of Annex B for explanation of terms R Bevised GDP estimates of August 19'74, Source: Table B-1 of Annex B  TABLE 3a: EXPENDITURE AND REVENUE OF PUBLIC SECTOR AS PERCENT OF GDP 1/ FY1966 FY1967 FY1968 FY1969 FY1970 FY1971 FY1972 FY1973 FY1974 Expenditure Current Expenditure 10.9 11.9 12.7 13.3 13.1 13.7 14.0 13.0 13.0 Capital Expenditure 6.0 6.4 7.3 7.6 7.1 7.8 7.4 6.7 5.7 Adjustments -0.1 -0.2 2/ -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 - Total 16.7 18.1 19.8 20.7 20.1 21.4 21.3 19.6 18.7 Revenue Current Central Government Tax Revenue 11.8 12.5 13.0 13.2 12.7 12.1 12.2 12.0 13.7 Central Government Non-Tax Revenue 1.3 1.1 1.2 1.1 1.2 1.2 1.4 1.3 1.0 Local Government Revenue 0.9 0.8 0.8 0.8 0.9 0.9 0.8 0.6 0.8 State Enterprise Operating Surpluses n.a 1.1 1.0 0.8 0.9 0.8 0.8 0.9 0.4 Sub-Total n.a 15.5 15.9 16.0 15.6 15.0 15.2 14.8 15.9 Foreign Grants 0.9 1.0 1.1 1.2 0.8 0.8 0.6 0.5 0.3 Net Extrabudgetary Treasury Receipts 0.3 0.9 0.3 0.5 0.6 1.1 0.3 0.4 0.3 Total n.a. 17.4 17.4 17.6 16.9 16.9 16.1 15.7 16.5 Deficit 3/ n.a. 0.7 2.5 3.1 3.2 4.5 5.0 3.9 2.3 Source: Tables B-l and B-2, Annex B 1/ Revised GDP estimates of August 1974 were used. 2/ Including unidentified transfer payment from the central government, which was 0.2 percent of GDP. 3/ Expenditure less revenue adjusted for time-lags in the payments and receipts of intra-public sector transfers.  TABLE 4: COMPOSITION OF PUBLIC EXPENDITURE ( As Percent of Total) FY1966 FY1967 FY1968 FY1969 FY1970 FY1971 FY1972 FY1973 FY1974 General Administration (Current) 11.1 13.6 13.1 12.8 10.2 10.2 8.3 10.7 13.3 Defense and Police (Current) 17.2 16.4 17.0 17.8 20.5 20.8 20.8 19.8 21.7 Education 14.2 13.7 15.1 14.8 15.0 16.5 17.6 16.4 15.4 Hlealth Care 3.9 3.2 3.2 3.0 2.7 2.9 2.9 2.5 2.3 Water Supply 1.4 1.0 1.3 1.4 1.5 1.8 1.9 2.3 1/ 2.1 1/ Power (Capital) 3.4 3.6 4.2 5.9 6.0 4.9 5.9 6.9 4.9 Communication and Transportation 14.6 15.7 16.4 17.0 16.5 14.6 13.6 13.5 12.8 Of which: Highways and Roads (8.9) (11.0) (11.9) (11.7) (11.1) (10.5) (10.9) (8.7) (8.0) Agriculture 8.8 9.1 10.1 8.7 10.0 9.8 7.4 6.4 6.1 Of which: Irrigation (5.4) (5.5) (6.7) (5.2) (6.6) (6.7) (4.8) (3.8) (3.4) Persons 2.8 2.4 2.1 2.1 2.2 1.9 2.3 2.1 1.9 Interest Payments 4.0 4.4 4.4 4.3 5.1 5.9 7.3 7.7 8.2 8 Other 2/ 18.4 16.9 13.3 12.3 10.4 10.8 12.1 11.7 3/ 11.4 3/ Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Current 65.0 65.9 64.0 64.0 65.3 64.2 65.9 66.5 69.6 Capital 35.7 35,1 36.6 36.7 35.4 36.4 34.6 34.0 30.4 Adjustments etc. 4/ -0.7 -0.9 5/ -0.6 -0.7 -0.7 -0.6 -0.5 -0.5 - Source: Table C-2b of Annex C 1/ Capital expenditure only. Cuarrent expenditure included in the figures for other years was about 0.2 percent of the consolidated public ex- penditure in the period from FY1969 to FY1972. 2/ Mainly the expenditures of which the purposes are not identifiable. "Adjustments etc." in the last row are.also included. 3/ Current expenditure for water supply is included, as its magnitude is not identifiable. 4/ Adjustments for double counting and for "unspent balance" of the budgetary funds disbursed from the central governmeit treasury (see Annex B). 5/ Unidentified transfer of $ 20 million (0.1 percent of consolidated total expenditure) is included.  -9- 14. Public services in Thailand, as in most developing countries, need to be improved. Elementary education is compulsory, and yet there are villages with no primary schools within a reasonable distance. Public health services reach only one-third of the total population. Most rural roads are in such primitive condition that villages are isolated in dry season when water trans- port cannot operate, and the Bangkok metropolitan area suffers from heavy traffic conges-tion. Increased expenditures for social services are needed to reduce income disparities among regions, to equalize opportunities among in- dividuals, and to improve the living conditions of an increasing population. Larger expenditures for economic services and infrastructure are necessary to maintain the growth of productivity in the economy. The extent of public services to be provided, and the expenditure this would entail, depend on the objectives of the society and the costs of providing the necessary finance. A projection of public expenditure without taking account of financial con- straints would not be realistic. On the other hand, the discussion of a feas- ible finance effort must be based on some ideas about the urgency of expendi- ture needs. These are topics which would be best analyzed in the context of national plans. Since the existing plan does not provide such a ready basis, the Mission attempted to piece together the relevant information to arrive at some meaningful scenarios for desirable cum feasible public sector expendi- ture levels and financing alternatives. 15. Examination of past public expenditure and the impressions gained in the course of interviews with the Thai government officials suggest that the recent decline in public expenditure relative to GDP reflected a tight- ening financial constraint imposed by the slow increase in revenue. The rising trend in the public sector's revenue relative to GDP had already come to an end by FY1968/ 69; after this there occurred a decline in the ratio of revenue to GDP. 1/ The public sector sustained rising level of expenditure for a while by drawing on cash balances and borrowing heavily from the banking system. In FY1971/72 the excess of public expenditure over revenue equalled 5 percent of GDP. It was the attempt to restrain the size of borrowing and hence the deficit that brought down the ratio of public expenditure to GDP in FY1972/73. 16. Looking at eht recent developments in public finances and public service supply, we consider that the ratio of public expenditure to GDP should not be less than 22 percent, which is slightly higher than the average ratio for FY1970/71 and FY1971/72. This minimum level will be referred to as the "floor target" for public expenditure in the period from FY1973/74 to FY1979/ 80. 1/ "Revenue of public sector' is also defined in this report a little dif- ferently from the definitions in the IBRD Economic Reports, which adopt the Bank of Thailand terminology. Here it consists of the tax and non-tax current revenues of central and local governments, operating surpluses of state enterprises, foreign grant receipts and the net extrabudgetary receipts of the central government treasury. Hence the deficit figures cited in this report differs from the deficit figures given in the IBRD Economic Reports.  TABLI3 5: Financing of Public Expenditure (as percent of expenditure) FY 1969/70 FY 1970/71 FY 1971/72 FY1972/73 FY1973/7h Current Revenue of Central and Local Governments Central Gov't. Tax Revenue 63.0 56.5 57.3 61.2 73.2 Central Gov't. Non-Tax Revenue 5.9 5.14 6.14 6.7 5.3 Local Gov't. Revenue 4.3 14 .4.0 2.9 4.4 State Enterprise Operating Surplus 1.4 3.8 3.9 1.7 1.9 Total Current Revenue 77.6 70.0 71.5 75 Other 6.8 8.9 14.2 41.11 3.6 Total Revenue T777 75727 79.9 P .7 Cash in Transit 1/ -0.2 .... 0.8 0.4 -0.4 Net Borrowing Foreign Sources .... 0.6 1.5 3.3 4.4 Domestic Sources 2/ 2.5 9.5 20.6 13.90 6.0 Monetary Authority 3/ 12.7 7.7 1.3 3.1 0.1 I Total Net Borrowing 15.2 o 20.3 1. H Other Sources 0.6 3.3 0.2 -o.6 1.5