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Fiscal Sustainability, Inflation Targets and the Appropriate Policy Mixed

Fiscal Sustainability, Inflation Targets and the Appropriate Policy Mixed. Outline. 1. Public Debt and Fiscal Risk Assessment. 2. Fiscal Model. 3 . Policy Coordination. 4 . Fiscal Sustainability. 5. Conclusion. Public Debt. Debt incurred and accumulated by governments over time.

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Fiscal Sustainability, Inflation Targets and the Appropriate Policy Mixed

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  1. Fiscal Sustainability, Inflation Targets and the Appropriate Policy Mixed

  2. Outline 1. Public Debt and Fiscal Risk Assessment 2. Fiscal Model 3. Policy Coordination 4. Fiscal Sustainability 5. Conclusion

  3. Public Debt Debt incurred and accumulated by governments over time Debt burden borne by the public (taxpayers) Debt of the public: Not debt of the government or any particular person

  4. Thailand’s Public Debt % of GDP 53.5% (2,869 Bil. Baht) 52.3% 1987 11.5 (614) 17.6 (942) 14.0% 1996 24.5 (1,313)

  5. Bil. Baht % of GDP 1. Public debt (as of Mar 2002) 2,869 53.5 2. Off-budget expenses (within next 5 yrs) 535 9.4 2.1 FIDF debt 277 5.2 - FIDF 2+3= 892 Bil. B. (Less 615 Bil. B. already included in public debt.) 2.2Universal health insurance (30 Baht) 142 2.3 - 24 Bil. B. annually 2.3Education reform 103 1.7 - 20 Bil. B. annually 2.4 Reserve fund for GPF 13 0.2 - 2 Bil. B. annually 3. Public debt + Off-budget expenses 3,404 62.9 LessLow-risk state enterprise debt 733 13.7 4. Total 2,671 49.2 Public Debt and Fiscal Risk Assessment

  6. Outline 1. Public Debt and Fiscal Risk Assessment 2. Fiscal Model 3. Policy Coordination 4. Fiscal Sustainability 5. Conclusion

  7. Debt Dynamics Market rates Output gap Monetary policy RD3M MLR GAP RP Inflation P Domestic demand Domestic demand Bond yield Expectations C, I CINFEX RB C, I Government spending GDP growth GDP growth Debt interest G GDP DINT GDP TAX PB DEBT Tax revenue Budget deficit Debt/GDP

  8. if budget surplus  if budget deficit _ _ Revenue Expenditure Interest Bond yield Tax revenue RP14D Fed Funds GDP Modelling Debt PUBLIC DEBT Central government domestic debt Central government foreign debt State enterprise debt Debt(t) Debt(t-1)

  9. Monetary Policy Reaction Function *[Actual GDP – Potential GDP] *[Actual inflation - Target ] • Monetary policy responds to deviations of GDP from potential and inflation from target. • Weights (, )applied on gaps determine how strong interest rate adjusts to output and inflation deviations. RP14D Equilibrium rate Inflation gap Inflation Output gap • 14-day repurchase rate is monetary policy instrument.

  10. Monetary Policy Reaction Function % Monetary policy behaves broadly in line with policy rule.

  11. Fiscal Policy Reaction Function TAX *{[Debt(t) – Target] - [Debt(t-1) – Target(t-1)]} *[Debt(t) – Target] • Tax rates (VAT, personal income tax) are fiscal policy instruments. • Fiscal policy responds to deviations of debt (Debt/GDP) from debt target, in terms of direction and speed. • Tax-smoothing parameters (, ) determine the rate at which tax rate changes.

  12. Outline 1. Public Debt and Fiscal Risk Assessment 2. Fiscal Model 3. Policy Coordination 4. Fiscal Sustainability 5. Conclusion

  13. Coordination between Monetary and Fiscal Policy Monetary Policy Fiscal Policy RP14D TAX, G Price Stability Fiscal Sustainability Macroeconomic Stability Sustainable Growth

  14. Coordination between Monetary and Fiscal Policy (VAT and RP14D) % % % Debt stays above target. Monetary policy tighter and VAT rate increases from 7% to 11%.

  15. Coordination between Monetary and Fiscal Policy (VAT and RP14D) % % Core Inflation Real GDP Growth Larger impact on inflation.

  16. Coordination between Monetary and Fiscal Policy (Personal Income Tax and RP14D) % % % Debt reduced to target. Monetary policy stance remains easy, while personal income tax rate doubles.

  17. Coordination between Monetary and Fiscal Policy (Personal Income Tax and RP14D) % % Real GDP Growth Core Inflation Stronger effect on real GDP growth.

  18. Sustainable Growth • Coordination between Monetary and Fiscal Policy Coordination Cooperation Consistency Macroeconomic Policy Commitment Clarity Economic Stability

  19. Outline 1. Public Debt and Fiscal Risk Assessment 2. Fiscal Model 3. Policy Coordination 4. Fiscal Sustainability 5. Conclusion

  20. Scenarios for Long-term Projections

  21. Public Debt % of GDP Peak 65.7% in 2005 Peak 60.9% in 2005

  22. Interest Payments : Total Expenditure % Peak 13.6%in 2007 Peak 12%in 2007

  23. Debt Services : Total Expenditure % Peak 16.5%in 2007 Peak 14.9%in 2007

  24. Public Debt In the past 20 years and in the next 30 years % of GDP 60.9% 2005 52.3% 1987 40.8% 2006 35.8% 1987

  25. Debt Service and Interest Payments In the past 30 years and in the next 30 years % of Total Expenditure 24.7% 1987 14.9% 2007 17% 1988 12% 2007

  26. Economy reaches potentialin medium term Low interest rateenvironment Slower economic growth? Higher interest rates? Fiscal Sustainability

  27. Fiscal Sustainability • Increase VAT rate back to 10%and introduce other tax reforms. • Fiscal consolidation to accommodate private sector recovery. • Reform the public sector and keep personnel budget growth below 5%. • Debt management strategy should be in line with bond market development plans. • Closer coordination between government and state enterprises in debt management plans. • Increase efficiency in budgeting e.g. multi-year budgeting plan.

  28. Outline 1. Public Debt and Fiscal Risk Assessment 2. Fiscal Model 3. Policy Coordination 4. Fiscal Sustainability 5. Conclusion

  29. Coordination between Monetary and Fiscal Policy Monetary Policy Fiscal Policy Price Stability Fiscal Sustainability Economic Stability Sustainable Growth

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