The macroeconomic effects of the public sector deficit : the case of Thailand

In the past, the Thai government usually ran a budget deficit. In recent years, the deficit has become a surplus. A continued high growth rate in the last three years produced an unexpected rise in tax revenues, and the growth of public spending was effectively controlled. The government has adopted an early retirement plan for foreign debts and in fiscal 1991, for the first time in recent history, the government proposes to balance the budget. The central government's actual spending is usually below planned spending - which is overestimated during slumps and underestimated during booms. Tax capacity has increased gradually over time relative to GDP. This factor has contributed most to reducing the public deficit. There have also been more automatic stabilizers and a decline in dependence on foreign trade tax. Thailand's pattern of deficit finance has contributed to macroeconomic stability. In times of high deficit, the government relies less on borrowing from the central bank and more on borrowing from commercial banks and the private sector. Money-financed deficits are more likely to exacerbate inflation and the current account deficit than any other method of deficit financing. The strong growth of the Thai economy is attributable partly to appropriate fiscal responses to external shocks. Stable prices helped facilitate the depreciation of the real effective exchange rate, further strengthening export and output growth.