Innovation in an era of debt brake

PUBLISHED : 7 MAR 2022 AT 04:30




In the 21 years after the Asian financial crisis of 1997, Thailand's government ran a budget deficit 18 times. However, due to ineffective management, excessive fiscal spending did not produce the intended effect of economic acceleration. 

Given the monopolistic nature of the economy, which is primarily owned by a few elites, the sprinkling of water did not result in more competitive investments, employment, rising wages, and finally, more revenues for the state coffers. That prompted the government to adopt fiscal rules in 2018 to control this tendency towards permanent deficits.

Since 2020, the Covid-19 pandemic has forced the government to increase health expenditure and provide more relief for the poor, thus borrowing more. Public debt has grown from the equivalent of 41% of GDP in 2019 to an expected 62% this year. Recognising the unavoidable increase in debt, the government raised the public debt ceiling from 60% of GDP to 70% in late 2021.

Holding the line on public debt makes sense because it will, in the long run, ensure economic stability and investor confidence. Countries that lose control of their debt spiral into hyperinflation, default, and economic misery.


But will that, by itself, be enough to bring economic growth back to Thailand, which has relied chiefly on centrally driven economic development strategies? Is now the right time to question what this means for local governments, which have not been recognised as critical in national economic development and protecting people's livelihoods?

Only about 11% of the annual budget is allocated directly to provincial and local governments.

The central government indirectly spends money to provide public services through local and provincial administrations via responsible ministries such as the public health ministry and education ministry.

However, revenue-sharing generates an equivalent of another 23% of central government spending, boosting the role of provincial and local government spending in the economy to about 7% of GDP versus about 17% for the central government based on 2021 GDP. Local governments' contributions to economic recovery will be much more pronounced if their proportion of public investment spending is higher.

A debt brake is a method of capping the public debt that has been used successfully by European countries like Switzerland, Sweden, and Germany to ensure that politicians cannot wiggle out of promises to control public spending. In Thailand, national financial success under a debt brake will require local innovation.

Because of insufficient understanding of local government's contribution to national economic development, most people assume that tighter budget control for local governments at the time of a national debt brake is necessary. Partly because local governments in Thailand do not enjoy fiscal autonomy, unlike their counterparts in economically advanced countries, they are too dependent on central allocations and revenue-sharing.

Granting more fiscal autonomy and a higher share of taxes to local governments will unshackle them from dependence on the central government.

It will eventually encourage local fiscal innovation and capacity-building. Khon Kaen municipality, for instance, has tried to draw investment from China to help build its light-rail system. Property and environmental taxes are two areas that local governments can also expand without hurting economic activity. If managed properly, this could unleash local innovation through matching grants and performance-based budgeting.

However, the bigger picture goes beyond the immediate fiscal effects of a debt brake. For one thing, it is not the quantity of central government spending but the quality that matters for improving the national economic climate. Indeed, a paper issued by the Bank of Thailand found that expenditures of the central government between 1993 and 2014 had minor effects on the growth of the nation's economy because most went to immediate consumption. In addition to the positive impact of a debt brake on macro-economic stability, a more strategic national budget is needed to improve local development conditions by getting the most bang for the buck.

A national debt brake could also adversely affect local government development efforts by tightening the relationship between national and local government policy priorities. As the African proverb has it, when the watering hole is shrinking, the animals must stand closer together. But this may be an advantage to those local governments that can prove themselves agile and effective partners for national development priorities. It also means that local governments that act upon national priorities will see their influence in Bangkok grow.

As we come out of the Covid pandemic, Thailand's list of to-do items is quite long if the country is to avoid long-term economic scarring and escape the middle-income trap. Digital transformation of both public and private sectors is critical. So is boosting the workforce skillset and bringing more workers into the formal labour market. Regulatory reform remains pressing. Building smart local infrastructure is needed for competitive cities and creative local economies.

In all these respects, local governments must play a leading role. And far from being despondent because of the belt-tightening accompanying a national debt brake, they should play a crucial role in identifying local innovation and growth opportunities. Our colleagues at the College of Local Administration at Khon Kaen University are researching local government innovation at a time of a national debt brake that will examine this question in all its facets through fieldwork, pilot studies, economic modelling, and forecasting exercises.

The overarching conceptual framework investigates and assesses the impact of the central government's fiscal and economic development policies on local development administration and its ensuing feedback loop of growth on economic recovery. Just as Thailand needs to avoid spiralling debt, rising unemployment, the rising cost of living, economic stagflation, and debt default, it also needs to ensure that stricter fiscal rules are accompanied by more relaxed provisions for local governments to raise their own revenues and make their own strategic choices about how to spend them.

The United Nations Development Programme calls the new opportunities for local government leadership in the face of weakened national institutions a ""positive externality"" of the Covid crisis. This is a window opportunity for Thailand to avoid an economic nosedive and soar to new heights.