A version of this article was first published in The Nation on December 27, 2023.

Like many countries, Thailand has been navigating a complex transition from crisis to post-pandemic recovery since last year. Its tourism-led rebound, marked by intermittent starts and stops, was made even more challenging by decades-high inflation fueled by a steep rise in imported food and fuel prices.

Yet, Thailand is no stranger to adversity. Having weathered decades of political instability and catastrophic climate events like floods, Thailand has consistently demonstrated its capacity to overcome economic challenges.

Its ability to withstand economic storms, including those brought on by the COVID-19 pandemic and the spillovers of the Ukraine-Russia conflict, is rooted in its longstanding record of strong fiscal discipline. This approach has enabled the Thai government to provide substantial financial support to affected Thai citizens and businesses during the pandemic and provide subsidies to dampen excessive fuel price increases, thus fostering a stable macroeconomic environment for continued economic recovery.

Looking ahead, this recovery will continue, driven by continued recovery in tourism and resilient domestic demand. However, the road ahead is still fraught with risks.

A further slowdown in global growth would not only curtail Thailand’s tourism recovery but also demand for its manufacturing export. Inflation has subsided but food inflation remains a concern due to El Nino. The country’s structural challenges, including an aging population, slowing productivity, and an infrastructure gap, add to the complexity of its waning growth prospect. Moreover, the need to adapt to global trade shifts and climate risks is becoming more pertinent.

The government, led by newly elected Prime Minister Srettha Thavisin, is aware of these challenges while targeting an ambitious 5 percent real GDP growth. The digital wallet scheme –aimed at promoting the use of digital wallets and boosting the economy by providing THB10,000 baht to every eligible Thai – has become a key thrust of the government in boosting growth, albeit scaled down and delayed slightly based on the latest announcements.

However, the digital wallet scheme entails a significant fiscal cost. Under this scheme, the government’s debt burden, which has increased sharply from 40 percent of GDP in 2019 to over 60 percent in 2023 due to pandemic-related spending, is set to rise further.

The digital wallet scheme may boost growth in 2024 by as much as 2 percentage point but it is one-off and unlikely to have durable impact on potential growth. That can only come through investment and productivity enhancement measures. Worse, it will delay the rebuilding of the fiscal space that underpins the resilience of the Thai economy. Based on our estimates, although the debt-to-GDP ratio would still be below the 70 percent ceiling set by the government, the pace of fiscal consolidation will likely be delayed by at least three to five years.

As Thailand continues to shift away from crisis response to longer-term goals and tackle a multitude of structural challenges, the policy focus should be geared toward rebuilding fiscal space to cope with future shocks and promote sustainable long-term growth. The pace of rebuilding fiscal space can be sped up by introducing additional revenue-enhancement measures as well as tax policy and administration reforms.

A few measures could be considered. They include restoring the value-added tax (VAT) rate to 10 percent from 7 percent, complemented by financial assistance to lower-income individuals to ease the burden; streamlining deductions for personal income tax to align with the economic environment; and reforming corporate income tax incentives such as shifting away from tax holidays to more targeted tax incentives on new capital expenditures.

Given the elevated level of public debt, continued adherence to fiscal consolidation plans is essential. Without adding fiscal burden, priority should be given to budgeted growth-enhancing fiscal spending, especially in the areas of infrastructure development. For example, the upgrading of inter-city road and rail systems would not only close the country’s infrastructure gap and reduce regional disparity, but also raise the country’s overall growth potential.

Finally, the digital wallet scheme, if implemented, can be more targeted, focusing on lower-income households and aligning with existing welfare and social protection schemes for better synergy.

While the Thai economy is finding a right balance in such complex transition, adherence to fiscal prudence and prioritizing growth-enhancing fiscal spending will be vital to promoting sustainable growth and building resilience against an increasingly uncertain future.