Bangkok Post - Tax reform in the limelight. However, Thailand cannot adopt a Scandinavian-style welfare state because of insufficient government revenue.

Tax reform in the limelight

Mr Pichai noted that since the government is seeking to bolster revenue to pay for rising expenses, raising value added tax would be appropriate. 

In 2025, a key government policy to monitor is tax reform initiatives recently floated by Finance Minister Pichai Chunhavajira.

Mr Pichai said Thailand should follow the example of many countries that have reformed their tax systems by reducing personal and corporate income taxes while increasing consumption taxes, such as value-added tax (VAT).

The Fiscal Policy Office (FPO) has promoted tax reforms for more than a decade, but has not achieved much because of what are described as political challenges.

Following the pandemic in 2020-21 and the global economic slowdown, the government's public debt level surged compared with the pre-Covid period.

In September 2019, the government's public debt totalled 41.1% of GDP. This figure rose during the pandemic, prompting the government to raise the public debt ceiling from a maximum of 60% to 70%.

As of October 2024, public debt tallied 64%, causing fiscal pressure and reducing fiscal space, according to the FPO.

Government revenue has not increased significantly relative to GDP. Over the past decade, state revenue as a percentage of GDP was the highest in 2016, at 16.4%.

Following the pandemic and its impact on the global economy, government revenue as a percentage of GDP in 2022 was at its lowest point in 10 years, at 14.6%.

In fiscal 2023, the figure increased slightly to 14.9%.

Moreover, revenue from categories that are difficult for the government to cut, such as civil servant salaries, civil servant benefits, public welfare and contributions to various funds that mandate government contributions, such as Social Security and the Government Pension Fund, as well as expenditures for principal and interest payments on government debt, have increased.

In fiscal 2023, these expenditures accounted for 67.2% of the government's total expenditure budget, up from 65.8% in fiscal 2022.

The FPO considers tax system reforms, based on the approach proposed by the Finance Minister, to be essential.

Studies conducted in Organisation for Economic Co-operation and Development countries found having high personal income tax and corporate income tax rates can lead people to feel discouraged from working.

In other words, once they reach a certain income level, they may decide to quit their jobs and instead rely on government welfare, a phenomenon particularly noticeable in Scandinavian countries.

However, Thailand cannot adopt a Scandinavian-style welfare state because of insufficient government revenue.

The approach should be to encourage people to work and earn income, with a reduced personal income tax rate to motivate people to work more, according to authorities.

As the government seeks to bolster revenue to pay for rising expenses, raising the VAT would be appropriate, said Mr Pichai.

Increasing VAT by 1% is expected to generate around 70-80 billion baht in state revenue. Although many essential goods for people's livelihoods are exempt from VAT, a VAT hike is expected to affect low-income groups and vulnerable segments in society.

Therefore, any VAT increase should be accompanied by measures to assist these groups in order to offset the impact, said the minister.

Danucha Pichayanan, secretary-general of the National Economic and Social Development Council, previously suggested that if VAT is hiked, the additional revenue should be used to care for the country's steadily growing ageing population.

Thailand became a "complete aged society" in 2024, with individuals aged 60 and older accounting for 20% of the total population.

He said the idea of increasing VAT should be considered by the government as one option to support the elderly population.