On July 15, the Cabinet endorsed a six-point economic package that will come into effect for a period of six months. Cuts in fuel excise taxes, among other measures, are regarded as important and will help ease the impact of soaring inflation. These tax breaks will include reductions in the excise taxes on all types of gasohol (gasohol 95, E10, E85 and gasohol 91) from THB3.3165/liter to THB0.0165/liter, and on diesel from THB2.305/liter to THB0.005/liter. KASIKORN RESEARCH CENTER (KResearch) has assessed the likely effectiveness of this program and come to some conclusions, below:
- With the new excise tax rates, the retail prices of gasohol and diesel fuels may decline by 8.7 percent and 5.2 percent, respectively. As weighted in the Consumer Price Index (CPI), the cheaper gasohol and diesel prices may trim the CPI by some 0.61 percent and 0.17 percent, respectively. As a result, these tax breaks may cut the CPI around 0.78 percent.
- The excise tax cuts on fuels are expected to come into effect on July 25, 2008. The fuel price reduction may reduce the inflation rate for August to below 10 percent, lower than the double-digit figure earlier projected.If other variables remain intact, 2008's average inflation may drop to 7.3 percent against KResearch's earlier projection of 7.8 percent.
- The government is expected to spend around THB49 billion on these measures. In KResearch's view, the assistance program may ease consumers' expenditures by some 1 percent of their total spending. Still, these measures that are aimed at helping ease the financial burdens of the public may be a trade-off with a higher budget deficit, which is expected to reach some THB220 billion – 2.3 percent of the GDP, against the previous projection of around THB172 billion – 1.7 percent of the GDP. This may affect the fiscal status because a budgetary deficit has to be offset, possibly resulting in falling liquidity in the financial system.
In conclusion, KResearch holds the view that the relief measures on inflation as approved by the Cabinet on July 15 may somewhat ameliorate the impact of accelerating inflation. The inflation rate in August is thus expected to be lower than 10 percent and the average inflation rate for 2008 may stand at 7.3 percent, against the 7.8 percent previously projected. Even so, these measures are a trade-off with a higher budgetary deficit, likely to reach THB220 billion against an earlier projection of THB172 billion. Amid runaway oil prices, however, priority should be given to collaborative energy saving efforts. It is obvious that these tax breaks will come at the cost of a larger fiscal deficit. Therefore, these measures should be implemented only for a limited time. After a period of six months, especially if global oil prices come down, the program would be well-timed to end.
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