Thailand's economy is picking up speed in 2015 as government spending accelerates and urban consumption improves after political turmoil last year choked growth, its finance minister said on Wednesday.

If the economy continues to improve, the government plans to go ahead with plans to raise value-added tax (VAT) by 1 percentage point to 8 percent by the end of September to boost state finances, Sommai Phasee told Reuters in an interview.

Protests paralyzed Thailand's government in the first half of last year, hurting tourism and denting consumer confidence. The military seized power in May to end the turmoil, but has struggled to revive Southeast Asia's second-largest economy.

Thailand's economic growth should accelerate to 2-3 percent in the first quarter on the year, Sommai said, although that would be below the government's 4 percent growth target which will be tough to meet.

"We are seeing the economy start to pick up," he said. "Four percent will be challenging."

Rising tax revenue in January was a good indicator of improved investment, and urban consumers were starting to spend, he said.

VAT revenue rose nearly 10 percent in January from a year earlier, he said. Ideally, the government should raise VAT to 10 percent, its level during the 1997/98 Asian financial crisis, but that could only happen gradually and if the economy improves, he said.

Economists expect government spending on infrastructure to spur growth this year, although delays in disbursement of funds pose a downside risk to their projections.

Sommai, who was appointed finance minister in August by coup leader and now Prime Minister Prayuth Chan-ocha, said that delays in government spending were initially due to bureaucrats working through new rules imposed to prevent corruption.

Those projects, many of them initiated by the ousted administration of former Prime Minister Yingluck Shinawatra, would now proceed, he added.

The junta is under pressure to speed up infrastructure spending projects to rev up growth amid weak exports and sluggish domestic demand.

LIMITED STATE REVENUES

Economic growth was just 0.2 percent in January-September 2014 from a year earlier, and the government expects full-year growth for 2014 to come in at less than 1 percent, the weakest since the impact of severe floods hit the economy in 2011. Official data is due on Feb. 16.

Fiscal spending would be a more effective tool to stimulate the economy in 2015 than changes in monetary policy, he said.

A cut in interest rates would be unlikely to have much impact on the economy, he said.

Some economists expect the central bank to cut its benchmark interest rate when it next reviews policy on March 11 after consumer prices fell in January and amid easing monetary policy in many countries.

The bank has left its main interest rate steady at 2.0 percent since March, when it cut it to help business cope with political tension.

High household debt has capped consumption, but that is starting to improve in urban centers after the government hiked salaries for public sector workers, Sommai said.

The situation is less rosy in rural Thailand, he said, where the junta has cut generous farm subsidies which cost the state billions of dollars under Yingluck's government.

Thai state revenue is equivalent to 18 percent of GDP, much lower than the 30-40 percent seen in many developed countries, he said. Thailand needs to boost that if it is to raise living standards.

The government forecasts a budget deficit of 250 billion baht ($7.66 billion) for the current fiscal year ending September, similar to the previous year's deficit, and equal to 1.9 percent of gross domestic product. For the next fiscal year, it estimates a wider deficit of 390 billion baht, or 2.9 percent of GDP.