By Basant K. Kapur
THE Budget proposals presented to Parliament by the Finance Minister Tharman Shanmugaratnam last week contain many positive features, such as the Jobs Credit Scheme, the enhanced Workfare Supplement and the limited drawing on past reserves. However, in one important respect, it would appear that more could have been done.
As Mr Shanmugaratnam stated, the Resilience Package is 'mainly a supply-side approach, aimed at keeping jobs'. Supply side measures have been a hallmark of fiscal policy here, the justification being that in a highly open economy like ours, the stimulation of, say, consumption demand would not be particularly effective owing to high import leakages. But the facts do not entirely bear this out.
According to the Singapore Input-Output Tables 2000 (the latest available), the import content of consumption expenditure in Singapore is only 34.1 per cent. The 'total (domestic) value-added' content is 53.7 per cent, with a further 12.2 per cent comprising import duties and 'other taxes on products'. By contrast, the import content of investment expenditure is as high as 55.9 per cent, and of exports 59.2 per cent.
Stimulation of domestic consumer demand, to the extent feasible, would thus appear to be advisable. Lowering the cost of keeping workers employed will not suffice to maintain employment if there is insufficient demand for the products of firms. So both demand and supply sides deserve attention.
[See the letter below that also argues for stimulating demand, not just saving jobs.]
More specifically, as Professor Tan Khee Giap pointed out in these pages last week, domestic demand is of particular importance to our small- and medium-sized enterprises, which account for 55 per cent of our total employment, and to the wholesale, retail and commerce services sectors.
How, then, might consumption demand have been stimulated through Budget measures? The most direct measure would have been to roll back the two percentage point increase in the Goods and Services Tax (GST) that was instituted in 2007. Many observers, myself included, had argued against this increase. This year's Budget proposal to increase GST credits and to target them at the less well-off, is not likely to provide as broad-based a stimulus to consumption as an across-the-board two percentage point reduction in the GST.
This is particularly likely to be the case if what economists term the 'real balance effect' is also taken into consideration - the fact that higher prices reduce the real value of fixed-nominal-value assets (such as bank deposits), and thereby exert a negative wealth effect on consumer spending.
Some figures in this regard are instructive. In its Macroeconomic Review of January 2003, the Monetary Authority of Singapore estimated that a 1 percentage point GST increase would increase the Consumer Price Index (CPI) by about 0.4 percentage points in the same year, and by about 0.75 percentage points in total eventually. Thus, the two percentage point GST increase can be expected to increase the CPI by about 1.5 percentage points. Another way of looking at this is to say that the GST increase has contributed to the negative real interest rates earned by fixed nominal-value-assets over the past year.
What is the size of these assets? The two key items would appear to be M3 (currency in circulation plus deposits), and CPF balances. According to MAS and CPF Board figures, these amounted to about $306 billion and $136 billion respectively in 2007. Thus, a GST-induced 1.5 percentage point increase in the CPI would generate a one-time $6.6 billion reduction in the real value of these assets - a sizeable capital loss. It imposes a welfare loss to the holders of these assets, Singaporean or foreign, and also tends to diminish the attractiveness of Singapore-dollar-denominated fixed-nominal-value assets as a 'store of value'.
To be sure, not all of these assets are held by Singaporeans, and the depressing effect on consumer demand here would be correspondingly less. However, there would certainly be a negative effect. Right now, our economy needs 'all the help it can get', and even a modest stimulus to consumption from a GST roll-back would be welcome.
An estimated tax revenue loss from a 2 percentage point GST roll-back - about $1.8 billion - is well within the Government's capabilities to absorb. In fact, the revenue loss should be less than this, since the need for enhanced GST offsets would be lessened by a roll-back, and if, as I would argue, the roll-back induces an increase in consumption spending.
[The question is, would a GST roll-back stimulate demand at all? If a DVD costs me 40 cents less, would I buy more DVDs (assuming a DVD costs $20)? If a pair of shoes costs me $2 less would I buy more shoes? The problem isn't just economics. It's also psychological. It's also about consumer behaviour.]
Finally, a brief discussion of related, longer-term issues. In a recent article in this newspaper, economists Sim Moh Siong and Kit Wei Zheng pointed out that 'consumption constitutes less than 40 per cent of Singapore's GDP - and the figure has been falling consistently'. By contrast, the figure for 'another equally open economy', Hong Kong, is over 60 per cent. This certainly increases the vulnerability of Singapore to external shock. They also suggested that one reason for Singapore's low consumption-GDP ratio is the high levels of home ownership here.
This raises further issues which are worthy of investigation. It is frequently argued that high housing prices in Singapore, including prices of HDB resale flats, are due to 'market forces'. However, as the main provider of housing properties in Singapore, the Government is certainly in a position to influence market forces. Increased supply of HDB flats would tend to reduce their prices below what they would otherwise be, and induce some substitution of HDB for private accommodation, thus reducing the prices of private properties as well.
In my view, this is a longer-term policy option which deserves careful consideration. Some decline in housing prices would not be disruptive. At the very least, over the longer term, further increases in housing prices should be significantly moderated.
The writer is Professor of Economics and Director, Singapore Centre for Applied and Policy Economics, Department of Economics, National University of Singapore.
[The wonderful thing about economics is that for every argument or position taken, you can usually find 2 or 20 opposing viewpoints arguing for a counter position. A truly great economics debate will tell you that you are right, but for the wrong reasons.
The article above raises three points.
1) The argument that stimulating demand in Singapore would not lead to unduly high leakages thru imports as imports only constitute 34% of the value of consumption. (I think this means that on average for every $1 you spend, 34 cents go overseas, 54 cents goes to the Singapore business, and 12 cents goes to the govt in the form of taxes. So his point would be that the leak is only 34% and so there is still a case to be made for stimulating demand with tax rebates or handouts.)
2) GST causes inflation, which affects the value of savings and assets, specifically, M3 and CPF. In fact, the 2% GST increase resulted in a $6.6b decrease in value of these assets. Then from this point, he jumps to the conclusion that the 2% rollback will boost consumption modestly, but in the name of giving the economy "all the help it can get", we should do it.
3) Singapore's low-consumption as a ratio of GDP is because of the high levels of home ownership, and the high prices of homes in Singapore. And this is because the govt as the main provider of homes are artificially or actively keeping the supply of homes low in order to maintain the values of homes.
I can't believe he can make such arguments. Or maybe I should. As I said, for every economic viewpoint, there are maybe 20 opposing views.
On point 1 about the import component. It is not just the import value, it is also the multiplier effect. The domestic value added content of 54% is what gets multiplied in the Singapore economy. That is for every $1 spent, only 54 cents goes to the business as salaries, wages, and profit. And this then becomes the disposable income that is used to buy other goods, of which only 54% goes into wages and salaries, etc. and so on. So a 34% leakage may be quite significant. The professor provides no comparative data on other economies' leakage.
On point 2, the "GST devalues assets and savings" argument is just a red herring with absolute no connection to the point he was trying to argue, which is that the 2% GST increase should be rolled back. Even he admits that the roll back will have a modest impact on the economy. I would argue that the impact would be negligible, not even modest. If you want to boost consumption, you need to make the people feel richer and this you do so by giving the person enough cash to affect his disposable income. GST cuts won't impart this feeling. A 2% GST increase is a lot. A 2% GST cut is nothing. This is the psychology of the consumer.
On point 3, it would be more convincing if the professor addresses these points:
a) Are property prices higher in Singapore or in Hong Kong? My impression is that HK prices are higher. So there goes his point.
b) Assuming I am mistaken (about the above), There were a backlog of unsold HDB flats above 6 - 7 years ago. It took HDB several years to clear their stock. It is not simply a matter of supply and demand. The housing market in Singapore is not as simple as capitalistic economics. Added to the mix are a whole bag of social engineering policies, as well as the CPF factor. CPF savings are a distorter of the market. It artificially boosts the prices of homes to positive and negative effects. And without addressing this effect, his analysis is flawed at best and incomplete at worst.
This article just goes to show that even educated people are also emotional people, because I can't imagine how else he can pass off the flimsy analysis as a rationale for rolling back the GST.]
Jan 26, 2009
Better to create demand, rather than save jobs
IN THIS global recession, the Government announced the Budget statement a month earlier than usual.
The main concerns addressed included saving jobs so employees remain employable and their way of life is not much affected; providing more financial help to vulnerable groups such as the needy and the elderly; and giving more incentives in terms of tax rebate or tax reduction to companies and individuals.
On saving jobs, I have a different angle.
Why save the job of a salesman (for example) when he has no customers? Let me explain.
A salesman sells a product, say, TV sets. But if there are no customers to buy TV sets, why is the salesman needed?
I suggest we create demand rather than merely save jobs.
If more people buy TV sets (that is, demand has been created), the salesman is much needed. Then his job is saved with earnings from the sale of TV sets.
Likewise, if there is demand for goods and services, there will be a plentiful supply of jobs.
I strongly advise against giving handouts without strings attached, except to the needy and the elderly.
There are people who rely on financial assistance and handouts, even though they are strong and able.
They see no incentive to get a job since the Government has measures in place to help every citizen. They are like leeches on society because the financial assistance and handouts do not fall freely from the sky. The money comes from taxpayers.
There is a saying that applies here: 'Give a man a fish, and you have fed him for today. Teach a man to fish, and you have fed him for a lifetime.'
I hope the Government will seriously consider creating demand rather than merely saving jobs.
Jasmin Lim (Ms)
[This letter is simplistic, and looks only at the micro-picture. If the TV salesman is out of a job, he will have no income and he will cut back on his expenditure until he finds a job. This will reduce the demand for other goods and services, like shoes and clothes. If enough TV and other salesman lose their jobs, the shoes and clothes sales persons will lose their jobs and their respective businesses will close. So yes, give a man a job, and he will have disposable income to generate demand for other goods. The danger is to let jobs be lost thus creating a larger pool of unemployed who then become unemployable and become welfare recipients just looking for their daily fish.
So look at the larger picture. In this unprecedented crisis, the govt is applying unprecedented measures like saving jobs. In the past the Govt has never saved jobs for the sake of saving jobs. If your job is redundant, it is redundant, and off you go. Retrain, reskill and come back when you have a marketable skill. But with a broad-based Great depression-like economic downturn, different measures unprecedented measures are required.]