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Ways for govt to help during bad times.

Helping Singaporeans cope with the recession

Tan Kin Lian / Columnist

Introduction

Singapore’s economy is in recession. It will get worse and may take one or two years to recover.

Senior Minister Goh Chok Tong has advised people to continue spending, to keep the economy growing and avoid the downturn getting worse. (See here) Many people do not agree with this call. They are afraid of losing their jobs. They prefer to save more, in case the need they money in the future. The reduced domestic spending is now being felt in many sectors of the economy.

I wish to suggest two measures to overcome the fear and stabilise the economy – relief loan and cut in GST.

I suggest that the Government introduce a new scheme, to provide a relief loan to Singaporeans who are retrenched or face a reduction in earnings due to a shorter work week.

The relief loan is to be provided by a Government agency and is subject to certain conditions. Interest rate shall be charged at 2.5% per annum. The amount of the loan shall be for the loss or reduction in earnings, and shall be available for a period of up to 24 months.

Certain measures can be implemented to prevent abuse, and ensure that the relief loan is used for the right purpose. The loan has to be repaid at a future date, when the borrower is able to find a better paying job, e.g. when the economy recovers. If not paid, it can be deducted against the CPF savings payable at age 55.

The existence of this relief loan will give comfort to the working people that they can continue nearly as usual, and do not need to cut down their spending drastically at this time. It will support the suggestion made by Senior Minister to keep the economy going.

Those employed will have the comfort that if they should be retrenched at a later date, they have access to a relief loan that carries a modest rate of interest. They do not have to borrow from credit cards at 24% interest or from loan sharks at higher interest rate.

The relief loan should also be available to workers who agree to work on a shorter work week (e.g. 3 or 4 days a week) for a proportionate reduction in wages. They can get a relief loan for the difference. This will encourage businesses (facing a drop in demand) to keep their workers on a shorter work week, instead of retrenching the excess workers.

The relief loan is similar to unemployment benefit that is available in many advanced countries. In this case, it is a loan that is required to be repaid in the future.

The Governor of California, Arnold Schwarzenegger, has introduced a simple and effective scheme to cope with the budget deficit of the state. He asked all state employees to take 2 days of unpaid leave each month. This should reduce the expenses by about 10%. This is better than to retrench 10% of the state employees to achieve the same results.

It is not just cutting wages by 10%. The employees get two additional days of free time to spend on other activities. For employees who have been working long hours, this will be a welcome break.

I hope that the employers in Singapore can adopt the same approach. Perhaps the Government can take a lead.

Reduce GST to 3%

There is a need to increase domestic spending and personal consumption, to offset the drop in external demand.

A temporary reduction in GST to 3% will help to stimulate spending. Many people will consider spending now, and enjoy a 4% reduction in prices, due to a reduced GST. Other people will still be cautious and save the money, but a big reduction (of 4% in GST) may spur others to spend now.

If money is given to people to spend, it is likely that many people will use the money to pay off their debts or save for the future. The actual impact on domestic spending is reduced. This was the case of the stimulus package in the USA a few months ago.

A reduction in GST is likely to produce a positive impact on the economy. With people continuing to spend, more people will keep their jobs and the economy will carry on nearly as much as before. There will still be a contraction in demand, but the impact will be minimised.

I agree with the call by SM Goh Chok Tong for people to continue to spend normally, so that the economy will not suffer such a severe decline. I believe that a reduction in GST is likely to encourage people to achieve this desired outcome.

Conclusion

This economic downturn is global in nature. It is the most severe in 70 years. Singapore is likely to face a larger impact from this downturn, due to the structure of our economy. We need to have “out of the box” measures to overcome the challenges.

I hope that my suggestions can be considered.

Tan Kin Lian will be speaking at Speakers’ Corner this Saturday, 27 December, at 5pm. This will be the last gathering on the issue of structured products until further notice.

www.tankinlian.blogspot.com

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