The greatest economic uncertainty Singapore is facing now comes from the global external demand for its goods and services, in which additional Government stimulus may not be the best solution to it, said the Minister for Trade and Industry Chan Chun Sing on Wednesday (15 July).
The city-state’s economy contracted by 41.2 per cent in the second quarter from the previous three months, data Tuesday showed, in which the decline was inflicted by its circuit breaker measures against the coronavirus pandemic.
To this, Mr Chan noted in his interview with Bloomberg TV yesterday that the contraction in demand caused by the circuit breaker was within expectations and “within our control”, indicating that external demand is more uncertain.
“The greatest uncertainty and the downside risks at this point in time is the global external demand, and I don’t think fiscal measures alone will be the most appropriate for this kind of challenge,” he remarked.
The Minister said the Government is concerned about a second, third, or recurring waves of COVID-19 infection around the world would cause the demand for economies to further shrink, therefore it is difficult to predict “when the upturn will come about”.
But he believes that Singapore is poised for economic recovery if it’s positioned as a “safe harbour” for investment and talent, maintain trade links with all major economies and diversify its markets and sources of materials.
The Government has put aside 20 per cent of its GDP fiscal stimulus to help affected businesses and households, and prevent a surge in retrenchments. Mr Chan also emphasized the need to help some industries to rethink their business models for a post-pandemic world.
“It’s not just waiting for demand to pick up again as for some sectors, where the business models are still relevant. There are also sectors where we will need to develop new business models,” he said.
The ruling party People’s Action Party (PAP) retained its power with 61.2 per cent of the votes in the General Election (GE) on 10 July, while the Workers’ Party (WP) attained two Group Representation Constituencies (GRCs) – Aljunied GRC and Sengkang GRC.
“Regardless whether it’s opposition parties or the PAP, we all have to work together to transcend the challenges of the current moment,” Mr Chan stated.
WP’s Jamus Lim proposed alternative solutions to meet anticipated increases in Government spending needs
During the political debate on 2 July, the WP’s Jamus Lim pointed out that while the PAP tends to be on the side of Capital, the WP aims to help Singaporean workers have a larger share of the national income.
“We think, in fact, that for every dollar of national income, Singaporean workers already receive an insufficient amount – 42 cents compared to 55 cents in Japan, and much higher in other high-income countries. And we think that a re-balance of that kind of share of labour income is ultimately necessary,” he said.
The economics professor broke down his statement further in a Facebook post on 3 July, explaining why the GST hike would be an error both in the short and long term.
“In the near term, a GST increase amounts to contractionary fiscal policy. If we believe that this could be a prolonged recession, a premature tightening of macro policy would short-circuit a nascent rebound, and the shock may even send the economy back into recession,” he elaborated.
Citing the example of Japan, Dr Lim said it has “remained in a low-growth regime, and often fell into recession each time it either attempted to (or actually did) increase its consumption tax, ever since 1997. Consumption tax hikes may have well prolonged its lost decade(s).”
While he acknowledged that the Government understood this by ruling out GST changes for 2021, he opined that “the refusal to end the proposal entirely can dampen expectations and weaken the stimulus effects of current fiscal expenditures”.
Moreover, this would also urge consumers toward greater saving instead of spending, which would have negative effects on the economy.
“But the proposal has pernicious long run consequences, too. When potential output of the economy is low (perhaps due to demographic factors), a small policy shock can have disproportionate effects on growth,” Dr Lim added.
He further noted that Singapore’s income distribution “already skewed in capital’s favour”, thus a “consumption tax would only serve to further exacerbate this inequality”.
Dr Lim proposed alternative solutions to meet anticipated increases in future Government spending needs, “one is to slow the rate of reserve accumulation by raising the net interest returns contribution to 60 from the current 50 percent”.
“Another way is to channel a fraction of land sales receipts (which currently go toward reserves) toward meeting recurrent expenditures like health and education,” he noted.