Perspective Unlimited

Wednesday, February 20, 2008

Is the Budget Inflationary?

Even before the budget was announced last Friday, it was widely anticipated to deal with the thorny issue of inflation. Inflation in Singapore has reached multi-year highs. One of the contributing factors has been the rise in food prices. The price hikes of food and commodities could certainly have caused hardship for some Singaporean families, and also increased economic anxiety for all.

The highlight of the budget however is the return of much of the $6.4 billion surplus in the form of various rebates. For example, individuals are given growth dividends and also a one off 20 per cent rebate on their income taxes (capped at $2000). Furthermore, there are various handouts - particularly to poorer families - which all in all erased much of the budget surpluses.

Aggregate Demand

To fight inflation, policy makers should be crimping aggregate demand through tighter monetary conditions, tighter fiscal policies, or a combination of both. However, instead of reducing aggregate demand through higher tax collections, the government is in fact increasing the purchasing power of tax payers through the various forms of rebates.

The increase in disposable incomes through the rebates and handouts is expansionary since it will lead to increase in aggregate demand. Seen from a demand-supply perspective, this might even translate to higher inflation. The budget can therefore even be construed as inflationary, which means that it could be doing the economy more harm than good.

Inflation in a Small Open Economy

To truly understand the impact of the budget on inflation, one must first appreciate that Singapore is a small and highly open economy. Added to this is a highly flexible workforce, including the use of foreign workers and talent.

The first implication is that much of Singapore's inflation is imported. For example, oil and commodity prices - which have risen a lot over the past few years - are also not within Singapore's control. Since we are a small economy, our demand will have a negligible impact on world prices. The second implication is that the aggregate supply of Singapore is in principle is highly elastic. Flexibility in the labour market lessens the impact of wage-driven inflation. The conjecture here is that price-wage inflation spiral is less likely to take hold in Singapore.

The overall implication is that the budget - even though it is expansionary - will probably not give rise to too much inflationary pressures because we are a small, open and highly flexible economy. From this perspective, the objective of the budget is to help Singaporeans cope with the effects of inflation rather than fight it.

15 Comments:

  • Fortunately it remains to be seen if the poor actually gets all the $$ promised. I hope not! I fully agree those losers are parasites of the society and should at least have the decency not to trouble the useful folks by causing inflation and wiping out the budget surplus!

    NoName

    By Anonymous Anonymous, at 9:30 am  

  • Noname,

    I do care to have a proper discussion with you if only you will refrain from this double-talk, which is by the way nowhere as funny as Lucky Tan.

    By Blogger Bart JP, at 9:45 am  

  • Dear Bart

    you said -
    "Furthermore, there are various handouts - particularly to poorer families - which all in all erased much of the budget surpluses."

    Double-talk?
    The middle class (me) is paying a heavy price so that the dumb poor (whose cause funny man Lucky champions) can get their crumbs.

    Unlike Lucky I do not aspire to sainthood. the faster the middle-class lose their guilt-complex the better.

    Unfortunately I AM feeling the inflationary pressure and I feel the budget can do much more.


    NoName

    By Anonymous Anonymous, at 11:05 am  

  • Hi Noname,

    Without doubt, the cost of living has increased. Food, milk, basic essentials have all gone up. For the middle class with a car, pump prices have increased significantly over the past year.

    Unfortunately, much of it is due to global trends, China's inflation is nearing double digits. Food prices are shooting up due to natural or economic reasons (such as food crops being switch for biofuels in response to high oil prices).

    Has the budget done enough for the middle class? The definition of middle class is very wide. One could be getting anything between $0 to $2000 in income tax rebates, depending on income. But I do feel that the govt is right to send more help for lower-income families since (1) average incomes are increasing, meaning that the average median family should still be seeing income growth (2) income gap is widening, meaning the lower-income group is not doing as well as the rest (3) inflation has for some years been highest for the lowest income groups due to the price increase of basic essentials.

    I think the govt is right to worry more about the lower income groups.

    By Blogger Bart JP, at 3:30 am  

  • "The poor you will always have".

    Please dun be yet another "Pity the Poor" blog... each time the self-righteous opens their mouth, the middle-class gets hit with "gst hike to help the poor", cpf life (which i am sure u have computed that the economically optimal choice is refund-90).

    As someone who has actual contact with the real poor, my conclusion is that they must want to help themselves. It is not just $$$. Besides, the real poor aren't affected by inflation cos they get food vouchers etc. Let the civic groups help them. not the gahmen or quasi gahmen. renci, nkf rings a bell? audit for comchest any1?

    We are much better off reverting back to 5% gst and NOT helping the poor.

    If the gahmen really wants to help the poor & middle-class, they should do so by cutting defense spending, have less generals, scrap conscript, scrap maid levy and increase education subsidy.

    PS: to get $2000 rebate, u need to have min $155k p.a which is hardly middle-class by sg standards. Our beloved states times had published a nice table. u can refer to it.

    NoName

    By Anonymous Anonymous, at 1:02 am  

  • Noname,

    With all due respect, I think it is better for me not to give a direct reply to you except to say that this is not a "pity the poor" blog, I don't recall writing much about the poor.

    By Blogger Bart JP, at 2:01 am  

  • Bart jp,

    The PAP govt is so kind to help us cope with inflation. Some analysis show that our inflation is "worse than necessary" because of 1) Lingering effects of GST hike 2) Transport hikes (ERP, Taxi, etc) 3) Utilities....all of which the PAP govt has some control over....

    Budget time is a time of kindness in Singapore. Kindness for those who cannot afford the excellence of a great govt.

    By Blogger LuckySingaporean, at 3:29 am  

  • noname,

    jus asking how do you define the middle class? and i agree that the poor should want to help themselves before they are given help. but how do you suggest to differentiate between the 2 groups of people?

    By Anonymous ecy, at 2:59 pm  

  • Poor? what Poor? Was in town trying to find a decent place for dinner, most of the restuarant are fully filled!

    The poor are a minority. Why can we let them just disappear quitely here from Singapore? Why pro-long their pain of being poor? Why are the gov wasting money on these group of people who are a drag to the society?


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