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SECTION II
STABILITY FOR LONG-TERM GROWTH
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Chapter 5
Steering a Small Ship in Rough Seas
Since independence, Singapore has enjoyed rapid growth and now has one of the highest per capita GDP in the world.23 The markets that Singapore exports to now include the major markets in the West (the US and EU), and developing markets in Asia including China, Malaysia, and Indonesia.
But Singapore also experienced wide swings in the growth rates, which reflected global economic and geopolitical events. Despite recent efforts to diversify its economy, Singaporeās exports are still affected by global cycles at the aggregate level.24 As shown in Fig. 1, Singapore has seen increasingly large and frequent fluctuations in its growth rates even as its economy matured over the years.
After several years of good growth since independence, Singapore was buffeted by the two oil shocks in the 1970s. In 1985, Singapore suffered its first recession which was mainly due to internal factors of reduced cost competitiveness. Subsequently, Singapore experienced sharp slowdowns that reflected global events such as the Asian Financial Crisis in 1998, the bursting of the dot.com bubble in 2001, the SARS epidemic, and Iraq War in 2003. When the subprime mortgage crisis hit the world during the Global Financial Crisis at the end of 2008, Singapore was among the first countries in the world to enter into a recession. In fact, Singapore has become so integrated with the rest of the world, global observers have described Singapore as the proverbial ācanary in the coal mineā25 of the world economy.
Figure 1:Singaporeās Annual GDP Percentage Growth Rates at 2010 Market Prices (1961ā2016).
Source: Singapore Department of Statistics
In each of the global events that impacted Singapore, the government responded swiftly with measures to not only cushion an otherwise hard landing but also steer the economy towards safer waters by restructuring and creating new capabilities in line with longer-term strategic shifts in the world. Table 1 summarises the fiscal measures undertaken by the government over the years in response to the global shocks.
Low Fiscal Multiplier in Singapore
It is noteworthy that through every downturn, the government did not engage in policies to artificially prop up aggregate demand as the main objective. For example, though the government announced the acceleration of development projects to moderate the decline in the construction sector during the 1997 downturn, these were in fact projects that had been planned for implementation in the coming few years to meet social and economic needs. The record shows that the Singapore government does not initiate infrastructure projects solely for the sake of boosting the economy. This would only create white elephants requiring additional resources for maintenance down the road.
Table 1:Summary of Fiscal Measures in Response to Economic Downturns.26
The approach taken in Singapore is markedly different from countries less dependent on trade, where governments would undertake expansionary fiscal policies to boost aggregate demand and create jobs. These governments would initiate infrastructure projects, increase transfers or lower taxes so as to put more money in the hands of businesses and households who would then spend more to generate an increase in economic activity and create more jobs. But the fiscal multipliers in Singapore are simply too low for the government to pursue such expansionary fiscal policies effectively.27
Fiscal multipliers measure how much GDP changes for every additional dollar in government spending or reduction in taxes or revenues. Given the high savings rate in Singapore, a large percentage of the increased incomes of households and businesses would be saved rather than spent. In addition, Singaporeās dependence on trade means that for every dollar spent in domestic consumption, around 40 cents would āleakā out of the economy in paying for imports.28 Therefore, increasing government expenditures or reducing taxes to increase domestic incomes would have limited impact to boosting domestic spending.
Macroeconomic Impact of Budget Balances
When the Government generates a Budget Surplus, the Government is effectively taking out from the economy via taxes more than it is putting back into the economy as expenditures. It is a net subtraction to aggregate demand.
An increase in budget surplus constitutes a negative fiscal āimpulseā that would help reduce inflationary pressures. This is appĀropriate when the economy is overheating (working at above the long-term potential output ā the level of production at which there is no pressure for prices to rise or fall).
Conversely, a Budget Deficit is a net contribution to aggregate demand. An increase in the deficit or reduction in surplus equates to āpump primingā to boost the economy when it is operating at below potential.
Instead, given that the value added from exports makes up two-thirds of Singaporeās GDP,29 it would be more effective for fiscal spending to be targeted at enabling the export sector to raise productivity so that goods and services could be priced competitively to keep export levels up.
Long-Term Sustainability
Given the low fiscal multipliers in Singapore, the fiscal measures undertaken in response to recessions have generally been crafted to cushion the impact of downturns and restore economic competitiveness rather than to boost domestic demand as the main objective.
Households and businesses (especially small and medium enterprises (SMEs), which employ around two-thirds of Singaporeās workforce) would receive short-term relief to help them tide through the difficult times. The government would put much care into designing the measures to achieve the greatest effect in assisting those who needed help most, for example, lower-income households. In addition, the measures are one-off so as not to breed a dependency on such transfers which would affect long-term fiscal sustainability. The assistance packages are usually termed as āspecialā transfers to emphasise that they are not to be expected under normal circumstances and are usually given in 1 year. If the benefits were to be extended for a few years, they would be scaled down over a few years and removed when the economy recovered.
Helping Businesses with Labour Costs to Keep Cyclical Unemployment Down
One of the key objectives of special transfers for businesses is to help keep employees on payrolls to prevent widespread unemployment. By helping workers keep their jobs, their families would also be provided for. Businesses would also preserve the capacity to respond when demand recovers. The government would also usually take the opportunity of a downturn to push through initiatives to encourage companies and workers to upgrade. For example, the government launched the Skills Programme for Upgrading and Resilience (SPUR) in the wake of the 2008 Global Financial Crisis which provided higher course fee support for companies and individuals and absentee payrolls for companies that send their workers for training. In just 6 months, 124,500 workers signed up for SPUR, including 83,500 workers sent by 1,800 companies, many of which were using SPUR to manage their excess manpower. Another 40,600 individuals signed up to upgrade their skills and 19,000 job seekers found jobs through SPUR.30
Prior to 2009, the government relied on CPF adjustments as the main tool to help keep workers employed during downturns by bringing wage costs down to help businesses stay competitive. However, the measure of cutting CPF contribution rates would eventually affect the sufficiency of CPF savings for retirement and healthcare needs of workers. The government would thus restore the CPF reductions as soon as economic conditions and productivity improve.
In the wake of the Global Financial Crisis in 2009, instead of cutting CPF contributions, the government undertook discretionary fiscal intervention in the form of a one-off Jobs Credit scheme to help businesses keep workers on the payroll during the downturn. This marked the first time the government helped businesses and workers using surpluses accumulated by past terms of government so that CPF rates need not be cut in a downturn. In the process, the government articulated the two principles for the use of accumulated reserves for a downturn. First, the reserves would be used only in āvery exceptional situationsā, such as when external events or crises pose a threat to Singaporeās economy or society. Second, the measures to be funded out of the reserves are to be of a temporary nature and not built into continuing government programmes.
Promoting Capability Development and Restructuring
Another consistent characteristic of the recession packages is the focus on capability development and restructuring. As a small export-oriented economy, Singapore has no choice but to ensure that it can produce goods and services at comparable if not lower costs than competing exporters in other countries. The best way to help workers and businesses over the long term is to ensure that they are productive and globally competitive.
During recessions, measures to help reduce costs for businesses, such as rebates for income taxes and fees and charges, would almost certainly be included in the fiscal packages announced by the government, but these would be temporary in nature. Cost reduction measures were undertaken to help businesses stay afloat so that the capabilities built up by businesses over the years would not be lost just because of a temporary slump. But the Singapore government does not engage in subsidising the operations of businesses simply to boost economic competitiveness and beef up employment. It would be fiscally unsustainable.
Rather, the cost reduction measures would be phased out and replaced by longer-term initiatives to encourage economic restructuring over the longer term by providing support for businesses who make investments to improve productivity and move up the value chain. For example, following the 1985 recession, the National Productivity Board (NPB) established a Management Guidance Centre in 1986 to administer various management consultancy programmes for local companies to raise productivity levels at the company level as well as industry level.31 In the wake of the 2001 recession, the Trade and Development Board was reconstituted as International Enterprise Singapore (IE Singapore) in 2002 to help Singapore companies internationalise and develop new overseas markets. Through schemes such as Global Company Partnership and Market Readiness Assistance, IE Singapore works with Singapore-based companies in their various stages of growth towards being globally competitive. In the wake of the 2008/2009 Global Financial Crisis, the National Productivity and Continuing Education Council (NPCEC) was established in April 2010 to drive the national effort to raise the productivity at the sectoral, enterprise, and worker levels. The NPCEC taps on the National Productivity Fund, the Lifelong Learning Fund, and the Skills Development Fund to fund 10-year roadmaps developed for sectors with significant contributions to employment and GDP and which have potential for productivity gains. Over the years, these long-term initiatives have served to sustain the competitiveness of both businesses and workers by encouraging them to build on their own strengths, upgrade capabilities, and adjust strategies to meet new needs in the global economy.
Summary
As a small and open economy, Singapore is like a small ship in rough seas.
Historically, for each time its economy suffered a setback due to a global shock, Singapore rebounded quickly by making cost adjustments and restructuring its economy to ride on new drivers of global growth by building new sectors and engaging new growth markets. This is not a trivial achievement. Restructuring is often very painful for the individual participants of the economy. Workers lose their jobs and cannot find new ones without retraining. The new jobs may not pay as well as before at the beginning, and increments in wages may only be possible over time through the building up of proficiency and experience. Owners of SMEs experience anxiety as they see costs escalate at the same time as revenues fall. Many businesses had to fold up or relocate to neighbouring countries where costs were lower. But businesses that take efforts to improve productivity to reduce costs and innovate to find and serve new markets would get government support and continue contributing to Singaporeās growth.
Singaporeās fiscal strategies have helped enhance the resilience of the Singapore economy by providing short-term relief which prevented economic capabilities that had been built up over time from being set ...
