The long-awaited budget (or Ang-Pow season) is finally here. With the dimming global economic outlook and the COVID-19 outbreak weighing on consumer and business sentiment, it is unsurprising that the government has taken an ultra-accomodative approach to its budget for 2020. Here are some of the key highlights:
1. Fiscal Deficit at $10 billion; the Highest since the 2009 Financial Crisis
When the government runs a fiscal deficit, its expenditures are projected to exceed their tax receipts. This is known as expansionary fiscal policy, where increased government expenditure and tax cuts stimulate the economy by raising the aggregate demand (AD) for goods and services. Given the negative economic outlook where AD is expected to fall from decreased household expenditures and falling exports/tourism from the COVID outbreak, Singapore's economy is expected to go into a recession. By cutting taxes and increasing spending, the government is able to stimulate the demand for goods and services in the economy; firms have more money to be able to make investments, households have more money to buy goods and services, and private sector firms such as construction companies are able to get contracts from the government to build infrastructure such as those for flood prevention. Consumer spending (C), investments (I) and government expenditure (G) are components of AD; an increase in C, G and I will help to stimulate the economy and counter the recessionary forces that Singapore faces in 2020.
2. Postponement of GST Hike
As Singapore's population ages, the government's fiscal budget is expected to be under pressure from slower growth in tax receipts (slower growth in labour force) and rising government expenditures in providing for healthcare services and retirement. Thus a GST hike is inevitable to help fund the increased expenditure. However, a GST hike puts further recessionary pressures on Singapore as it represents a rise in aggregate costs of production for businesses that will have to pay higher taxes to the government and attempt to pass it on the consumers in the form of generally higher prices for goods and services. This can be illustrated diagrammatically as shown below:
Given the dim economic outlook, it is wise to postpone the GST hike until the Singapore economy is more robust, where rising aggregate demand can offset the potential decline in economic output. This would ensure that the incomes and jobs of citizens are better protected.
3. Corporate Income Tax Breaks & Transfer Payments
In practice, government hardly cut corporate tax rates as part of their fiscal toolkit due to the practical accounting complications associated with changes to the tax code. Instead, corporate tax breaks are offered to companies to provide temporary relief to their tax bills, putting more profits in their hands to support investment in capital goods (buying more machinery, expanding factories etc.) and stimulating aggregate demand in the economy.
The government is also supporting household consumption by providing transfer payments in the form of cash handouts and other top ups. This would help bolster the disposable income of households that would encourage consumption spending on various necessities like food and utilities.
Together, the rise in investment spending by companies and the consumption spending by households would help to alleviate the recessionary pressures faced by Singapore due to the impact of the COVID-19, by raising aggregate demand in the economy.
Decisive fiscal intervention during the 2009 Financial Crisis allowed Singapore to avoid a prolonged slump, escaping with a "mere" 1.3% decline in real GDP in 2009 on the back of the global recession. The COVID-19 outbreak is unlikely to bring about a deep recession in Singapore, with forecasts estimating GDP growth in 2020 to be between -0.5% and 1.5%. Nonetheless, the accommodative fiscal and macroeconomic policies by the government are certainly welcome, and hopefully help Singapore achieve the higher end of the projected growth rates.
Read More About the Budget Here: https://www.channelnewsasia.com/news/singapore/budget-2020-covid-19-slowing-economy-exceptional-12446392