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The topic and country we chosen was fiscal policy and Singapore. First of all, we must have a brief knowledge about what is fiscal policy. Fiscal policy is policy uses by government to affect the macro economy. In other words, government uses revenue collection and expenditure to influence the economy. The revenue is by collection of taxes and how government spends all the revenue collected. After the implementation of fiscal policy, it will affect the variable in economy such as aggregate demand, how the income distributed, structure of resource allocation within the government and private sector.
Fiscal policy categorized into three stances which are neutral fiscal policy, expansionary fiscal policy and contractionary fiscal policy. In neutral fiscal policy, government implies a equal budget between government spending and tax revenue. All the revenues spent by government were collected by taxes. It has a neutral effect on the level of economic activity.
Government implements expansionary fiscal policy during economy recessions. The spending will definitely beyond the tax revenue hence leads to a larger government budget deficit or a smaller budget surplus. The objectives of this policy are to increase the economic growth and lower down unemployment rate. To increase government expenditure and aggregate demand, government should increases disposable income by lower down the direct taxes or increase transfer payments.
Contractionary fiscal policy occurs when then government spends less than tax revenues collected. The unused tax revenue will be used to pay the government debt or to stabilize the economy during inflation in future. The objective of this policy is to lower down the inflation rate. Government can done this by decrease expenditure on goods and services. In another way, decrease disposable income by increase direct taxes and transfer payments.
The fiscal policy has few limitations. The fist limitation is the inflexibility of government expenditure and taxation. To increase government expenditure and change the tax structure, it may take a long time from few weeks until few months for the economists to make decisions and get an approval. It is also hard to increase a large portion on a area because it consists of areas such as healthcare, education and infrastructure which equally important. The second limitation is it may have a crowding out effect for expansionary fiscal policy. When the government increase expenditure which not enough support from taxes revenues, government will issues securities which leads to financial deficit. When this occurs, the demand for the securities will increase and directly cause a higher interest rate. Higher interest rate will reduce the investment and consumption in several areas hence directly offset the initial increase by government expenditure. The third limitation is smaller multiplier. If the economy of a country with high income taxes, saving and imports, the effect to fiscal policy will have a smaller multiplier on unemployment and inflation.
Issues of Fiscal policy in Singapore
In Singapore, the government has provided mainly essential goods and services by using fiscal policy. Singapore government just used about 10% of national income in government expenditure to stimulate the economy market. By this, Singapore government has set up a huge amount of reserves because of achieved budget surplus in normal years. The limitation of small multiplier occurs in Singapore forced Singapore’s government spends a very small portion from the collections of tax relative to the exports items, and the fiscal policy is just effect the supply side of market. Singapore government increase expenditure in several areas such as education, training and development, and infrastructure. By making hypothesis that aggregate demand in Singapore is rising, the increase in the aggregate supply will lead to a better economic growth and reduce the inflation rate.
During year 2008 and year 2009, the global economy experienced financial crisis. Hence, Singapore government used expansionary fiscal policy in that particular recession year. The result of small government expenditure in Singapore, Singapore’s government furnished it by the ways of giving transfer payments to households and also firms. During the period of high inflationary pressures, Singapore government avoids to implement contractionary policy which may cause a reverse effect. There is no area to decrease the government expenditure due to its small expenditure size. Singapore relies heavily on foreign talents, so the government does not want to increase direct taxes as it will cause and adverse effect on the economy. After the recession in years 2008 and 2009, Singapore experienced a strong rebound in the year 2010 which helped to raise revenue collections. Expenditure has been increased as showed government’s long term commitment to raise investment in public transport infrastructure, health care of citizens and education for the youth.
Singapore’s fiscal policy implemented successfully due to the combination of fair tax policies and prudent expenditure programs. The main objective of Singapore’s fiscal policy is for the sake of economic growth in future, not on how income distributed and cyclical adjustment. Singapore government has set few philosophies in his action to achieve its objective. First, provides a steady and full of opportunities environment for the private sector. This is due to private sector are the key to achieve a sustainable growth in long term economy. Second, legitimate the tax and expenditure policies based on microeconomics of current market. Third, the ability of counter cyclical role of fiscal policy is limited due to high import leakages in. Singapore government done a fine research before implemented fiscal policy, hence successfully created budgets surplus for the past few years. Singapore is on the front rank of the highest investment rates in global due to the high savings rate in Singapore. This achievement is done without borrows any money from foreign country. Investor feels confidence because Singapore has a big amount of foreign reserves. The reserves were accounted by high domestic savings and used to buffer against adverse economic shock during economy downturn. (www.sgs.gov.sg)
In Singapore, the long term objectives of fiscal policy are to make sure economic growth steadily and no hyperinflation in future. In general, fiscal policy works in specific tools such as taxes, government purchases and transfer payment. Taxes are the involuntary payments government charged on the rest of economy to gain the revenue needed to provide public goods and public infrastructure. Expansionary fiscal policy involves in reduce the income rates or by rebate based on taxes paid previously. Directly, disposable income will increase and can be used for more consumption expenditures, then stimulates the aggregate production and employment, in result an increase in income. In point of administration, tax changes are the easiest to implement and political leaders and voters usually support a decrease in tax burden rather than increase the government expenditure. There are three main sources government gains revenues, tax revenue, fees and charges and other receipts. The tax revenues consists 75.3% of total operating revenue. For the PY2012, operating revenue is estimated at $53.1 billion, an increase of 5.1% compared to the FY2011. The most important tax revenues are from various taxes by the Singapore government:
Income tax: Chargeable on income of personals or corporate. Personal income tax collections are estimated increase to $7.8 billion or an increase of 14.4% in FY 2012. Corporate income tax is estimated increase to $13.4 billion in FY2012 or an increase of 9.6%.
Property tax: Chargeable on the expected rental values of the properties. Property taxes collections are estimated decrease to $3.7 billion or a decrease 4.5% in FY2012.
Estate duty: Imposed on the value of a deceased’s assets in excess of a threshold amount.
Motor vehicle taxes: Imposed on car or motor vehicles. To restrain car ownership and road congestion. Collections are estimated to a decrease to $1.6 billion or an decrease of 13.8%.
Customs and excise duties: imposed on motor vehicle, tobacco, liquor and petroleum products.
Goods and services tax: is chargeable on consumption and spending money on goods or services, also includes imports.
Casino taxes: chargeable on private lottery, betting and sweepstake.
Stamp duties: imposed in commercial and legal documents, basically such as stock, bones and shares or immovable property. Stamp duties collections are estimated a decrease to $2.5 billion or an decrease of 15.5%.
Others: imposed on foreign worker levy and airport passenger service charge. (www.mof.gov.sg)
Government purchase are expenditures by the government sector, spends on final goods and services. It consists of portion of gross domestic product purchased by government. The actual purchases processes are done by the individual government agencies. Expansionary fiscal policy involves an increase in the funds for the individual agencies. The individual agencies use the additional funds in purchases to stimulate aggregate production, increase nation income and rate of employment.
Transfer payments are payment by government to the household sector with no expectation of productive activity in return. The common transfer payments are social security benefits for the people who already retired, disable person, unemployment compensation to the people who have no job and welfare for the weak financial person. It has system and payment schedule, who are verify to meet the criteria will then receive the financial helps. Expansionary fiscal policy participates in increase the payment and increase the transfer system, indirectly offered household extra disposable income. Hence, boost the aggregate production and consumption expenditures and leads to increase in income.
Special transfer to Households
Total Cost in FY2012 ( $ millions)
GST Voucher comprising :
Cash for lower income Singaporeans
CPF Medisave top-ups for elderly Singaporeans
Utility-save rebates for lower and middle income households
CPF Medisave top-ups
Others ( self-help group, voluntary welfare organization, etc.
Top ups to funds to support longer term investments
Top up amount in FY2012 ( $ millions)
New funds :
GST Voucher Fund
Bus services enhancement fund
Existing funds :
Special employment credit fund
Edusave endowment fund
Medical endowment fund
Community care endowment fund
Special transfers committed from previous budgets.
Total cost in FY2012 ( $ millions )
Utilities save rebates
CPF Medisave top ups
Fiscal policy is a policy that will affect the macroeconomic circumstance through government spending. This policy control economy through government spending, government tax rates and interest rates.
Singapore is one of the largest exporter and importer in the world which has the ranking of 14th and 15th in the world. Besides, due to Singapore`s supreme location, skill labor force, low tax rates and it evolve infrastructure it attracted a lot of foreign investors to make investment in Singapore. This help to stimulate Singapore GDP and makes Singapore to become one of the advance economies in the world.
But in year 2009 Singapore has gone through its toughest economy which is the deepest and sharpest recession in Singapore. Basically, deep recession can be defined as a period during which aggregate output decline. This deep recession in Singapore had last for the whole year of year 2009. One of the major reasons that caused this recession is the faster and deeper declination of international economic activities and the over flow effects of this declination on important sectors of the economy of Singapore. Moreover, due to this recession it brought some serious effect to Singapore. Rise in unemployment rate, stock exchange fall down, downscale in major corporations, low production and growth remain negative for the whole year.
In order to solve this problem, Singapore`s government had applied fiscal policy. In year 2010 Singapore`s economy has improved revenue collections. Besides, Singapore`s government also boost the expenditures, in return on Singapore government`s long term commitment to move up asset in infrastructure of transport, healthcare and education.
In Singapore fiscal policy, the government has implemented a careful approach. At first the Singapore government has constantly kept the budget balanced which mean the government spending equal to the tax revenues that collects by the government. In 2001, Singapore`s government has came out a budgetary policy with the theme of budget 2010 was “Superior skills”, “Quality jobs”, “Higher incomes”. The purpose of this budget is to obtain a direct rebound in the economy and aid Singapore`s economic to move to the subsequently phase development over the subsequently decade. This is very important because if the budget surplus, it may lead to government borrow money from other countries and forced to pay high interest rate.
Besides, the goal set by the Singapore`s government was to boost the productivity by 2 to 3 percent over the subsequently decade.
The three main push of budget 2010 were, increase the productivity. This plan cost the government approximately 5.5 billion dollar over the subsequently five years which involved National Productivity Fund Creation, education, training and introduce of the productivity and innovation credit.
It aided Singapore companies to be more profitable and grow worldwide competitive. Besides, it also aids in sustain for low salary employees to improve their knowledge, ability and skills to ensuring the wide ranging growth.
Second, Singapore`s government spend on essential. In order to maintain the balanced budget, Singapore`s government set their spending target which is the total government spending must be less than 20 percent of the GDP of Singapore. The overall burden of economy could be reduced through this spending target and let the Singapore`s government to decrease the tax rates. Although it is very tough to maintain the balanced budget but to solve this recession problem, government must spend on what they need to contain expenditures at the lowest possible level. In long term this expansionary fiscal policy could help Singapore`s government to support persistent, non-inflationary economic growth. The most important is to sustain a balanced budget.
The total expenditure of Singapore`s government in year 2010 was approximately 44 billion dollar, which has an increase of 8.8 percent from year 2009. This is because Singapore`s government has heavily raise investments in development of economic and education. And the operating expenditure was amounted to 33 billion dollar which has the 74 percent of total expenditure whereas, expenditure on development consisted of 11 billion dollar. (Marcoeconomic policy)
Besides, through the expansionary fiscal policy it also involved tax revenues of Singapore`s government. In Singapore, the core purpose of this tax policy is to increase the revenues of government. These revenues are the important source for the operations of government. In other hand, it also helps to promote social and economic goals. In traditional, government constantly used tax to control behavior on the way to desirable economic goals and social goals. For example, Singapore government promotes Singaporeans to have more children through reduce tax for the first to fourth children.
Moreover, Singapore`s government can control the tax rate to aid other corporation and individual in Singapore. It is better to keep the income tax of corporation and individual as low as possible. This tax policy is the importance source to attract new foreigners to make investment. For instance, lower corporate tax rate could help to attract the interest of foreign investments. Whereas, lower individual tax rate could give confidence Singaporean to work hard and it could encourage people to take risk in investment.
In year 2010, the operating revenue of Singapore was 45 billion dollar which is 18 percent higher than in year 2009. This help Singapore`s government to enhance their incomes and make the GDP growth increase. This tax revenues was made up by 91 percent of total operating revenue, included majorly of income taxes, goods and services tax(GST), customs taxes, gambling taxes, stamp duty , motor vehicle taxes and assets taxes. (Marcoeconomic policy)
In addition, Singapore`s government has gain an increased in income tax by 8.2 percent which is 18 billion dollar in year 2010, this brought the Singapore`s economic to recover in the second half of 2009. In other hand, goods and services has fostered by 16 percent, due to the increased in private consumption level which brought by the increased in tourism receipts and tough economic growth. Besides, in property-related revenues it has accumulative increasing by 43 percent. This revenues consist of accumulate of stamp duty which has 56 percent increased from year 2009. (Marcoeconomic policy)
Argument of fiscal policy in Singapore
From 2008 to 2009, Singapore government applied expansionary fiscal policy because economy crisis. This policy successfully stimulated the economy growth during the recession. First of all, through this expansionary fiscal policy, this can encourages industrial development and also the exports of the country. During the economy crisis, the price of manufacturing and agricultural fell. In order to balance the economy, manufacturers are encouraged to produce more goods so that it can use their own goods instead of import. Singapore government also did industrial research to the manufacturers so that they can get the information to improve the industrial development. The government also establish programmes and agencies to assist the manufacturers and so can encourage exporting.
In addition, expansionary fiscal policy successfully develops Singapore as an international financial centre. The government invent and sustains Singapore’s role by adapting the preservation of internationally competitive tax and thus form a stable financial system, this transform Singapore as an international financial centre in the financial market. The corporate governance and tight regulation are the key element that is part of the causes to Singapore’s position as international financial centres. The tax concession that implement by the government is reducing the tax of loan interest and income tax. To solve the problem of unemployment and boost the economic growth, Singapore government increase the aggregate demand by spending more on goods can services.
Moreover, by implementing expansionary fiscal policy, this can directly increase the confidence of investors in consumers. When the consumer confidences increased, the household sector will raise to spend without restraint especially on durable assets like houses, cars and some properties. People will spend more when they have more income. Normally people will spend on convenience goods like groceries and household items first like clothes and furniture and then go after the necessity items like clothes and furniture. This will raise the business expenditures. This is because factories will need to buy more raw materials and process into final goods for consumer consumption. This will result in increase in consumption, investment and employment sectors in the economy. This will promptly cause in the increase in consumption expenditures and shift the aggregate demand curve to the right, which means increase in aggregate demand. Consequently, this can shows the government is putting effort in saving the economy.
Other than that, the increased in the investments for both private and public sectors can provide more jobs. If there is a building construction project need to be accomplished, so construction workers and staffs will be needed, so this will decrease the unemployment rates. Additionally, these projects have the need of raw materials and also finished goods from suppliers, so this will lead to an increase in production shifts and more staffs are needed to be hired in order to satisfy the demand of the market. Singapore government also implement job training programs to reduce the unemployed workers by teaching them those new skills and technologies to fulfil the demand of the market.
Nevertheless, this brings some negative impacts to Singapore too with the implementation of expansionary fiscal policy. Firstly, Singapore’s economy is considered small but very open. Singapore need to import raw materials and intermediate goods in order can produce their own goods and export to other countries as the natural resources of Singapore is limited. Some necessities for consumption also imported because they unable to produce for consumer consumption. This means high income taxes, high imports and high savings will lead to a small multiplier. This small multiplier will regulate the effect of the fiscal policy in few sectors like inflation, unemployment and national income. As a result, the size of multiplier is small because the import leakage is large.
The other shortcoming is the lag in time to put expansionary fiscal policy into practice. Singapore needs to take a long time to adopt and show effect of such policy. This is because it needs to take time to realize the economy got problems. An economy recession is not easily recognize until there have been two quarters of continuously negative growth. For the reason that Singapore need time to plan, discuss and implement an expansionary fiscal policy, so it takes time. By the time the government have make decision on the money and taxes, the condition of the economy maybe become worse and changed radically, this new policy maybe will destabilizing the economy. The problem of lag time will cause the recession already self-corrected before the government apply the policy. This may overheat the economy and make the economy worse than before.
Another problem that will arise is crowding out effect. This effect stated that expansionary fiscal policy will reduce the investment in public sector. The government is safer compared to corporate debt, so the investors and potential investors will prefer government debt. Another reason is the interest rate of government debt is lower than the corporate debt. When the government expenditure is increase spontaneously, this will cause a budget deficit. To implement the expansionary fiscal policy, government need to provide government bonds by raising more money. Indirectly, this will boost the interest rates of government debt and more investors will be attracted to buy the government bonds. Conversely, the growth of private sector will be affected and the demand for corporate debt will decrease. When the investment and consumption expenditure decline, this will offset the increase in government expenditure.
Furthermore, this will increase the deficit levels of Singapore. Expansionary fiscal policy that financed by debt only can solve the economy recession temporary. When the Singapore economy goes back to normal, the government should take actions like increase the taxes and decrease the expenditure to end the expansion. However, this is hard to accomplish. Consumers may adapt with the current situation which is higher government spending and lower tax rates, and they will refuse to make any changes. Due to political issue in Singapore, there is always a risk to apply temporary fiscal expansion. The big amount of government spending will deteriorate deficit and will lead to long-term debt.
Last but not least, the expansionary fiscal policy will lead to the problem of inflexibility of the government expenditure and also taxation. A high degree of inflexibility is needed when boosting the government expenditure and makes a change in taxation, this is because this issue need to pass through the parliamentary debates and approve, which may be take a few weeks for the whole progress. This is decision time lag. The government expenditure also tough to decrease drastically as it involves all the important areas in a country like healthcare, education, national defence and infrastructure.
In a nutshell, expansionary fiscal policy with the limitations that we mentioned does not means that it is ineffective in Singapore because it also stimulating the economic growth in different sectors.
The negative impacts of expansionary fiscal policy in Singapore are small multiplier effect, crowding out effect, time lag and inflexibility. Expansionary fiscal policy does not have effect on the supply-side policies. Since Singapore’s main objective is for economic growth, their central bank can implement expansionary monetary policy.
As the central bank increase the money supply, interest rate will decrease and increase the aggregate demand. This will reduce the high marginal propensity to save in the working individuals. This will also result in an increase in investment expenditure when interest rate is lower. Although monetary policy is a demand-side policy, it also has impact on the supply-side. An increase in capital stock of businesses will happen as investment increases.
Expansionary monetary policy is also able to cover the time lag of expansionary fiscal policy. Central bank has faster decision-making cycle compared to the government because only a few people have to make an emergency decision. Monetary policy also has a faster effect on consumer and business behaviour.
Furthermore, more money will flow in the economy when interest rate is lower. The worth of the Singapore Dollar will be less when more money is out there. When the dollar’s value is lower, the domestic goods and services are cheaper compared to foreign goods and services hence this will increase Singapore exports.
Singapore’s main economic objectives are to maintain balance budget and economic growth. Expansionary fiscal policy implementation in Singapore is effective in targeting certain groups. Their main revenue is from indirect taxes instead of direct taxes. They also attract foreign investment to enhance their revenue. Singapore’s GDP also improved the past few years.
It managed to solve their unemployment which is currently at low unemployment. It also helps to stabilize the financial market which helps Singapore to achieve as an international financial market. This implementation also aided Singapore in achieving confidence in investors successfully. The training programs for unskilled workers the government implemented also managed to eliminate the structural unemployment.
There are certain limitation for expansionary fiscal policy such as small multiplier effect, crowding out effect, time lag and inflexibility. It is hard to improve every sector of economy for growth at the same time with one policy. Therefore,
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