Budget 2024 should keep cost-of-living handouts targeted to avoid fuelling inflation
MANY Singaporeans may be watching the Budget Statement this Friday (Feb 16) for news of fresh financial support for households. Indiscriminate handouts, however, could hurt rather than help the country’s efforts to fight inflation.
Singapore’s inflation has been easing but is expected to stay elevated, with core inflation projected to average 2.5 to 3.5 per cent this year. Against this backdrop, the government has said that it is studying ways to provide more cost-of-living help. This January, every Singaporean household received some S$500 in Community Development Council (CDC) vouchers. Some watchers expect more of such largesse in Budget 2024, with estimates of up to S$2 billion in direct transfers. This could take the form of more CDC vouchers or special cash payouts, for example.
All this would be in the name of helping households cope with cost-of-living pressures. Yet that could, ironically, help those pressures to persist.
Cash handouts are a common way to boost consumer spending. This was seen during the Covid-19 pandemic, when governments across the world doled out cash to their citizens – not just to ease the blow of lost income, but to prop up domestic consumption.
However, that was in a situation of unusually depressed demand. While growth is admittedly sluggish today, it is debatable whether the government should be aiming to boost demand.
The risk here is of demand-pull inflation, where consumer demand outpaces the supply of goods and services. Indeed, some economists have recently noted how consumption has contributed to sustaining inflation in Singapore. When December inflation figures were released last month, HSBC noted higher-than-expected services inflation, “signalling continued support from the labour market to consumption”. Similarly, RHB economist Barnabas Gan flagged a risk of domestic demand-led inflation due to higher disposable income.
Of course, helping households cope with rising costs is a worthy policy aim. But, it should be balanced against the risk of prolonging inflationary pressures. After all, it would be unsustainable to dole out inflation-related help that ends up keeping inflation higher for longer and necessitating even more help, in something of a vicious circle.
To balance these policy objectives, it might be better to provide help only where it is needed most: to the lower-income groups. Instead of a blanket disbursement of CDC vouchers, handouts could be given to households below a certain per capita income threshold. Another approach could be to focus on areas where demand is relatively inelastic, meaning that households would have to incur the expense regardless. This way, financial help would truly serve to defray expenses rather than spur spending. These might include, for instance, cash rebates for school bus fees and public transport vouchers – suggestions that economists, too, have made.
Apart from helping to keep inflation at bay, a targeted approach would be in line with the government’s long-running and oft-voiced commitment to fiscal prudence and progressivity.
In the longer term, it could help to temper and wean citizens off the perennial expectation of such broad-based handouts – thus making such prudence more acceptable in future budgets too. With major trends such as ageing and climate change set to keep weighing on public coffers, the government may probably want to be mindful about being judicious in other aspects, particularly where there could be knock-on effects.
