Singapore’s support package won’t solve inflation, but it’ll still help, analysts say

SINGAPORE’S latest S$1.5 billion raft of relief measures will go some way to defray the impact of rising costs on businesses and households, even though it does not address the underlying drivers of inflation, economy watchers have told The Business Times.

Calling the targeted approach of the measures “fiscally prudent”, OCBC chief economist Selena Ling said the package is not meant to “solve all the inflation woes of firms and households”.

“Instead, it is to signal that the government is doing something about it, apart from tightening monetary policy settings,” she said in an e-mail to BT.

Deputy Prime Minister Lawrence Wong, who is also Finance minister, on Tuesday (Jun 21) unveiled enhanced business loans and hiring incentives, higher payouts to ComCare recipients and some pensioners, and one-off grants for self-employed workers in transport and delivery services.

The support package will also help pay for energy-efficient equipment for smaller firms in the retail and food services and manufacturing sectors, which the Ministry of Finance (MOF) said in a statement “have been significantly affected by higher electricity prices” in their business costs.

Wong warned, however, that “we must expect price increases to continue in the coming months”, with energy prices likely to stay high for the rest of the year.

Chua Hak Bin, senior economist at Maybank, noting the absence of fuel subsidies or fuel tax reductions in the latest support package, said the government’s move points to “allowing higher fuel prices to discourage usage, a shift towards public transport, and a move towards a green economy”.

Indeed, back in April, Wong had come out against slashing fuel duties or offering road tax rebates, which he framed as an effective subsidy on private transport; and Second Minister for Trade and Industry Tan See Leng called electricity subsidies “not tenable” at the same time.

DPM Wong has now added, in reply to a question on high pump prices, that global energy prices offer a timely opportunity to “accelerate to cleaner, more energy-efficient vehicles”.

Senior Minister of State for Finance and Transport Chee Hong Tat said business transformation – especially in energy efficiency and labour productivity – will boost economic competitiveness and “is the best way to deal with the cost increases over the long term”.

In this vein, the new Energy Efficiency Grant will cover up to 70 per cent of qualifying costs for eligible small businesses, that is, up to S$30,000 for each company. It will support the take-up of energy-efficient lighting, air conditioning, cooking hobs, refrigerators, water heaters, and dryers.

Trinh Nguyen, senior economist for emerging Asia at Natixis, suggested that more clean transition-related subsidies could be on the cards: “While Singapore can’t affect the supply of energy globally, it can control its demand through increasing efficiency. The question is the speed at which this can be done in the short term.”

In an upgrade to the Progressive Wage Credit Scheme, the government is also raising its co-funding share for salary increases for lower-wage local workers this year in 2022 – to 75 per cent for those earning up to S$2,500, and 45 per cent for those making between S$2,500 and S$3,000.

“Increasing the co-funding share of lower-wage workers will also help reduce the risk of a wage-price spiral,” said Maybank’s Chua, who noted that it may help businesses to spread out the pass-through of higher wage costs to end-prices over a longer period of time.

At the same time, the Jobs Growth Incentive, which encourages the hiring of ex-offenders, older workers and those with disabilities, will be extended by another 6 months to March 2023.

Separately, the government will grant S$150 in relief to eligible taxi and private-hire drivers in August. And about 1.5 million recipients of the GST Voucher – Cash for lower-wage workers will get a special payment of up to S$300; all local households will get S$100 in utilities credit.

Said Nguyen: “Demand remains strong, and supply shocks persist, so it’s difficult to see how a one-time payment can materially impact price pressure, although it will help on the margin.”

She argued that, with inflation in Singapore driven by transport, housing and utilities, the one-off utilities credit “does not address underlying inflationary pressures, from food, for example”.

But DPM Wong said that the latest support measures were designed “so that the package does not in itself spark more inflation in Singapore, which can easily happen because, we give more stimulus, that stimulus creates more inflationary pressure”.

The MOF has also said that the package should not distort price signals, and must advance Singapore’s medium-term agenda “in a fiscally responsible and sustainable manner”.

OCBC’s Ling noted that policymakers prefer to tackle economic issues through wages and fiscal transfers, “rather than give to all, whether they need it or not, or to tinker with price subsidies”.

Suan Teck Kin, head of research at UOB, said that indirect help, such as relief payments, forms “a more calibrated and targeted approach to support the vulnerable groups in our society, and is better than direct intervention through price caps or ceilings, which could be too broad”.

Chua from Maybank, who has been suggesting that fiscal support will have to be a sidekick to monetary policy amid rising costs, said that this round of help “met our expectations”.

The amount comes to about 0.3 per cent of gross domestic product (GDP) “and is not overly excessive”, he said. He estimated that the package will channel back about three-quarters of the extra annual revenue generated from a 1-point hike in goods and services tax (GST). The GST is slated to go from 7 per cent to 8 per cent in 2023.

Suan from UOB added that the size of the package “could be partially offset” by stronger tax revenue, economic growth, a recovery in international visitor arrivals, and the export sector.

RHB senior economist Barnabas Gan remarked in a note that the support package “is unlikely to move the inflation needle”. However, he estimated that it could boost economic growth by a marginal S$0.4 billion of real GDP, or 0.1 percentage point against his full-year forecast of 3.5 per cent.

DPM Wong said “we will not need to pass a supplementary Budget at this point” or draw on past reserves, as the package will be funded from a better-than-expected FY2021 fiscal outturn.