The need for more discretionary fiscal measures
We believe an aggressive fiscal policy is needed for
Singapore. The lack of indigenous domestic demand and an export-oriented strategy means the economy is likely to see contraction in 2009. Moreover, weak currency is likely to be less effective in exporting the economy out of a downturn when the global environment is weak. Automatic stabilisers that help cushion the economy by reducing tax collections and increasing unemployment benefits have also grown smaller.
What can be done?
The F2009 budget is likely to focus on: 1) supporting demand and preventing the adverse social impact of a slowdown from income compression and unemployment; and 2) easing credit conditions and reducing systemic risks of asset market correction and corporate credit failures on banking sector. On (1), to cushion corporates’ bottom line, corporate tax rebates, property tax rebates, rental concessions, and reduction in employers’ contribution to pension funds could be implemented. To support consumers’ income, individual income tax rebates, top-up to pension funds accounts, and cash handouts are possible options. On (2), the government would likely need to cushion the impact of banks’ aversion to new lending due to the inevitable rise in NPLs by expanding the existing Local Enterprise Financing Scheme for SMEs. With real-estate loans accounting for 50 percent of the incremental loan growth since 2007, supply and demand-side property measures are also likely.
How much is needed?
The IMF has said a 2-percent fiscal stimulus is needed for the global economy. For a high-beta economy like Singapore, we expect at least 3 percent stimulus. The good news is that recent regulation change that allows the government to tap into capital gains of managed reserves will unlock ammunition around 2 percent of GDP for usage. This will help as a tepid recovery in 2010 means fiscal pump-priming is not merely a 2009 story.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Investment Asia. The author was not remunerated for this article.
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