The Reform Party

Build Back Better, Fairer

Reform Party Calls For Urgent Action To Stabilize The Economy: Budget 2016 Will Not Deliver The Stimulus Needed And MAS Easing Will Not Make A Difference

Published: 16th April 2016

Yesterday MTI released its advance estimates of growth in the first quarter of 2016. As Reform Party predicted, the economy is in serious trouble. While GDP was 1.8% higher than a year ago, growth was flat on a quarter-on-quarter basis. Both manufacturing and services contracted while growth would have been negative were it not for continuing public sector investment in infrastructure. The latest growth estimate merely continues the trend of extremely weak growth since 2014. We have warned since April 2014 about the decline in external demand and about the need for a fiscal stimulus to combat it.

In response to the GDP figures, MAS announced yesterday they would be halting their policy of allowing a gradual appreciation of the S$ which had been in place since 2010. This is an effective easing of monetary policy since MAS will now supply more S$ if the currency appreciates.

MAS denied its policy change was aimed at depreciating the currency but effectively that is what it amounts to. However, in a sign that any currency war would be largely self-defeating, the S$’s fall yesterday sparked similar or greater falls in the currencies of other Asian exporters including China and South Korea. Any competitiveness gains by Singaporean exporters would be eroded quickly by similar moves by other Asian central banks to depreciate their currency.

Japan has also tried in the last few years to use deliberate depreciation of the currency to boost exports, while tightening fiscal policy, in what the markets have dubbed “Abenomics.” However this is nothing new just a return to the old policies on which Japan built its industrial recovery after WWII. It has demonstrably failed in the absence of a significant fiscal stimulus and the Japanese economy is once again slipping back into recession. The Chinese economy is also likely to follow Japan into recession as long as the Communist Government fails to rebalance the economy towards domestic consumption.

Since the Statistics Department is not independent and under the control of the Ministry of Trade and Industry, one cannot rule out manipulation of the GDP statistics to present a more favourable picture of the economy than is actually the case. The technical definition of a recession is two consecutive quarters of negative growth. So far Singapore has avoided falling into a technical recession due to some suspicious revisions to the GDP data (see here for an example that we drew attention to in 2014). However whether the economy is technically in recession or not the growth rate is already close to zero if not actually negative. Only a significant fiscal stimulus as called for by the Reform Party since 2014 is likely to rescue the economy from its current downward trajectory.

However there were no signs of that in this year’s Budget. The new Finance Minister claimed that the 2016 Budget delivered a fiscal stimulus of greater than 1% of GDP. It is true total budgeted expenditure was higher by some $5 billion but so was revenue. Special Transfers excluding Top Ups to Endowments and Trust Funds (which should correctly be classified as saving) were some $2 billion lower than last year. Including the higher level of Net Investment Returns Contributions, the result was an increased surplus compared to last year.

As we have been saying since at least our analysis of Budget 2012, the Budget presentation attempts and succeeds in pulling the wool over Singaporean’s eyes and only tells half the story. The real surplus is in fact much greater and conservatively likely to be of the order of $30-$40 billion per annum once revenues from land sales and the returns of GIC, Temasek and other corporate entities like Changi Airport Group (CAG) and MAS are included.

The Government includes figures for land sales and dividends and interest income received under Capital Receipts and Investment and Interest Income in Total Estimated Receipts for 2016 in the Budget documents. These show that actual receipts were over $22 billion and far in excess of even the increased NIRC figure of close to $15 billion.

However this figure for receipts treats the Government like a holding company and only takes into account dividends paid and interest income received. The Government’s share of Temasek’s profits alone was $14.5 billion in year to March 2015. Even that is too low because one should add back depreciation to get a true picture of the surplus. The Government should provide a consolidated figure for the total surplus including all Government-owned entities like Temasek, GIC, MAS and CAG. This is known as the General Government Surplus. Even the IMF, which called for greater transparency in the Government accounts in July 2015, has missed this point and calculates a figure just for the Government’s surplus that is too low. The General Government Surplus is probably comfortably in excess of $30 billion per annum.

The Finance Minister should be dipping into the unnecessarily high level of Government saving to offset the effects of the fall off in foreign demand. Even given the economically illiterate rules that he claims he is bound to follow about not spending earnings on past reserves would allow him to spend considerably more than in Budget 2016. We believe the Finance Minister could spend up to $12 billion more p.a. while still allowing the reserves to grow but at a slower pace.

Reform Party has called for more spending on the people rather than more investment in infrastructure, which has probably reached the point of diminishing returns. Some of our proposals for additional spending have been for a basic old age pension of $500 per month and child benefit of $300 per month per child under the age of 16. The cost of these proposals is about $6 billion per annum. We have also called for abolition of Medishield Life premiums for over 65s and under 18s, both of which are likely to cost less than $1 billion p.a.

While a baby step in the right direction, the Government’s new Silver Support Scheme is far too small to make much of a difference. Similarly a one-off payment of $3,000 for new babies represents less than a year of Reform Party’s proposed Child Benefit scheme which would pay $3,600 per child p.a.

The Finance Minister also spent money on extending the Wage Credit Scheme and the Temporary Employment Credit. Unfortunately these amount to wage subsidies encouraging employers to use labour wastefully. They also could be construed as export subsidies since they make labour cheaper and could potentially be challenged by our trading partners under the WTO.

Additionally the Finance Minister extended the equally wasteful Productivity and Innovation Credit, which has cost billions of dollars while productivity has actually declined over the last three years and is lower than it was in 2007. This is the worst performance of any advanced country with the possible exception of the UK. We are a long way from the goals of the IT2000 plan in 1991 that promised productivity growth of 3-4% per annum and even from Tharman’s target in 2010 of productivity growth of 2-3% p.a. by 2020. In fact we are going backwards.

Reform Party is the only party that has any understanding of macroeconomics. We have been consistently right in our predictions for the Singapore economy. Yet the PAP appear determined to persevere with the failed mercantilist policies of the past in the hope that something will turn up, to paraphrase Charles Dickens. These policies emphasise investment and saving over consumption and the accumulation of reserves through huge export surpluses. Yet the world is a radically different place than before the recession of 2008. Placing such a heavy reliance on external demand to drive economic growth for an economy at Singapore’s stage of development is unlikely to work in the future. Unless we have fundamental reforms Singaporeans will be paying the price for this outmoded strategy for many years to come.




Kenneth Jeyaretnam
Secretary General