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With fuel prices increasing, Singapore’s chicken supply being threatened, and many other contributing factors, inflation has been a key topic on many Singaporeans’ minds; and for good reason too — Singapore’s core inflation rose to 3.6 per cent in May, the highest in more than 13 years.

Many are concerned about the ongoing inflation, and the government is no exception. Late last month, Deputy Prime Minister and Finance Minister Lawrence Wong announced the rollout of a S$1.5 billion support package to help cushion the impact of inflation. 

Other proposals have also been floated in parliament, with Workers’ Party MP Jamus Lim suggesting the strengthening of the Singapore dollar. The government has also ruled out any price ceilings on fuel costs, though they have suggested that they are on the lookout for anti-competitive behaviour among fuel retailers in Singapore.

All these beg the question: Is enough being done for Singaporeans to combat inflation? 

What is the government doing?

First off, we should examine what efforts are underway to help Singaporeans better deal with the effect of inflation. The government has already been steadily providing GST vouchers to help lower income Singaporeans cope with inflation.

On top of this, all Singaporean households will receive a S$100 utilities credit to offset their bills and households facing financial difficulties will also receive higher monthly cash assistance through ComCare.

This seems to make economic sense — lower income families who do not have enough to spend will be better equipped to survive, and the utilities credits and GST vouchers will likely go towards consumption of basic necessities such as food and rent.

Given that the prices of housing, food and education are on the rise, the impact of these cash subsidies could very well be the difference between starvation and survival.

The effect of inflation, at least for the meantime, can be deferred for these households.

Such targeted policies are to be lauded for their good intention of helping the less fortunate in society, but the most jarring figure in this statistic is still transportation costs. At an inflation rate of 15 per cent, it is very likely that many Singaporeans will feel this pinch much more than the rest.

singapore expenditure
Data Source and Image Credit: Singapore Department of Statistics

Yet, the government has ruled out any possible price ceilings for fuel retailers. Private car owners and the increasing number of private-hire as well as delivery riders and drivers will be left paying hefty sums for fuel.

For this group of Singaporeans, how is the government assisting them?

Problem-solution mismatch?

In macroeconomics, there are two different types of inflation: cost push inflation, where prices rise due to a rise in input costs; and demand pull inflation, where prices are driven up due to increased spending and price competition for limited output.

What Singapore is seeing here is a rise in input costs: Russian oil is banned from being imported worldwide, leading to an increase in oil prices. Given that the transportation industry relies heavily on oil as an input, it should come as no surprise that transportation costs have seen the sharpest increase.

oil price
Image Credit: Reddit

In response, the Singapore government has actually offered limited support. While price ceilings have been ruled out, taxi main hirers and private car hire drivers will receive a one-off relief of S$150 to offset the rising cost of fuel.

But the question is whether the subsidy will be used to offset fuel costs.

As fuel costs rise, drivers that continue to consume fuel as much as they do before may indeed welcome the fuel subsidy. But there will also be some who find that this line of work is no longer worth it, and decide to take the subsidy without actually driving.

This would result in the subsidy translating into additional income, which can be spent on consumption of other goods instead.

Ironically, this might actually contribute to further inflation — demand pull inflation occurs when consumption increases, resulting in intensified competition for scarce goods.

This argument is not limited to fuel costs — any subsidies, including those intended to offset price increases for other consumer goods — can become additional income for extra consumption if the amount is in excess of inflationary costs. 

The government’s policy therefore could turn into a double-edged sword, that requires careful balancing to ensure that the less fortunate are not left behind by insufficient subsidies, while also ensuring that the subsidies that are available to the general population do not result in added inflation at a time when inflation is already high.

And this is not a farfetched situation.

The utilities subsidies, for one, is available to all Singaporean households, even the well off in landed properties. These households may indeed feel the rising costs and see the value of savings diminish, but they are nonetheless well off.

Would subsidies for these households really work to curb inflation, or simply increase it?

Will Jamus Lim’s proposal for a stronger currency work?

Another point that has been raised in parliament is for the Singapore government to strengthen the Singapore dollar.

Workers' Party Jamus Lim
Workers’ Party Jamus Lim / Image Credit: Wikipedia

The point was raised by opposition MP Jamus Lim and his argument was that this would reduce the costs of imported goods and services which Singapore relies on for consumption. These lower costs, in turn, would reduce costs for local importers, and cost savings can then be passed on to consumers, reducing prices and inflation.

The proposal has some merit — Singapore imports over 90 per cent of our food for consumption, and most recently the Malaysian chicken export ban has resulted in increased prices. Our energy sources are also dependent on imports of natural gas from foreign exporters.

But there is a longer-term concern that also cannot be neglected. Cheaper imports also mean that our exports are more expensive from other countries’ perspective, which would likely reduce the cross-border trade that is the lifeblood of the Singapore economy. A country’s strength is not determined by how much it can consume, but how much it can produce. 

As evidenced by the government’s decision to charge GST on imported goods, local producers are already struggling in price competition against foreign producers. With an even stronger domestic currency, foreign goods will become even cheaper, exacerbating an already unfair advantage that they have over local producers.

While cheaper imports would indeed keep citizens happy in the short run, it might be deleterious to our economic strength in the long run, when local production is strangled by foreign goods.

To add on, these subsidies are largely funded from our budget surpluses — in other words, from taxes on businesses and consumers in Singapore. Without local businesses to tax, Singapore’s tax revenue would likely take a hit and future social spending would come at increasingly high opportunity costs to security, investments, and the like. 

The situation that Singapore is facing is cost-push inflation — rising costs due to supply-side shocks. So far, the government has been cautious in its interventions and prudent in its spending, and for good reason.

That being said, some aspects of policy still leave something to be desired. The risk of subsidies being used to fuel additional consumption still exists, though the intention is to reduce the burden of inflation. 

No one wants to be the one paying for inflation, but at times, we must accept that it is unavoidable — we cannot expect to have our cake and eat it too.

Social spending requires money, and that in turn requires us as consumers to sometimes pay for inflation in the short term, in order to enable Singapore as a whole to remain competitive in the long run.

Featured Image Credit: Bloomberg

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Vulcan Post aims to be the knowledge hub of Singapore and Malaysia.

© 2021 GRVTY Media Pte. Ltd.
(UEN 201431998C.)