Straits Times 29 Nov 08;
SO, SHOULD Singaporeans spend their way out of the recession or tighten their belts?
To this query, Prime Minister Lee Hsien Loong took pains to explain why increased consumption would not help Singapore's economy.
The reason: Its small size and open economy. Every dollar of spending would result in 60 cents leaking out of the economy, as almost all of what Singaporeans buy is imported. This would not boost Singapore's economy.
In large countries such as Brazil, China and the United States, more consumption and other pump-priming or fiscal stimulus measures would work, given their huge populations who would be consuming domestic products.
But there was still a need for some spending, added Mr Lee - not to encourage consumption as such, but in the form of investments for the long term, for example, in education and infrastructure.
Mr Lee was also asked about calls being made for more goodies to help Singaporeans in the January Budget. Some people have also argued for the goods and services tax (GST) to be cut, as a way to boost spending further.
The Prime Minister, however, cautioned against holding out 'unrealistic expectations' that could not be fulfilled.
As for a GST cut, he noted that Finance Minister Tharman Shanmugaratnam had explained that this strategy would not work, and that it would be more effective to use the tax revenues to target help at businesses and people with lower incomes.
He suggested looking at the overall package instead of individual revenue components, as a measure of government help - or, as he put it, 'where the Government is getting the money from and where the Government is spending the money'.
'Are we, on a net basis, putting assistance in the system, or are we, on a net basis, running a big surplus at a time when the economy cannot afford surpluses?' he said. 'That is the question.'
BERTHA HENSON
The Consumption Conundrum
With Singaporeans spendingless even in good times, it’s no wonder we can’t splurge our way out of trouble
Loh Chee Kong, Today Online 29 Nov 08;
WITH such a tiny population, it is often taken for granted that Singaporeans cannot spend their way out of a recession — never mind that we have one of the highest income per capita levels and a reputation as ardent shoppers.
Of the $243 billion generated by the buoyant Singapore economy last year, less than two-fifths were accounted for by private consumption, the lowest in the world.
But the size of the economy — and the domestic market — tells just part of the story. Take Finland, for example, which has about 700,000 more people than Singapore. Total household expenditure accounted for about 50 per cent of its Gross Domestic Product (GDP).
So, why are Singaporeans statistically the most conservative shoppers?
It is not so much that Singaporeans spend more overseas than tourists do here — we do. Rather, more than half of the profits generated by companies here ended up abroad, according to recently-released official data.
The latest corporate sector report, compiled bi-annually, shows that in 2006, the proportion of foreign-owned equities overtook local-owned equities for the first time, with the former amounting to $252 million, or 54.6 per cent of total paid-up shares.
Other reasons include Singapore’s export-driven economy, as well as the Central Provident Fund system and the high cost of housing which reduce Singaporeans’ disposable incomes.
“Another structural factor is that because we do not have a well-developed social safety net or social security system, Singaporeans probably save more than they need,” said Centennial Group economist Manu Bhaskaran.
It has become a long-running argument among economists here whether the low ratio of Singapore’s private consumption expenditure to GDP — described as the “weak link” of Singapore’s economy — means that there is much room to boost domestic spending, thereby improving the economy’s resilience to external shocks.
And the shocks do not come bigger than the current economic crisis gripping the world.
The DEBATE RAGES ON
Between 2003 and 2007, Gross Domestic Savings as part of GDP increased from 43.5 per cent to 51.4 per cent, putting Singaporeans on par with the Chinese as the world’s biggest savers. Over the same period, the ratio of private consumption expenditure to GDP fell from 46.1 per cent to 39 per cent.
However, Government economists Tan Kim Eng and Thia Jang Ping pointed out in a 2004 report that the low private consumption to GDP ratio “merely reflects the fact that GDP is a poor indicator of the income available for private consumption in Singapore”.
Said the two economists: “When the more accurate — but less widely published — personal disposable income is used as a basis for comparison, private consumption is close to international norms.”
Moreover, current patterns of consumer spending suggest that increasing private consumption would likely result in higher expenditure on imported automobiles and overseas travel — resulting in weak multiplier effect on the Singapore economy.
But economics professors Choy Keen Meng and Tilak Abeysinghe reiterated in their 2002 paper The Aggregrate Consumption Puzzle in Singapore that the declining private consumption rate — which has halved in four decades — has deprived the Republic of a “built-in stabiliser”.
They added: “As a small, open economy, Singapore is highly vulnerable to external shocks affecting her domestic exports. During such times, measures to stimulate consumer spending will not be very potent.”
But economists agree there are ways to increase Singapore’s private consumption rate over the long-term. These include increasing residents’ contribution to economic growth; ensuring that residential property and other household assets remain affordable; and raising the retirement age so that people would need to save less for their golden years.
SPEND OR SAVE?
Even during the most recent boom years, Singaporeans were spending less out of their disposable income.
“Those years also saw a rise in property prices in tandem with the economic recovery. Essentially, people have to divert more of their financial resources to paying for houses and cars, and this makes them feel poorer, so they cut down on discretionary spending,” Assistant Prof Choy told Weekend Xtra.
With many expecting the current recession — described as the worst in a century — to last for a while, the worry is that Singaporeans would become even more tentative in parting with that hard-earned buck.
Said Mr Bhaskaran: “The prudent thing to do when you are uncertain about the future is you try to conserve your cash.”
A recent study by The Nielsen Company showed just that: Consumer confidence has plummeted to a four-year low, with seven in 10 Singaporeans saying they would save up any spare cash.
At a community event earlier this month, Senior Minister Goh Chok Tong urged those who can afford to “to continue spending on life’s little pleasures”.
Said CIMB-GK economist Song Seng Wun: “One person eating one less plate of chicken rice may not make much difference. But if the fear factor multiplies ... the chicken rice stallholder may have to close shop.”
Any cutbacks in consumer spending would aggravate the expected dip in tourism receipts. In 2003 when Sars hit the region, tourist spending dropped 15.6 per cent compared to the previous year.
Around the world, the alarm bells have been sounded. And Taiwan became the latest to join a slew of countries, including the United States, that have previously resorted to giving out purchase vouchers, food stamps or gift cards.
With Japan also reportedly set to launch a new programme to spur spending, the Taiwanese government has announced that it would be giving out US$2.5 billion worth of shopping vouchers, with each Taiwanese getting more than US$100 ($152) to stimulate consumer spending.
But Prime Minister Lee Hsien Loong reiterated earlier this week that unlike in other countries, the Government could not pump-prime the economy.
Said Mr Lee: “In a big economy, you can boost consumption. The government gives money, people spend it and it’s spent within the economy ... In Singapore if people spend money, most of the money goes overseas.”
In contrast to Singapore, consumer spending accounts for 60 per cent and55 per cent of the GDP of Taiwan and Japan, respectively. As such, policy considerations have to differ, said Mr Song.
He added: “The bottom line here is about making sure the consumer has a job. The priority is in helping businesses to survive and continue to employ.”
Asst Prof Choy agreed, but nevertheless said cash handouts by the Government should be supplemented with income tax rebates for both firms and households. “This way, it may get consumers to spend at least part of the tax savings, if not the full amount.”
For Mr Bhaskaran, the solution to getting Singaporeans to open up their wallets again could be more subtle.
He said: “What you need is a policy response where the Government signals that it is stepping in to support the economy. When the Government does that, it gives confidence to people and people will spend.”
