Facing up to stagflation
Meanwhile the gap between rich-poor widens.
Andy Mukherjee. Bloomberg.
Feb 19, 2008
Stagflation has come to Singapore. The focus of the government's annual budget, announced last Friday, was on dealing with the perils of slowing growth and accelerating inflation, a deadly combination less fiscally robust governments may soon discover.
Of the two, the bigger threat is the 4.4 percent consumer prices rose from a year earlier in December, the quickest pace in a 25 years. It is natural then that the word "inflation" appears 43 times in this year's statement.
Last year it wasn't mentioned once.
The authorities are entering the combat zone from a position of strength. The budget has been in surplus in most years for four decades. For two straight years, people in every income bracket have taken home bigger paychecks.
Even the poorest 10 percent of non-retiree households - with a per-capita income of S$180 a month - have increased their purchasing power. But the rich have fared much better. Since 2006 inequality has widened every year.
Singapore's Gini coefficient, a measure of income concentration, overtook that of the US in 2006 and rose to 0.485 last year, with 0 being absolute income equality and 1 perfect inequality, a high level of disparity for a society with an educated workforce.
Inequity may become a problem because growth momentum has suddenly collapsed as the much-expected "decoupling" from the troubled US economy has so far failed to materialise.
On an annualised basis, GDP contracted almost 5 percent in the final three months of last year compared with the previous quarter.
If there's another fall in GDP this quarter Singapore would technically be in recession.
It is one thing to have an unequal society where the workforce is, for all practical purposes, at full employment and income growth is outpacing inflation for everyone, albeit more quickly for the rich than for the poor.
Lopsided income distribution is to be expected in a city that wants more rich people to come to live and work.
It now takes just a week to register a hedge fund from scratch in Singapore, many times faster than in Hong Kong.
Two casinos will open by 2010, and an annual Formula One night race starts this year.
Singapore tends to eschew subsidies to aid the poor, except in education, basic health care and public housing, the biggest source of wealth creation for its average citizen.
However, Singapore has mechanisms for transferring fiscal surpluses to the poor in bad years and ensuring they can get by even on monthly income that wouldn't buy a meal for two at My Humble House, a restaurant that isn't what its name suggests.
What Singapore has resolutely shied away from is giving citizens any handout that may dissuade them from seeking work.
Unemployment insurance, discussed following the 2001 recession, remains a no-no.
That may be prudent, especially in a fast-aging society trying hard to retain competitiveness as cheaper locations in China and India become more sophisticated producers of almost everything that Singapore makes.
But a prudent course may not be popular in an environment of stagflation. When people start losing their jobs while their electricity bills keep going up, there may be resentment against the rich, many of whom are foreigners.
Singapore is too pragmatic to want to use tax policies to fashion a more egalitarian society. Even this year's budget gave a bonus to the rich by scrapping estate duty.
The move is aimed at getting the world's wealthy individuals to move assets to Singapore, with no levies on capital gains and the top rate for personal income tax at 20 percent.
To make sure the poor don't fall further behind, the emphasis of the government's budget this year is on returning S$5.4 billion worth of fiscal surplus to the people, especially low-income households and the elderly.
As a small, open economy, Singapore cannot do much to escape stagflation. As a prosperous nation - average household income from work last year was equivalent to US$50,000 a year - it is going to be under increasing pressure to shield its vulnerable from economic forces over which authorities have no control.