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Time To Loosen Reins On Fiscal Policy?

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  • Sg_Review@yahoogroups.com
    Singapore s fiscal policy implementation is in severe need of drastic reform. The same applies for CPF policies and wage-reform (i.e wage cuts) policies. The
    Message 1 of 1 , Mar 31, 2004
      Singapore's fiscal policy implementation is in severe need of drastic reform.
      The same applies for CPF policies and wage-reform (i.e wage cuts) policies.

      The tiny island nation of Singapore is set to end 2003 with a weak
      economy and high unemployment but a very fat bank balance.

      Singapore's reserves, already estimated to exceed $100 billion in a
      nation of just over 3.3 million citizens, are set for a top up from a
      record current account surplus the country has in its balance of
      payments with the rest of the world.

      But as the reserves mountain grows analysts are questioning whether
      the current system of control by a large and secretive institution,
      the Government of Singapore Investment Corp (GIC), is in the best
      interests of the country.

      http://business-times.asia1.com.sg/story/0,4567,112431,00.html

      Business Times
      Published March 31, 2004
      Time to loosen up the reins on fiscal policy?

      Is Singapore's fiscal policy too tight? What does the US dollar's
      decline mean for Singapore's monetary policy? These were among the
      issues debated at the Second S'pore Economic Roundtable. ANNA TEO
      reports

      WITH the Singapore economy in the throes of restructuring, and
      clearly subject to more frequent cyclical swings now as well, could
      not Singapore's fiscal and monetary policy be more accommodative to
      cushion the greater uncertainty?

      If the government was saving for a rainy day, 'it was raining pretty
      hard last year'.
      - Credit Suisse First Boston's Ray Farris

      This was the burning issue that, along with concerns about structural
      weaknesses in domestic demand, dominated discussions among some 20
      participants - almost all economists - at the second Singapore
      Economic Roundtable.

      Taking up - in the broad themes - where the first roundtable left off
      last September, the forum, held recently at the Institute of Policy
      Studies, pushed the case for more proactive fiscal and exchange rate
      policies, particularly during this 'painful' transitional phase of
      economic restructuring, even as it recognised the limitations of
      either tool in the Singapore environment.

      And while, compared to six months earlier, the economy is now on a
      better footing and headed for recovery, various structural issues -
      such as there being too few 'automatic stabilisers' in the economy
      (such as social welfare payments, which automatically inject
      purchasing power in an economy when unemployment rises) - remain a
      nagging concern. This is especially so given the greater uncertainty
      and volatility that mark both the external and domestic environment,
      even in the short term.

      As Edward Robinson, principal economist in the Monetary Authority of
      Singapore's (MAS) economic policy department, told the roundtable,
      Singapore's GDP growth could well hit the upper end of the official
      forecast range of 3.5 to 5.5 per cent this year, if the current
      recovery momentum is sustained.

      'Nonetheless, we cannot rule out a slowdown in the US economy or in
      the IT (information technology) markets, and I think from the ground
      we are getting feedback of continuing uncertainties in the second
      half of the year,' he said.

      Singapore's externally-driven economic recovery will be 'heavily
      front-loaded' in the first half of 2004, said Ray Farris, director
      and head of Asian fixed-income strategy at Credit Suisse First
      Boston, citing key US and OECD indicators that have begun to
      moderate. And as global demand weakens in the second half of the
      year, there is the risk that Singapore's overall export growth -
      which already underperformed most other Asian economies 'quite badly'
      in recent years - may slow more sharply than others in Asia, he said.

      Such risks to growth, coupled with excess economic capacity and low
      inflation, call for stimulative policies to provide a buffer against
      potential shocks.

      According to Mr Farris, Singapore's fiscal policy has moved in the
      right direction over the past two years, but the magnitude of the
      stimulus - about 0.5 per cent of GDP in 2002 and 0.9 per cent in
      2003 - has been small. A larger positive fiscal impulse would have
      been desirable, to the extent that any increased government spending
      or reduced taxation would have spurred growth, and is sustainable
      over the medium term, he said. If the government was saving for a
      rainy day, 'it was raining pretty hard last year', he added.

      For 2004, he estimates that the fiscal position will turn slightly
      contractionary, and prematurely so, given that the economy is still
      running well below capacity, and faces rising external risks to
      growth.

      Injecting further stimulus

      But there is also the 'more complex' issue of whether the government
      would be able to efficiently inject further stimulus, given
      Singapore's already high level of infrastructure and public services,
      and the fact that a lot of additional spending will simply leak out
      of Singapore's highly open economy, he said.

      In his analysis, Mr Farris made some adjustments to the Budget data,
      by including, for instance, total investment income as government
      revenue (which the government does not include). 'The issue here is
      really one of transparency in overall fiscal policy setting and
      presentation,' he said.

      Other economists have pointed out that, if Singapore measures the
      fiscal balance less conservatively - the way Hong Kong does, for
      instance - its 2004 Budget will likely result in an overall surplus
      of at least S$3 billion.

      MAS' Mr Robinson maintained during his presentation on the Singapore
      economy that both fiscal and monetary conditions are conducive to
      growth.

      'The supporting conditions for a sustained cyclical recovery appear
      to be in place,' he said. Domestic liquidity has generally been
      declining since the start of 2003, and the fiscal impulse measure,
      which assesses the stance and thrust of fiscal policy, has remained
      positive since 2001, he added.

      'I would just point out that our simulations show that the
      expansionary stance of the past years will continue to have a
      supporting effect into this year,' he said.

      But most participants took up Mr Farris' point: Couldn't a wealthy
      and prudent government have done more to offset external shocks and
      moderate growth volatility? Or are there inherent structural factors
      that hamper the use of domestic demand levers? And how could fiscal
      policy enhance the role of automatic stabilisers?

      Among the factors behind lacklustre domestic demand, participants
      cited the predominance of multinationals (which repatriate profits
      overseas) and the high proportion of foreign workers in the economy
      (who remit much of their wages back home, thus limiting their
      consumption in Singapore).

      Moreover, amid the downturn and restructuring, wages have been capped
      if not cut, unemployment has surged, and personal consumption has
      slowed. Indeed, for a nation of supposed shopping addicts, Singapore
      has about the world's lowest consumption relative to GDP.

      Enforced saving through the Central Provident Fund (CPF) - and
      perhaps voluntary saving among baby boomers in the ageing population -
      also depress personal spending. One stark measure that reflects the
      weak domestic demand: Singapore's current account surplus hit a
      record 31 per cent of GDP in Q3 last year, and averaged about 30 per
      cent in all of 2003. In other words, the economy was saving 30 per
      cent of GDP more than it was investing last year.

      It remains to be seen if the huge current account surplus - and weak
      domestic demand - will reverse as the economy picks up.

      Ravi Menon, deputy secretary (policy) at the Ministry of Finance,
      told the roundtable that his ministry is in the process of looking
      into the issue of automatic stabilisers in the economy.

      'Pay as you earn' tax scheme

      A self-adjusting mechanism like a 'pay as you earn' system of
      collecting income tax from individuals and companies - as suggested
      by IDEAglobal economist Nizam Idris - is worth looking at, Mr Menon
      said.

      Mr Nizam, who commented on Mr Farris' paper, said by eliminating lags
      in tax payments, a 'pay as you earn' scheme would make the tax system
      more robust, and the Budget a more effective 'automatic stabiliser'.
      In so doing, it would render fiscal policy less pro-cyclical.

      On the overall fiscal impulse, Mr Menon suggested that Singapore's
      fiscal policy has been counter-cyclical enough, given that Singapore
      no longer runs large fiscal surpluses, as in the past. However, a
      smaller deficit this year is not inappropriate, given the improved
      economic outlook, he said.

      'What matters is the flow, not the stock,' he said, referring to the
      change in the size of the Budget balance from year to year, rather
      than the absolute size. And the key issue, he added, is
      sustainability in the medium term.

      Jointly organised by The Institute of Policy Studies and The Business
      Times, the Singapore Economic Roundtable brings together public and
      private sector economists twice a year to discuss macroeconomic
      policy issues. The recent roundtable was co-chaired by IPS director
      Tommy Koh and Patrick Daniel, managing editor, English/Malay
      Newspapers Division, Singapore Press Holdings

      -----------------------------------------------------------------------------------

      From: Sg_Review@yahoogroups.com
      Date: Sat Feb 14, 2004 10:21 am
      Subject: Singapore's public wealth management raises question of control

      http://www.forbes.com/markets/newswire/2003/12/05/rtr1170497.html

      Richard Hubbard
      Reuters
      5 December 2003

      ANALYSIS-Singapore's public wealth management raises question of
      control

      The tiny island nation of Singapore is set to end 2003 with a weak
      economy and high unemployment but a very fat bank balance.

      Singapore's reserves, already estimated to exceed $100 billion in a
      nation of just over 3.3 million citizens, are set for a top up from a
      record current account surplus the country has in its balance of
      payments with the rest of the world.

      But as the reserves mountain grows analysts are questioning whether
      the current system of control by a large and secretive institution,
      the Government of Singapore Investment Corp (GIC), is in the best
      interests of the country.

      "It is highly risky for Singapore to place virtually its entire
      reserves under the management of a single entity, particularly one
      marked by low transparency," said Manu Bhaskaran, a partner in
      Centennial Group Inc.

      Owing to the government's dominance in the city state's economy, a
      large slice of the current account surplus -- the gain from exporting
      more goods and services than are imported plus net investment income -
      - is likely to end up in the coffers of either the central bank or
      the GIC.

      The surplus for the first three quarters of 2003 stood at S$35.1
      billion ($20.36 billion) -- the highest ever recorded, according to
      the Department of Statistics.

      A strong final quarter will easily push it above S$40 billion for the
      whole year, a level never seen before.

      "It's a crisis of plenty," according to P.K. Basu, managing director
      of Robust Economic Analysis in Singapore.

      Basu said the surplus, running at around 30 percent of gross domestic
      product, was a result of a reluctance by the government to increase
      spending as the economy slowed down.

      When a government increases spending, people generally have more
      money to buy imported goods and the current account surplus would
      normally shrink.

      Analysts said the surplus also partly reflected Singapore's weaker
      currency after the central bank eased monetary policy mid-year, which
      would have made imports more expensive.

      With the manufacturing and service sectors hit by the Iraq War and
      the deadly SARS outbreak, Singapore's GDP is expected to be only one
      percent higher this year than in 2002, when it showed 2.2 percent
      growth.

      Investments abroad

      A current account surplus must be invested in foreign assets, such as
      foreign exchange, stocks, bonds, and real estate overseas. In
      Singapore some of this will be done by private sector firms, but the
      bulk would be handled by the GIC or the central bank.

      The GIC manages funds that come from the government's accumulated
      budget surpluses, including the profit of investment agency Temasek
      Holdings, and some of the assets of the central bank, the Monetary
      Authority of Singapore.

      Chaired by modern Singapore's founder and current senior minister,
      Lee Kuan Yew, the GIC said last year it had around US$100 billion in
      assets, but does not make public its accounts.

      The central bank, chaired by Lee Kuan Yew's son Lee Hsien Loong,
      currently has official foreign reserves of over $90 billion, mainly
      held in foreign exchange and gold.

      Temasek, whose executive director is married to Lee Hsien Loong,
      earns income from stakes worth more than $45 billion in about 40
      major Singapore companies.

      The agency's stable of companies includes well known names such as
      Singapore Telecom, Singapore Airlines and DBS Bank, and the port
      operator PSA Corp.

      The GIC invests its funds in everything from outright purchases of
      hotels and hospitals in Australia to heavy investments in U.S.
      equities and bonds.

      Temasek uses its money principally to build local companies, but
      recently has begun making direct investment abroad as well, including
      buying stakes in two large Indonesian banks.

      Some analysts argue that, after years in which this government-led
      investment has turned Singapore into a highly developed country, it
      may be time for the state to step back.

      "What needs to be done is that the government has to decide whether
      to pass the investment decision back to the people," said Joseph Tan,
      an economist at Standard Chartered Bank.

      "The wealth in a sense doesn't belong to the government."

      Basu of Robust Economics believes the concentration of the management
      of the country's wealth has also contributed to the country's lack of
      entrepreneurship.

      Centennial Group's Bhaskaran said the GIC was most in need of reform
      and suggested a statutory board be set up to oversee its management,
      and that the group's various fund management divisions be broken up
      and sold off.

      "For a small country, do we want to put all our savings in one fund
      management house?" he said. ($1=1.724 Singapore Dollar)
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