The Economics of Singapore Budget 2020

The Budget 2020 is dubbed as the "Election Budget" or "Recession Budget" in view of the upcoming elections and possibly an impending recession.

Overall, the Budget 2020 lays out the plan for the sources of government spending (G) and tax revenues (T) for the fiscal year 2020 (from 1 Apr 2020 to 31 Mar 2021). The budget balance, which is T - G, is expected to be negative, meaning the government will be running a budget deficit (G > T), estimated to be S$10.9 billion or 2.1% of GDP.

In terms of macroeconomics policy-making, a budget deficit implies an expansionary fiscal policy, which refers to deliberate action to increase the Aggregate Demand (AD) by increasing government spending (on goods and services directly or on transfer payments to households) or decreasing direct taxes such as personal income and corporate income taxes to increase consumption and investment.

However, the most important component of the budget is the $4 billion Stabilisation and Support Package (see image above), which is not part of the standard expansionary fiscal policy tool-kit. Rather, it is a short-term supply side policy geared towards government spending on cost-cutting measures for firms as follows:

1) The Jobs Support Scheme is a form of wage subsidy which offsets 8% of a worker's wages for 3 months, which will effectively lower labour costs for firms.

2) The Wage Credit Scheme is also a form of wage subsidy in the sense that the government will co-fund wage increments to workers earning up to $5000, so the effective or after-subsidy labour costs will be lowered. Also, it encourages firms to raise wages of workers in line with productivity gains to retain talent, and could be a motivating factor for workers to seek skills upgrading and training.

3) The government has also identified 5 sectors which is directly affected by the COVID-19 situation, namely Tourism, Aviation, Food Services, Retail and Point-To-Point Transport Services. Within these sectors, the government will give rebates to firms to partially offset their costs in the form of rental rebates and property tax rebates. For example, The government has set up a $77M point-to-point transport package which will allow 40,000 eligible drivers to receive a $20 rental rebate per day for 3 months.

The effect of these short-term supply side policies can be analysed from the microeconomic and macroeconomic perspective. From the microeconomic perspective, the cushioning of operating costs by firms will prevent a possible shut-down / closure event when revenues fall due to falling demand arising from COVID 19. From the macroeconomic perspective, the fall in unit costs of production will help to increase short-run aggregate supply, thereby leading to a rise in actual growth and a fall in cyclical unemployment.

That said, the government has earmarked spending on goods and services which will increase the G of the AD, as well as transfer payments to households which will increase disposable incomes and hence increase C of the AD, leading to rise in actual growth via the forward multiplier effect. However, it is worth noting that the multiplier effect is limited by Singapore's small multiplier size which is the result of the high savings (culture of thrift and the Central Provident Fund) and high imports (lack of resource endowment). Therefore, the government has targeted to spend on sectors which can increase long-run aggregate supply as well, otherwise referred to as fiscal policy with supply-side slant.

Specifically, the government has earmarked spending on education and training such as the new SkillsFuture Enterprise Credit Scheme to help companies defray 90% of out-of-pocket costs of business transformation, jobs redesign and skills training, as well as $500 top-up to the SkillsFuture Credit, which is given to all Singaporeans aged 25 and above. This will help increase the skills and knowledge of workers, thereby leading to an increase in productive capacity and hence the long-run aggregate supply. This will aid in helping workers who may be displaced by economic restructuring and technological advances, thereby reducing structural unemployment and hence achieving inclusive growth.

It is also worth noting that the government is devoting spending on incentives to encourage environmental friendly vehicles such as electric cars, to facilitate the phasing out of internal combustion engine (ICE) vehicles by 2040. This will be supported by increased government spending on additional charging points of up to 28,000 in public car parks by 2030, from 1,600 charging points today. Consequently, vehicular emissions which contributes to greenhouse gas emissions and pollution will be significantly reduced, allowing Singapore to achieve an (environmentally) sustainable growth.

Further, the government will also give up to $300 cash handouts to Singaporeans aged 21 and above to increase their disposable income, which will increase the C of the AD. However, due to low consumption rate of Singaporeans (due to the high savings rate) and the small composition of C of the AD, this measure is unlikely to increase C significantly. It is more likely meant to help Singaporeans manage the rising costs of living due to inflation.

In a nutshell, the Budget 2020 is a policy geared towards helping Singapore ride out the short-term challenges of an impending recession, but also positioning Singapore to achieve both inclusive and sustainable economic growth in the long-run.