The PAP government will announce its annual budget for this "extraordinary" year tomorrow. I have read quite a few reports on how people wanted the budget to be. However, I feel that some of them are not very well thought of.
We are facing an EXTRAORDINARY crisis at the moment. It is not merely an economic crisis, not merely a financial crisis, not merely a currency crisis but as Nobel prize winner Paul Krugman has put it, the mother of all crisis. It is a crisis of confidence and economic irrationality prevails.
In a textbook assumption of "free market principles", Rationality of human beings is a paramount assumption. Paul Krugman himself has written about "Expected Rationality" in an economic system. But for this present crisis, it defies all economic theories of rationality basically because it involves an IRRATIONAL Crisis of Confidence.
Irrational behavior exists in stock markets during two extremes:
1) Boom Time where even money losing companies could have their stocks flying higher and higher. This is a sign of bubble forming.
2) Doom Time where even money making and fundamentally sound companies suffered drastic drop in their stock prices. This is due to a crisis of confidence brewing.
But as I have said, this mother of all economic, financial and currency crisis is more than merely stock digits moving up and down. It affects both savings/investment and consumption when all confidence of the world economic system collapse. While we need effort in building a NEW WORLD ECONOMIC-FINANCIAL-CURRENCY ORDER, for a small open economy like Singapore, we must maintain investment/savings (from Economics 101, Savings=Investment) and consumption confidence. This is the main paramount priority that this budget should be all about. It is not about "cost cutting", nor merely "giving money" out. The results of this crisis is credit crunch (which affect investment funding) and consumption confidence (which affect trades).
The most common policies that PAP government would melt out are the predictable few, though it may vary in the size of the budget. The following are the few perspectives that we have witnessed so far:
1) Cut Wages
2) Cut CPF
3) Cut Tax (along with GST increase?)
4) Rebates of all sorts
5) Simply give out money
In an extraordinary crisis like this one, an expansionary budget is unavoidable. But how far the budget is into REAL (well, we know that for many years, PAP may claim deficits but it turns out to be surplus in the end!) deficits is not the only consideration. The money pumped into the economy must be able to jumpstart the economy engine again.
If you take economic boom and bust as a motorcycle, you will understand the logic better. For a motorcycle, you could only keep it balance if and only if the engine keeps running. For economy, it is the same. To keep the engine running, the money (fuel) within the economy must keep moving around, from savings to investment to consumption to income and back again. What we are facing right now is a choked engine of the economy whereby credit crunch prevented the savings to become investment and the irrational fear hinder the consumption. This will ultimately causes loss of jobs and thus, no more money for savings and consumption.
It is a vicious cycle, in reverse of proper economic function. The worst thing is that with the credit crunch, a serious problem of "De-leveraging" will arise. In a proper economic functioning system, with every dollar of investment, it may create 5 dollars of economic worth of income. When the credit crunch comes, due to some irrational fear of banks and financial institutions over bad debts, the reverse of value creation will happen. For every dollar that the banks or financial institutions refused to lend, there will be a potential loss of 5 dollars of economic worth. This is what we call, "De-leveraging".
Thus for any country to counter this big economic-financial-currency (the currency system will ultimately fall into chaos due to the loss in confidence of world financial economy) tsunami crisis, it will have to address or at least PREVENT the further erosion in the confidence of investment and consumption.
Could the predictable PAP policies solve this crisis of confidence? I shall examine some of them here.
1) Cut Wages
The most common call from employers are to cut wages of workers. This is understandable because to them, cutting wages will help them lower business operation cost. However, cutting wages will only solve one part of the problem while creating or enhancing the other part of the problem.
Cutting wages will further erode consumers' confidence. Even when it is simply a mention of wage cut, workers will start to tighten their belt in expectation of a wage cut. This is simply a further erosion of consumption confidence and bringing down the economy as a whole. When there are less consumption, local business revenues will continue to suffer.
In Singapore's context, while we cannot control the global economy which we depended so much for our export-orientated industrial economy, further erosion of local consumption confidence will add salt to injury.
Of course, I will only support the cutting the bloated million dollar salary of ministers, permanent secretaries and high ranking civil servants. This is simply because their salaries are just too high.
(2) Cut CPF
Cutting CPF has the same effect of cutting wages, both in terms of lowering business cost as well as eroding consumption. Most Singaporeans finance their mortgage through CPF and when CPF is being cut, they may have to fork out extra money to pay their mortgages. This will force them to cut down on consumption in the economy.
Furthermore, cutting CPF will only push the problems to retirement financing. As we are now already at a point that we are already short of funds to sustain our people's retirement, further reduction of CPF contribution will only worsen this situation.
3) Cut Tax and Rebates
Most wealthy individuals and profit making companies will favor tax cut. However, such move has proven to be very ineffective in managing economic crisis, least a crisis of this scale. Tax cut may improve our nation's attractiveness in attracting foreign investment but we are now facing a big crisis of confidence, not fundamental problem of economic competitiveness.
Furthermore, tax cut could only benefits those who are paying tax. Those people who are poor don't pay tax. It is very unlikely for tax cut to transform into massive consumption if only a small percentage few benefits from it. Unless the PAP is going to cut GST PERMANENTLY, then that's worth the effort. Changing GST will incur huge administrative cost to businesses. An exercise of making adjustment to business system to cope with any adjustment of GST (be it lower or higher) will cost small and big business a huge sum of money. Unless the change is going to stay for a long while to come, else, the cost of such changes will erode the benefits.
For companies that are facing reds in their books, any tax cut will be meaningless simply because they are making a loss. Tax cut will not help them to stay afloat at all. If they go bust, more jobs will be lost.
Tax cut will not help to withhold confidence in business as well as consumption. It did not address the fundamental problem of confidence at all.
But there is one thing I think the PAP government should do away with. The Annual TV License fee of $110 and property taxes for HDB flats! HDB flats are basically overpriced public housing with 99 years lease which is packaged into a guise of "house ownership". In doing so, those who stay in HDB will have to pay property taxes.
5. Giving money
The most favorite vote-buying technique by the PAP government is giving money to everyone. This is populist move but it comes with a cost.
I would prefer the PAP government to direct such handouts to those who really need them. It should set up a formal system of social welfare for the unemployed. In Taiwan, they have such system whereby those who are jobless could seek unemployment social welfare for 6 months (now they are considering to increase to 9 months). This is to help those who cannot find any jobs to tie over this difficult period.
An all money giving exercise may make PAP looks good but it has little impact in saving those who are truly needy, those who are unemployed, regardless of what types of HDB flats they are staying in.
To be continued on the next post....
We are facing an EXTRAORDINARY crisis at the moment. It is not merely an economic crisis, not merely a financial crisis, not merely a currency crisis but as Nobel prize winner Paul Krugman has put it, the mother of all crisis. It is a crisis of confidence and economic irrationality prevails.
In a textbook assumption of "free market principles", Rationality of human beings is a paramount assumption. Paul Krugman himself has written about "Expected Rationality" in an economic system. But for this present crisis, it defies all economic theories of rationality basically because it involves an IRRATIONAL Crisis of Confidence.
Irrational behavior exists in stock markets during two extremes:
1) Boom Time where even money losing companies could have their stocks flying higher and higher. This is a sign of bubble forming.
2) Doom Time where even money making and fundamentally sound companies suffered drastic drop in their stock prices. This is due to a crisis of confidence brewing.
But as I have said, this mother of all economic, financial and currency crisis is more than merely stock digits moving up and down. It affects both savings/investment and consumption when all confidence of the world economic system collapse. While we need effort in building a NEW WORLD ECONOMIC-FINANCIAL-CURRENCY ORDER, for a small open economy like Singapore, we must maintain investment/savings (from Economics 101, Savings=Investment) and consumption confidence. This is the main paramount priority that this budget should be all about. It is not about "cost cutting", nor merely "giving money" out. The results of this crisis is credit crunch (which affect investment funding) and consumption confidence (which affect trades).
The most common policies that PAP government would melt out are the predictable few, though it may vary in the size of the budget. The following are the few perspectives that we have witnessed so far:
1) Cut Wages
2) Cut CPF
3) Cut Tax (along with GST increase?)
4) Rebates of all sorts
5) Simply give out money
In an extraordinary crisis like this one, an expansionary budget is unavoidable. But how far the budget is into REAL (well, we know that for many years, PAP may claim deficits but it turns out to be surplus in the end!) deficits is not the only consideration. The money pumped into the economy must be able to jumpstart the economy engine again.
If you take economic boom and bust as a motorcycle, you will understand the logic better. For a motorcycle, you could only keep it balance if and only if the engine keeps running. For economy, it is the same. To keep the engine running, the money (fuel) within the economy must keep moving around, from savings to investment to consumption to income and back again. What we are facing right now is a choked engine of the economy whereby credit crunch prevented the savings to become investment and the irrational fear hinder the consumption. This will ultimately causes loss of jobs and thus, no more money for savings and consumption.
It is a vicious cycle, in reverse of proper economic function. The worst thing is that with the credit crunch, a serious problem of "De-leveraging" will arise. In a proper economic functioning system, with every dollar of investment, it may create 5 dollars of economic worth of income. When the credit crunch comes, due to some irrational fear of banks and financial institutions over bad debts, the reverse of value creation will happen. For every dollar that the banks or financial institutions refused to lend, there will be a potential loss of 5 dollars of economic worth. This is what we call, "De-leveraging".
Thus for any country to counter this big economic-financial-currency (the currency system will ultimately fall into chaos due to the loss in confidence of world financial economy) tsunami crisis, it will have to address or at least PREVENT the further erosion in the confidence of investment and consumption.
Could the predictable PAP policies solve this crisis of confidence? I shall examine some of them here.
1) Cut Wages
The most common call from employers are to cut wages of workers. This is understandable because to them, cutting wages will help them lower business operation cost. However, cutting wages will only solve one part of the problem while creating or enhancing the other part of the problem.
Cutting wages will further erode consumers' confidence. Even when it is simply a mention of wage cut, workers will start to tighten their belt in expectation of a wage cut. This is simply a further erosion of consumption confidence and bringing down the economy as a whole. When there are less consumption, local business revenues will continue to suffer.
In Singapore's context, while we cannot control the global economy which we depended so much for our export-orientated industrial economy, further erosion of local consumption confidence will add salt to injury.
Of course, I will only support the cutting the bloated million dollar salary of ministers, permanent secretaries and high ranking civil servants. This is simply because their salaries are just too high.
(2) Cut CPF
Cutting CPF has the same effect of cutting wages, both in terms of lowering business cost as well as eroding consumption. Most Singaporeans finance their mortgage through CPF and when CPF is being cut, they may have to fork out extra money to pay their mortgages. This will force them to cut down on consumption in the economy.
Furthermore, cutting CPF will only push the problems to retirement financing. As we are now already at a point that we are already short of funds to sustain our people's retirement, further reduction of CPF contribution will only worsen this situation.
3) Cut Tax and Rebates
Most wealthy individuals and profit making companies will favor tax cut. However, such move has proven to be very ineffective in managing economic crisis, least a crisis of this scale. Tax cut may improve our nation's attractiveness in attracting foreign investment but we are now facing a big crisis of confidence, not fundamental problem of economic competitiveness.
Furthermore, tax cut could only benefits those who are paying tax. Those people who are poor don't pay tax. It is very unlikely for tax cut to transform into massive consumption if only a small percentage few benefits from it. Unless the PAP is going to cut GST PERMANENTLY, then that's worth the effort. Changing GST will incur huge administrative cost to businesses. An exercise of making adjustment to business system to cope with any adjustment of GST (be it lower or higher) will cost small and big business a huge sum of money. Unless the change is going to stay for a long while to come, else, the cost of such changes will erode the benefits.
For companies that are facing reds in their books, any tax cut will be meaningless simply because they are making a loss. Tax cut will not help them to stay afloat at all. If they go bust, more jobs will be lost.
Tax cut will not help to withhold confidence in business as well as consumption. It did not address the fundamental problem of confidence at all.
But there is one thing I think the PAP government should do away with. The Annual TV License fee of $110 and property taxes for HDB flats! HDB flats are basically overpriced public housing with 99 years lease which is packaged into a guise of "house ownership". In doing so, those who stay in HDB will have to pay property taxes.
5. Giving money
The most favorite vote-buying technique by the PAP government is giving money to everyone. This is populist move but it comes with a cost.
I would prefer the PAP government to direct such handouts to those who really need them. It should set up a formal system of social welfare for the unemployed. In Taiwan, they have such system whereby those who are jobless could seek unemployment social welfare for 6 months (now they are considering to increase to 9 months). This is to help those who cannot find any jobs to tie over this difficult period.
An all money giving exercise may make PAP looks good but it has little impact in saving those who are truly needy, those who are unemployed, regardless of what types of HDB flats they are staying in.
To be continued on the next post....
