Singapore unveils budget amid rising inflation

John Burton
Fiancial Times
16 Feb 08

Singapore will today unveil its annual budget, which is expected to include measures to deal with the city-state’s highest inflation rate in 25 years.

The government predicted yesterday that inflation could climb to 5.5 per cent this year, while it cut the economic growth forecast to 4-6 per cent, setting the stage for what some economists are calling “stagflation-lite”.

The estimates represent a tough challenge for the government, which has prided itself on a record of low inflation and strong economic growth.

Some economists have blamed the government for several decisions that have stoked inflation and called into question its policy of using the exchange rate, rather than interest rates, to control rising prices.

Although officials say that Singapore’s rising inflation rate is due to a global increase in food and fuel prices, “the spike in inflation in recent months has been self-inflicted, as it reflects cost pressures that are largely within the government’s control,” said Kit Wei Zheng, an economist at Citigroup in Singapore.

Lee Hsien Loong, the prime minister, decided last year to raise the sales tax to 7 per cent from 5 per cent instead of gradually increasing the rate as suggested by Goh Chok Tong, the former prime minister and current head of the Monetary Authority of Singapore.

Since then, the government has approved increases in electricity tariffs, public transport fares, taxi rates and hospital charges among other services. Housing rents have climbed sharply after a temporary shortage of accommodation since the government encouraged developers to demolish old apartment blocks and build new ones in an effort to revive the depressed construction industry.

The city-state’s high growth rate of 7-8 per cent in the past few years, partly due to the building boom, has added to inflationary pressure, with a labour shortage leading to higher wages.

Singapore has tended to rely on its exchange rate rather than interest rates to control inflation. A strong Singapore dollar, for example, cuts the cost of imports but also attracts increased capital inflows that in turn depress interest rates.

“Targeting the currency instead of interest rates is no longer working, when more capital is coming onshore in the expectation that the Singapore dollar will rise further,” said an economist at a foreign bank in Singapore.

A stronger currency also means declining exports. with Singapore cutting its 2008 economic forecast because of an expected slowdown in the US, one of its main overseas markets.

There are worries that rising wages and housing costs are eroding Singapore’s competitive edge in attracting foreign businesses, which make up a large part of the economy.

Inflation is deepening income inequality, since rising prices fall most heavily on the poor. The government revealed this week that the income gap was now at its widest since independence in 1965.

Given the new challenges, attention will focus closely on today’s budget. The government is expected to announce relief measures for the poor, such as offsetting the cost of higher sales taxes with rebates. Cuts in personal tax rates may be on offer, although a corporate tax cut is seen as unlikely.

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