Tackling the Macro Picture in Rising Cost of Living Challenges

Mdm Deputy Speaker, I wish to speak today on how macroeconomic policy can and should play a role in addressing our cost of living challenges.

As Members on both sides of this House are aware, the state of inflation in Singapore is not good. Since the start of the year, inflation in the prices faced by consumers has averaged 4.9%. This is more than double the rate of 2.3% in 2021. It is also close to double the average since our nation's Independence.

The pain of this rising cost of living is even more keenly felt by the average household and small business.

Food inflation is up to 4.5%, more than three times higher than last year. While news headlines and my mother's constant reminders focus on costly chicken and the threat to what most would consider our national dish, chicken rice, prices of all kinds of meat are up almost 6%. Eggs are about 30% pricier and even those choosing a healthier diet face vegetables that are 5% more expensive.

Another area where prices have shot up is energy. I am certain I am not the only Member here who has received irate emails from residents who have expressed shock and dismay at their utilities bills. Small wonder. Electricity is up 20% – dearer than it was a year ago – and gas, more than 10%. This not only means that more of us have to think twice before turning the air conditioner on; it also means that our small businesses, already operating on lower sales because of the pandemic, face even thinner margins.

With fuel prices up by a quarter, it is unsurprising that transportation is now more expensive, with price rises in the teens, compared to a year ago. This is not affecting just those who have the luxury of owning cars or getting on planes for the holidays. Public transportation costs are up more than 7%. For families that rely on the occasional taxi or private hire car (PHC) to get their kids to school when they are running late, this option has become that much more difficult.

When the prices of what we eat, getting to work and keeping our homes and businesses running are all rising rapidly, this is not an inflation problem any longer. It is a cost of living crisis. It is, therefore, incumbent on policymakers to do what they can to alleviate the pain felt by the people.

To be clear, the drivers of inflation are multifaceted. A significant part of inflation is global in nature. For example, the prices of commodities, such as food and energy, have climbed higher since the middle of last year. The war in Ukraine fed further uncertainty and led to spikes in the prices of wheat, corn and sunflower oil.

Supply chain pressures, not just in China, where the administration's stubborn adherence to a zero-COVID policy has led to rolling lockdowns, but also globally, have meant more upward pressure on prices for the rest of us.

Tight labour markets worldwide have seen wages add their own powerful contribution to the inflation mix.

At first glance, such imported inflation looks like something beyond our control since we are a small open economy and price taker in global markets. But it is incorrect to insist that inflation must be a storm, that we simply need a lull time to pass.

The experience of advanced economies that are around a half-year ahead of us in confronting the price dragon suggests that inflation may, like the last drunk uninvited guest at a party, hang around longer than we would like or appreciate. Their central banks have already abandoned rhetoric that the phenomenon is transitory. None other than our own MAS has pointed out that only a third of the increase in core inflation is due to external sources, with about half due to domestic drivers.

With the source of inflation emanating domestically, it behooves us to act locally. There are genuine consequences for failing to act. In addition to the real cost borne by various segments of the population, refraining from decisive action now could allow inflation to become even more entrenched in expectations of our households and businesses. This runs the risk that inflation becomes more permanent than temporary.

The role of macroeconomic policy is to stabilise the economy. While the Government has announced a suite of measures in an off-Budget fiscal package, I believe more can be done at this juncture from a big picture perspective.

In most economies, the first line of defence against inflation is the central bank. But as explained yesterday by Deputy Prime Minister Lawrence Wong, our nation's central bank, the Monetary Authority of Singapore (MAS), does not operate as a traditional central bank relying on short-term interest rates to manage price pressures. Instead, it subordinates the policy rate to exchange rate considerations consistent with our open economy and considerable exposure to international trade and financial flows.

Regardless of whether one agrees with this approach – I, for one, do – it is also well understood that, having adopted such a target, we can no longer control inflation via traditional interest rate hikes. But, thankfully, this does not mean that there are no other tools in MAS' toolkit. One strategy, developed in recent decades, is to intervene in markets for financial assets.

Some of us may be familiar with the process of quantitative easing, or QE. The central bank makes large-scale asset purchases to keep long-term interest rates low. The objective of QE is to stimulate the economy in the face of interest rates that are close to zero. Over the past decade, QE was applied by major developed economies' central banks, such as the Bank of Japan, the Bank of England, the European Central Bank and the US Federal Reserve, with some success.

Quantitative tightening, or QT, is essentially the opposite. Central banks would intervene in markets to sell longer-term government bonds. This will beat down their prices and, conversely, raise their yield. Thus, even though MAS does not directly seek to increase the Singapore cash rate – currently at 0.7% – it could, nonetheless, influence interest rates for Government bonds maturing 10 years or later.

Whether via QT or other means, it strikes me as eminently reasonable that MAS attempts to elevate such long rates so that the real interest rate – that is, the interest rate, net of inflation – would no longer be negative, as it currently is. This would represent a genuine tightening of monetary conditions, which is what is necessary to contain inflation.

Of course, the most direct approach to controlling inflation in the context of our current policy framework is to have MAS target a stronger Singapore dollar.

Madam, I appreciate that the legislature is seldom a place for in-depth discussion about as esoteric a topic as the appropriate level of the exchange rate. I am also keenly sensitive to how MAS operates best when left with relative free rein over how they conduct the more technical elements of monetary and exchange rate policy.

That said, as I shared with this House earlier this year, while the execution of policies is, indeed, best left to experts, the choice of what policy we pursue falls appropriately within the domain of politicians, who are best positioned to debate the relative merits or trade-offs that affect the welfare of the people we represent.

It is with this in mind that I am broaching the issue of our exchange rate.

I believe that we can do more to strengthen the Singapore dollar. This will reduce the cost of imported goods and services. Since much of what we consume is imported, a strong Singapore dollar can, in turn, lower domestic inflation as well.

As Minister of State Alvin Tan shared with this House two months ago and again yesterday, MAS is aware of this and had already tightened monetary policy thrice since October last year. But it is unclear how much this effort to strengthen the Singapore dollar has succeeded. This is because, of the three moves, only the most recent one was sufficiently aggressive, involving an adjustment of not just the slope but also the midpoint of the policy band, while the other two were more limited.

Ultimately, the proof is in the pudding. On 14 October, the day of the first MAS announcement, the exchange rate between the US and Singapore dollar was 1.35. As of mid-June, after three separate efforts, this was 1.40 – getting close to 4% weaker than when the exercise first started.

There are many reasons why this may be the case, not least because the US dollar has been exceptionally strong, even compared to other currencies. But the reality is that the Singapore dollar is, today, weaker in terms of the currency that global commodities like oil, gas and agricultural products are priced in, which is the US dollar. This translates into higher prices here as higher import prices pass through into domestic inflation.

The efforts of MAS are demonstrably too tentative. What is worse is that we will risk falling behind the curve even further as the Federal Reserve recently moved to hike interest rates more aggressively, which will further fuel appreciation of the US dollar unless we act more aggressively ourselves.

Sure, such a policy will entail winners and losers. We would be concerned about what the effects of a strong exchange rate could mean for exports. But there are reasons to believe that currency appreciation need not be that problematic in our modern Singapore economy.

We should not forget that our entrepreneurial model and natural resource scarcity mean that our producers often import raw materials and other intermediate inputs to production, which all benefit from a stronger Singapore dollar. Our economy is also less reliant on manufacturing than before. Indeed, a number of our tradeable services in finance, information and communications technology (ICT) and professional services have pricing power, which allows them to be more resilient to exchange rate fluctuations.

By the same token, capital inflows may also remain unaffected by currency appreciation and could even potentially increase. After all, multinationals based here can manage their foreign exchange rate risk through hedging as long as plans for doing so are telegraphed in advance.

In the long run, a stronger currency may provide the impetus for our local firms to finally upgrade their operations to reflect higher productivity and quality rather than competing solely on low prices and cost-cutting.

There are, of course, reasons for caution on this front. Even casual students of international economic history will have encountered the Plaza Accord, an agreement struck between then leading nations to intervene in currency markets to strengthen the Japanese yen and the German Deutsche Mark relative to the US dollar. The result was a success but some observers have argued that the concerted intervention set in motion the Japanese real estate and stock market bubble and the economy's subsequent Lost Decade.

We do not want that here, but even so, there is ample evidence that we can afford more strengthening of the Singapore dollar.

Standard metrics for comparing the under- and over-valuation of our currency suggest that the Singapore dollar is, indeed, significantly undervalued. There is latent demand for the Singapore dollar as an attractive safe haven currency in these tumultuous times.

Hence, paradoxically, we may not even need to spend that much to prop up our currency. It may be as simple as ceasing interventions that restrain our exchange rate and allowing foreign exchange markets to work more efficiently. This is a luxury that precious few countries can afford but one that we can leverage now.

These monetary and exchange rate moves should occur alongside fiscal policy. I would suggest three general principles that guide our thinking on this matter.

First, we should subscribe to the general principle of being timely, targeted and temporary. I have already outlined why support is needed now. So, it is timely, given how a souring of the global economic environment means that we must rely less on global growth tailwinds to support our economy. Targeting specific groups and keeping the policy temporary will also minimise the budgetary footprint at a time when we have already drawn liberally from our reserves and the economy is on track towards a self-sustaining recovery.

Second, our fiscal balances should not be building up excess surpluses at this time. This means that increased revenues resulting from higher collections of various taxes and duties should, as far as possible, be rebated back to citizens. This ensures that our Government does not enjoy a windfall gain, while our citizens suffer.

Finally, it is important that we avoid the temptation to index economy-wide wages to inflation. While tempting, since it automates the process of wage adjustment to rising inflation, the experience of emerging markets in the 1980s and 1990s is a testament that this well-meaning policy can end up institutionalising inflation.

While the package announced last month by MOF is based on three somewhat different philosophies, it also embeds some of the principles that I have mentioned of being temporary and targeted and relying on better than expected fiscal outturns from the prior fiscal year. But we can probably do more.

Revenue for the previous fiscal year, FY 2021, was $74.8 billion – $13.4 billion higher than the fiscal year 2020 and $7.1 billion more than two years ago, before the pandemic. The jump in property stamp duty alone was $6.8 billion even as personal and corporate income taxes have fully recovered. Yet, the announced package only amounts to $1.5 billion – a fraction of this revenue increase.

One important example of policy that follows these principles is to make adjustments for Singaporeans on fixed incomes.

For such people, inflation can be devastating. An elderly person spending $20 a day may now only be able to buy one prata instead of two for breakfast, may be forced to skip their afternoon tea or order two instead of three items of "cai png".

What is worse is that this diminished consumption will be with them for the rest of their lives even when inflation has returned to normal rates, because elevated prices do not automatically come back down even when inflation disappears. Inflation of 3% above the historical average would mean that their retirement funds now buy 3% less. In practical terms, this means adjustments for those that rely on ComCare and CPF.

We have to remind ourselves that while financial markets can and do adjust returns to reflect higher inflation, this is not the case for those locked into a fixed income stream.

For retirees, CPF returns have remained unchanged thus far, even as higher prices mean that whatever these retirees have set aside in savings will now buy less. For Comcare, the announced increase for Long-Term Assistance is surely welcome, but it is unclear why a comparable degree of support is not extended for short- and medium-term assistance, since inflation hits both types of households in much the same way. I believe that Comcare assistance should be permanently and universally increased, by a margin that reflects the excess inflation experienced by families for this year.

I also believe that we can roll out a temporary increase in CPF interest rates of around two percentage points for a six-month period, consistent with the increase in inflation. This can be funded by the returns paid on Special Singapore Government Securities, or SSGS. The higher returns on SSGS can, in turn, be made up from higher nominal returns that would accrue from financial assets that are marked to market.

Macroeconomic policies are often viewed as blunt instruments: they affect the economy on the aggregate; and hence, we may be concerned that pushing these levers may be too disruptive for an economy that is already on a tentative road to recovery.

On the contrary, my contention is that it is precisely because the effects of macro policy are wide ranging that we wish to consider applying such tools at this time.

For starters, a number of the policies that I discussed associated with interest and exchange rates, have the benefit of being fast to implement. Budgetary measures take time to draw up and disburse. In contrast, interest and exchange rate policies can be rolled out once the decision has been made.

Moreover, the suggestions I made are complementary in nature. The monetary measures deployed to cool inflation are contractionary, as they should be, by design. To limit the risk of derailing a still-fragile economy and recovery, we should offset this effect with fiscal measures that are modestly expansionary. The Government’s support package is consistent with this, but this risks being unwound by the impending GST hike.

Instead, what we want is a macro policy stance that is broadly neutral, which is what is appropriate for our economy at this stage of the business cycle. Put another way, we want to downshift and tap on the brakes to contain inflation, but pumping on a wee bit of gas with limited government spending that helps keep the engine from stalling.

Mdm Deputy Speaker, I appreciate that much of this speech has been relatively technical and we all want to go home. To some extent, this is inevitable; the nature of macroeconomic policymaking is often technical in nature. Nevertheless, it is possible to summarise my main suggestions in a few sentences.

Strengthen the Singapore dollar, because a strong currency makes the stuff we import cheaper. Buy long bonds, because this will dampen speculative investment and keep a lid on asset prices. [Please refer to "Personal Explanation", Official Report, 12 September 2022, Vol 95, Issue 67, Personal Explanation section.]

Spend to support those among us that are hurting most for a temporary period and finance this by rebating any windfall tax gains. But avoid wage indexation at all costs.

We need to battle inflation proactively and we have the tools to do so. Let us use them.

Mdm Deputy Speaker, I thank the Member for tabling today's Motion. I will respond to the Motion in two parts. I will start by addressing the macro picture, before zooming in to the micro picture.

A hallmark of our Government since Independence has been our ability to look long term. We see the big picture, the macro picture. This includes assessing the world and the winds of change, as well as identifying the trends, opportunities and challenges for Singapore.

In this House yesterday, I shared our economic outlook for Singapore, including our GDP growth and inflation projections. For the sake of brevity in this response, I shall not repeat those details and Members can refer to my speech yesterday. What I would like to focus on in my response is how we have planned for and laid foundations for the long term.

First, we maintain a stable macroeconomic environment so that businesses and households can make economic decisions with confidence. And a core tenet is our exchange rate-centred monetary policy which has helped us manage inflation.

During this period of rising inflationary pressures, MAS has pre-emptively tightened monetary policy since October last year, as the Member has observed. This longstanding policy has directly helped dampen imported inflation.

How? To Assoc Prof Jamus Lim's point on food prices, as well as energy prices, let me dive deeper. For global food prices, while global food commodity prices increased by an average of 25.4% year-on-year over the first five months of 2022, domestic food prices increased by an average of 3.6% year-on-year over the same period. So, 25.4% versus 3.6%.

On energy prices, likewise, even as global energy prices rose by 27.5%, energy-related components in Singapore's Consumer Price Index, which includes the cost of electricity, gas and petrol, increased by 13.6% year-on-year between January and May. So, 27.5% versus 13.6%.

Second, we continue to build our trade links to the world, to diversify our sources of imports and exports, even as the world is experiencing a retreat of globalisation. We concluded the world's largest Free Trade Agreement (FTA), the Regional Comprehensive Economic Partnership Agreement (RCEP), in November 2020, and are part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). We have also signed the Pacific Alliance-Singapore Free Trade Agreement (PASFTA) in January and are on track to conclude an FTA with Mercosur.

We have also signed Digital Economy Agreements (DEAs), Digital Economy Partnership Agreements (DEPAs) and are in the process of negotiating a green economy agreement with Australia.

These trade agreements help us to diversify our imports, open markets for our businesses and future-proof our economy.

Third, we continue to stay open and connected to the world and to innovation, investments and talent. And despite the challenges posed by the COVID-19 pandemic, we attracted S$11.8 billion in Fixed Asset Investments (FAI) last year. We have secured significant investments, for example, Sanofi has committed to setting up a €400 million vaccine production facility in Singapore.

These inbound investments create good jobs for Singaporeans, make our economy vibrant and competitive and prepare us for the next pandemic – long term. Overall, strong growth will support job creation, wage growth and help address inflationary pressures.

So, as we continue to plan and execute our macro and strategic plans, we also keep our eye firmly on the micro – the ground picture. So, we plan and execute the macro, but we also keep our eye firmly on what is happening on the ground. It is reflected in how we navigated Singapore through the COVID-19 crisis and support Singaporeans and local businesses during this period of rising costs.

During the height of COVID-19, we committed close to S$100 billion over the last two years, part of it to support businesses hit by COVID-19 restrictions. In particular, our Jobs Support Scheme (JSS), which provided wage subsidies to employers to help them retain workers, saved 165,000 local jobs between March and December 2020.

We also rolled out initiatives, such as our SingapoRediscovers Vouchers (SRVs) for our embattled tourism sector. Collectively, about $300 million in vouchers and out-of-pocket payments were generated through SRV transactions. This provided crucial support to our local tourism business.

In anticipation of higher prices, we rolled out support for Singaporeans in Budget 2022, including the Jobs and Business Support Package, to help businesses and workers, as well as the Household Support Package to help households with their daily needs. And to help Singaporeans cope with rising inflationary pressures, we also brought forward the implementation of some of the measures, including our CDC Vouchers and Small Business Recovery Grant (SBRG).

The additional S$1.5 billion support package Deputy Prime Minister Lawrence Wong announced on 21 June provides immediate and targeted relief to lower-income and vulnerable Singaporeans, who are disproportionately affected by higher prices.

The measures included in the package also help our local companies transform and cope with rising energy costs by becoming more energy-efficient. It also provides targeted relief for specific groups, such as self-employed persons, who depend on their vehicles for their livelihoods and, hence, are more adversely affected by energy cost increases. These include taxi drivers and delivery riders.

Overall, we designed the package to avoid stoking further inflationary pressures and distorting price signals, while being, as the Member suggested, fiscally responsible and sustainable. And as Deputy Prime Minister Lawrence Wong said yesterday, if the situation worsens significantly, we would be prepared to do more.

Let me turn to some of the specific issues raised by Assoc Prof Jamus Lim in his speech. On MAS' monetary policy response to inflation, more specifically, we need to recognise that the global nature of the price pressures we are facing is affecting all of our trading partners. The sharp pick-up of inflation of food and oil prices since Q4 last year, principally, reflects the effects of serious disruptions of global supply due to the Ukraine-Russia conflict.

So, it is inevitable, as the Member had mentioned, that some of these prices will affect our economy. Many Singaporeans do accept that the situation requires some adjustments to the high prices. Given the circumstances, I will explain a few points below.

MAS, using its monetary policy, has strengthened the exchange rate by at least 5% on an annualised basis, which has kept domestic food inflation, for example, to one-fifth of global food inflation thus far.

How MAS decides on the extent of its tightening of the exchange rate takes many different factors into account. Foremost is the fact that a strengthening exchange rate cannot fully offset global prices without causing immediate negative consequences on growth and, therefore, the labour market.

Indeed, this is precisely the reason why many advanced central banks are guarded in the speed and also the extent to which they will hike interest rates. This monetary policy action, in and of itself, has attendant spillover effects that we must all take into account in a very uncertain, dynamic and also challenging economic environment.

Therefore, a judicious blend of tight monetary policy and targeted supportive fiscal policy, carefully calibrated, is most appropriate. In fact, the Member mentioned that the fiscal policy must be timely, targeted and temporary in rebating back fiscal upsides. That is what we have precisely done with the S$1.5 billion support package.

If you look at it, the combined Budgets of 2020/2021, together with monetary policy decisions – both fiscal and monetary policy together – supported Singapore's GDP growth by about one percentage point in 2021 and prevented the deterioration of the unemployment rate by four percentage points, even as the combined expansionary monetary macroeconomic policy responses were non-inflationary.

At this juncture, the current round of combined fiscal and monetary policy responses is expected to contain medium-term inflation, without significant loss of output or inadvertently adding further to the underlying tightness in the economy.

On indexing financial assistance payments to inflation, I would just like to say that the Government regularly reviews our schemes to take into account needs and affordability. And inflation is one of the many factors taken into consideration.

Mdm Deputy Speaker, allow me to sum up. I have responded to the Member's Motion by articulating our Government's macro and micro approaches. We plan and execute for the long term and, at the same time, continue to have the dexterity to zoom in into the details that matter on the ground to Singaporeans and Singaporean businesses.

Indeed, the livelihoods of our people are not a theoretical exercise to us. Rather, we focus on strong job creation and wage growth as the best ways to help Singaporeans tide over these immediate difficult times and ensure that we have sufficient resources to tackle the long-term challenges.

The mindset and bias towards action have allowed us to weather storms and seize opportunities throughout our history. That is the hallmark of our Government. This is our commitment to Singapore and we will continue to do our utmost to deliver on this commitment, especially in these challenging times.