Impact of Rising Inflation on Planned GST Increase and Related Financial Offset Measures

Ms Jessica Tan Soon Neo asked the Deputy Prime Minister and Minister for Finance with regard to the global supply chain disruptions and countries imposing export restrictions, causing the prices of food to increase continually and putting further pressure on the cost of living for consumers (a) whether the Government will provide further relief for consumers facing eroding spending power, especially basic food necessities; and (b) what measures will be taken to manage the heightened inflationary risks.

Ms Foo Mee Har asked the Deputy Prime Minister and Minister for Finance (a) what tracking indicators have been used to determine the latest $1.5 billion support package to help Singaporeans cope with inflation; and (b) whether the Government will consider temporarily enhancing the GST offset package for the lower- and middle-income groups if inflationary pressures continue unabated with the impending GST hikes.

Mr Liang Eng Hwa asked the Deputy Prime Minister and Minister for Finance (a) what are the key considerations in the sizing and distribution of the latest $1.5 billion support package; (b) whether the various cost pressures faced by different segments of Singaporeans can be further mitigated; and (c) whether the Government will have the fiscal space to introduce further assistance measures in this financial year.

Mr Saktiandi Supaat asked the Deputy Prime Minister and Minister for Finance (a) whether the $1.5 billion support package announced recently and the Assurance Package will continue to offset the five to 10 years of additional GST expenses for Singaporean households; (b) what are the quantitative or qualitative thresholds that will trigger another support package; (c) whether there are any updates on non-fiscal and exchange rate policy measures to address rising prices driven by supply side factors; and (d) what are the risks of a wage-price spiral emerging in Singapore over the next year.

Ms Mariam Jaafar asked the Deputy Prime Minister and Minister for Finance what are the considerations in determining the size, scope and duration of the support measures in the $1.5 billion support package, including the assumptions on inflation beyond September 2022.

Mr Melvin Yong Yik Chye asked the Deputy Prime Minister and Minister for Finance (a) whether the Government expects inflationary pressures to abate and, if so, when; and (b) how does the Government intend to mitigate the risk of stagflation in the event that "higher-for-longer" inflation persists.

Mr Alex Yam asked the Deputy Prime Minister and Minister for Finance (a) what lessons can be drawn from the results of the recent survey conducted by Blackbox Research which indicate that cost of living and inflation issues raised in 59% of polled respondents are the two biggest threats Singapore is facing today; and (b) whether the Ministry has avenues of recourse for citizens faced with the challenge of rising costs amidst unprecedented global disruptions.

Sir, my response today will also cover similar Parliamentary Questions filed by several Members for subsequent Sittings. And if Members are satisfied with the response, they may wish to withdraw their questions after this session.

First, let me, in my capacity as Deputy Chairman of the Monetary Authority of Singapore (MAS), explain how monetary policy helps to mitigate imported inflation and manage heightened inflationary risk. MAS aims to keep inflation low over the medium term, through its exchange rate centered monetary policy. When inflationary pressures build up, MAS allows the trade-weighted exchange rate to appreciate faster, thereby, helping to directly reduce imported inflation.

As Minister of State Alvin Tan said just now, MAS has been pre-emptive in tightening monetary policy, in response to rising inflationary pressures. MAS has raised the appreciation path of the Singapore dollar nominal effective exchange rate (S$NEER) policy band three times in the past nine months – in October last year, in January and in April this year.

In April, MAS also re-centered the mid-point of the exchange rate policy band upwards. The stronger exchange rate has helped dampen imported inflationary pressures, for example, while global food prices increased by 20.3% year-on-year in the first quarter this year, non-cooked food prices in Singapore rose by a more modest 3%. So, global prices increased by 20.3%, but in Singapore, by 3%.

And more recently, over April and May, while global food commodity prices increased by an average of 21.7% year-on-year, domestic food prices increased by an average of 4.5% year-on-year. Meanwhile, energy-related components in Singapore's Consumer Price Index, which includes the cost of electricity, gas and petrol, increased by 13.6% from January to May, even as global energy prices went up by a more significant 27.5%.

So, these examples illustrate how our monetary policy has helped to mitigate inflationary pressures in Singapore. The effects of MAS' successive monetary policy tightening moves are still working their way through the economy and will continue to moderate some of the externally-induced price increases.

We are also closely monitoring the labour market situation. For now, we assess that the risk of a wage-price spiral remains contained. We have relaxed our border restrictions and the continued inflow of foreign workers should help to ease labour market tightness and moderate labour cost pressures.

Next, let me touch on fiscal measures. Our approach is to provide short-term relief and to support longer-term economic restructuring. And that means our fiscal support must continue to ensure the right incentives for businesses to build their capabilities and become more energy efficient and productive. We had anticipated the higher prices earlier this year and, therefore, had rolled out more support for Singaporeans in Budget 2022. This included the Household Support Package (HSP) for Singaporean families, as well as the Small Business Recovery Grant (SBRG) for SMEs affected by COVID-19 restrictions.

In my April Ministerial Statement, I brought forward the implementation of some of these Budget measures, including the CDC vouchers to May and the SBRG to June. Last month, I announced a $1.5 billion support package, in response to the more challenging global inflation environment in recent months, especially the sharp increases in energy and food prices. In formulating this latest support package, we have taken into consideration the latest economic and inflation outlook.

For now, as Minister of State Alvin Tan had said just now, we expect prices to pick up further in the coming months before they stabilise towards the end of the year, in line with the likely trajectory of global prices. At the same time, we continue to expect healthy growth across many sectors of the economy this year. The labour market is very tight and our overall unemployment rate is lower than pre-COVID-19 levels. On the whole, the economy is operating at slightly above potential.

Under such circumstances, we had to consider carefully the size of any additional support measures by the Government, because excessive fiscal injections at this juncture can exacerbate inflationary pressures and easily become counter-productive. And that is why we had designed a package to provide more targeted relief for the lower-income and vulnerable groups, who are disproportionately impacted by the effects of higher prices.

When you combine the additional measures in the latest package with the previously announced Budget measures, we are, in fact, providing comprehensive support for households and businesses throughout the year. For example, after putting together all the measures, about 1.5 million lower- to middle-income Singaporeans, including retirees, will receive a GST Voucher – Cash and Special Payment of up to $700 in August this year.

All Singaporean households received $100 in CDC vouchers in May and will receive another two tranches of $200 each in CDC vouchers over the next two years. Households living in 4-room HDB flats will receive a total of about five months' worth of rebates on their utility bills for the whole of Financial Year of 2022, while those in 3-room flats will receive about seven months' worth of rebates.

More importantly, I hope everyone understands that the challenges before us are not just about coping with higher prices. We must also adjust to major structural changes in our operating environment, including the threat of climate change, as well as greater geopolitical contestation between the major powers, all of which means that we are entering a more bifurcated, unpredictable and dangerous world.

We will, therefore, have to accelerate our efforts to restructure and transform ourselves for this new environment. In particular, we must decarbonise our economy, learn to manage with fewer manpower resources as our population ages and strive for more inclusive growth in the years ahead.

When designed well, the short-term relief we provide can also help us manage these structural issues. For example, as part of the $1.5 billion support package, I had enhanced the Government's co-funding share for this year under the Progressive Wage Credit Scheme (PWCS). This means that the Government will pay up to 75% of the wage increase of our lower-wage workers this year. And in this way, we are able to secure real wage growth for lower-wage workers, while cushioning the cost impact for businesses.

Crucially, we must always ensure that we have sufficient resources to tackle our longer-term challenges and do so in a fiscally responsible and sustainable manner. And this is why the Government will need to go ahead with the GST increase as announced at Budget 2022. We had already anticipated the higher inflation outlook earlier this year and that is why, instead of a two-percentage point increase this year, I had decided to delay and stagger the GST increase over two steps – by one-percentage point from January 2023, and another one-percentage point from January 2024.

We should not push back the GST increase any further, as we will need the funds urgently to take better care of our growing number of seniors and to meet our rising healthcare expenditures. That said, we have already set aside the $6.6 billion Assurance Package to cushion all Singaporean households from the impact of the GST increase. As I had shared in the Budget, the majority of Singaporean households will not feel the impact of the GST increase for at least five years. And for lower-income households, the impact of the GST increase is delayed by about 10 years.

Let me be clear, taking into account the latest inflation and the latest higher prices, this assurance still holds today. This is because we had designed the package with a buffer, precisely in case of higher inflation. We will continue to assess the adequacy of the Assurance Package as the inflationary outlook evolves. If need be, we will further enhance the Assurance Package to uphold our commitment.

The Assurance Package and the $1.5 billion package are two examples of how we are monitoring the global and domestic developments carefully and ensuring our support measures, whether already announced or new ones, are adequate and fit for purpose. You have my word that if the situation worsens significantly, we will be prepared to do more, especially to provide targeted help for the lower-income groups, and we will continue to do so while living within our means and upholding prudence and responsibility in fiscal management.

Sir, we must brace ourselves for a bumpy road ahead of us. We are confronting multiple crises. Governments and citizens around the world are facing the same problems of rising food and energy prices or uncertainties navigating economic challenges.

In Singapore, we have used a combination of monetary, fiscal and other policies to cushion our people from the extremes of global inflation, target help to those who need it most and help businesses adjust to higher prices, not just for today but for the medium term. With careful fiscal planning, we are able to mount further support, if the situation warrants it.

By continuing with sound policies and earning our people's trust, we will turn challenges into opportunities. We will take care of those with less and support the vulnerable, while keeping our eye on the medium and longer term. This is how we will get through this together and come out stronger as one Singapore.

Thank you, Deputy Speaker. It is assuring to hear that inflation is expected to moderate towards the end of the year. But nevertheless, I would like to ask the Deputy Prime Minister and Minister for Finance, what were inflation related assumptions used to develop the $6.6 billion Assurance Package that was announced and whether the Government is still committed to deliver the promise to our people that the 10-year cost increase cushion for lower-income households and the five-year cost increase cushion for middle-income households on a higher cost base that we are seeing now? When it was announced, there were some buffer, but can you still assure that the $6.6 billion is still sufficient?

The second question is, we have seen countries around the world announce minimum wage adjustments. Recent announcement on this includes Los Angeles, Australia and Turkey, in an effort to provide support to households on soaring inflation. I would like to ask if the Government will consider working with the tripartite partners to accelerate the wage increases planned under the Progressive Wage model for low-wage workers?

Mr Deputy Speaker, on the first question, the answer is absolutely yes. First, as I have said in my reply, we have done an update based on the latest inflation outlook. We are still able to assure today that our commitment holds, that the majority of Singaporean households will not feel the impact of the GST increase for five years and for the lower-income households, it will be 10 years.

Of course, we recognise that the situation is highly fluid. Inflation can be much higher than we had expected and for longer durations too. So, we will continue to review the situation, and as I mentioned in my reply, if the need arises, we will enhance the Assurance Package to uphold our commitments. So, let there be no doubt about this.

On the second point, we will certainly work closely with the tripartite partners to speed up the implementation of our Progressive Wage Model. We are doing our best on this front. The Government will do its part too, which is why in this latest support package, I had enhanced the Government co-funding share of the wage increase for lower-wage workers, so that we can encourage more businesses to implement the wage increases faster and the Government will bear a larger share of the increase to cushion the impact on business costs.

Thank you, Mr Deputy Speaker. I thank the Deputy Prime Minister and the Minister for Finance for his reply. I have two supplementary questions. First, can the Deputy Prime Minister share what are the consequences of further delaying the GST hike of 1% which is scheduled to take place by January 2023? Specifically, MOF has previously shared that the GST increase will go towards supporting healthcare expenditure and to take care of seniors as well as other areas of social spending. As such, which specific areas of healthcare and social spending will be affected if the GST increase does not take place by January 2023?

Second, the global economic outlook since January, has taken a nose-dive. Is the Government adaptable enough to consider what the approach to take, including reconsidering the GST increase, should there be a global recession in the coming months?

Sir, in my Budget speech this year, I had highlighted that the Government expects government spending to increase largely because of our rapidly ageing population, with a large part of the increase driven by healthcare expenditures. Today, the Government is spending about 18% of GDP. By 2030, we expect this to rise to 20% of GDP, or maybe even more.

And that is why I had also announced in the Budget, not just the GST, but a whole range of tax increases in order to ensure that we are fiscally sustainable in the medium term. So, the short answer to the question, what will happen if we do not have this GST increase, is simple. We will be at risk of a persistent structural funding gap, which will continue to widen year by year. And I do not think anyone wants this to happen in Singapore. It will be highly irresponsible for us to embark on this path.

So, I hope all Members understand why we need to ensure a sound and sustainable fiscal position for Singapore in the medium term and the GST increase is part of this package of moves that we have to put in place to ensure that Singapore is in a strong position for the medium term.

In the near term, there are cost increases, higher prices, lots of concerns and anxieties and we will do our best to deal with them. But we cannot keep neglecting the medium- and longer-term challenges either.

On the second question, we fully recognise that the situation is fluid. For now, we do not expect a recession or a stagflation scenario next year, but things are unpredictable, volatile, there can be new shocks. So, we will continue to monitor the global and domestic environment very closely and if the need arises, the Government will adjust its approach and measures accordingly.

Sir, I have two questions for the Minister for Finance. First, an article in The Business Times in May this year, citing Singapore's Department of Statistics data, confirmed that the Government's tax collections for fiscal year 2021 was $74.76 billion, a 10.5%-increase compared to the pre-COVID-19 fiscal year 2019, of about $67 billion.

The same article notes that stamp duty collection was 61% higher over the same period, hitting $6.7 billion for fiscal year 2021, ending March this year.

In light of this information, can I understand what is the Minister's assessment of the Government's current fiscal position and how much fiscal room it has to introduce more cost of living support measures for the lower- and middle-income end of Singapore, particularly families and small businesses?

Secondly and connected to the first question, in light of elevated fuel prices, has the Government considered the prospect of a more acutely targeted and temporary road tax rebate, similar to that introduced in 2015 and 2021, to assist Singaporean households, that for various reasons, need a vehicle for family use and due to historically high COE prices, as an example, cannot make the green transition to less pollutive electric vehicles (EVs) at this point in time.

I understand the previous policy explanation for road tax rebate was to offset the Government's decision to raise fuel taxes. However, in view of high pump prices today, would the Government consider some targeted financial relief for those who drive cars and motorcycles below a certain engine capacity and whose assessable income is below the median salary range, for example, because of inflation today?

Sir, we had indeed enjoyed some fiscal upsides in our projections. On the revenue side, these are largely once-off upsides due to higher-than-expected collections with regard to property and vehicle transactions. These are sentiment-based transactions. We can in no way count on them to happen year after year and certainly, we cannot rely on them to fund our longer-term recurrent and structural spending increases.

But we did enjoy this upside this year and on the expenditure side, it so turned out, fortunately, for us that Omicron was milder than we had expected and so we had some savings on the spending side. And that was exactly why – because of both the revenue and expenditure savings – we were able to mount this recent $1.5 billion package within our current budget, within our current means. So, we are fortunate in that regard but let us not count on these one-off instances to fund our longer-term structural spending increases.

On the second point, we had designed the $1.5 billion package precisely to help lower-income households, families, workers, as well as the more vulnerable groups. And we were very mindful that there are people who rely heavily on their vehicles for a livelihood, which is why we provided specific help for them, targeted help through the NTUC U FSE Relief Fund, as well as for taxi drivers and private hire car drivers.

So, that will be our approach, the general approach we take, as I have explained before. It will be very hard for the Government to shield businesses, workers directly from these cost increases which are externally induced. But what we will try very hard to do is to provide short-term relief and in the process of providing that relief, we will also want to encourage businesses, families, individuals, wherever possible, to become more energy efficient, for businesses to become more productive, so that even as we navigate through the immediate crisis, we will emerge stronger, greener and more productive and therefore better prepared for the challenges before us in a new environment.

Thank you, Mr Deputy Speaker. I would like to thank the Deputy Prime Minister for his answer. I have two supplementary questions. First, in regard to my Parliamentary Question (PQ). I am mindful there are multiple factors or reasons to move in regard to future packages, but in my PQ, I actually asked whether there is a quantitative or qualitative threshold that will trigger another support package, and if the Deputy Prime Minister can share, maybe not one single threshold but a few, if there are any.

My second question is in regard to a resident who came to me. He is a poultry seller. The Deputy Prime Minister mentioned that we are in a more complex, bifurcated world with climate change and processes will change. The poultry seller's example for the question I am asking is, whether there could be targeted, specific help for specific sectors or merchants affected? In this example, a poultry seller, a merchant affected by supply-side changes. With future food protectionism moves and in a bifurcated world, can there be that targeted help for specific merchants that will be affected; in this case, poultry, but in the future, there could be other types of food being affected?

Mr Deputy Speaker, on the first question, I understand the Member's question. It is going to be very hard to distill it into a set of indicators, where we say if these indicators and these thresholds are crossed, then, definitely, a new package would arise. But what I want to assure everyone is that we will monitor the situation very closely. We have already put out this additional package. The measures in this package, as well as the measures that were announced in the Budget will still be implemented in the months ahead, including the additional cash payout which I mentioned just now, up to $700 in August, the utilities rebates, CDC vouchers coming up soon. All of these are still going to be rolled out.

We will have to take it all in totality, looking at external developments: whether there are new shocks coming up, global prices as well as local prices, taking into account the state of our economy as well, before we size, if the need arises, any additional package.

As I had cautioned, too, given the state of our economy, that it is running above potential, if we were to give excessive fiscal injections, it may well end up being counterproductive and cause inflation to go up higher. So, we must always be mindful of this risk, recognising where the state of the economy is today and think very carefully about the need as well as the timing and scope and size of any future support, if the need arises.

So, that is something we are committed to doing. We are monitoring closely and responding swiftly, if and when necessary.

On hawkers who are impacted, particularly poultry sellers, MSE, NEA, SFA have been engaging them and helping some of them to adjust where possible to adapt to the situation, see if they can sell frozen chicken, for example, or see if there are other things they can continue selling in order to keep the business going. But for those who are truly impacted and are unable to adjust, we have existing help for them too – through ComCare, through the COVID-19 Recovery Grant – these existing mechanisms are in place. But, of course, the better way to help beyond these one time relief, is to make sure that they become more resilient over time and are able to adapt to future shocks. So, that is an ongoing process that we will continue to do, to build up the capabilities of our hawkers, of our SMEs, so that they themselves become more resilient and are able to cope with future disruptions.

Thank you, Mr Deputy Speaker. I have one supplementary question for the Deputy Prime Minister. Would the Government be able to share with us the assessment of the increase in household expenditures as a result of the higher inflation expectations and what is the expected offset in household expenditures as a result of this $1.5 billion package? I ask that also because as recently as January, I think MAS had assessed that inflation is expected to come in at between 2.5% and 3.5%, and now it is two percentage points higher at 4.5% to 5.5%, so that is quite a significant increase in terms of the expected rates of inflation.

Thank you. Mr Deputy Speaker, we can put out these detailed estimates separately. I do not have the figures with me right now. Obviously, with the higher-than- expected inflation, there will be an impact on households and that is precisely why we had put in place this package. But we have, as I mentioned in my reply, been very careful to target the measures more for the lower-income and vulnerable groups, because they are the ones who will bear the greater brunt of higher prices. That is a key objective that we had sought to uphold in designing the package and I hope Members understand this.

But we will continue to monitor the impact and where possible, we will put out more detailed figures to show the overall impact on household consumption and how the package that we have put in place can help households in the different income groups.

Thank you, Deputy Speaker. I would like to ask the Deputy Prime Minister, with regard to the $1.5 billion targeted support measure, can he elaborate how it specifically helps two groups: families and caregivers who continue to face cost pressures as they look after aged and ill parents; and parents and caregivers with special needs children, who are likely to find providing care continually difficult to be sustained.

Mr Deputy Speaker, Sir, the items in the package are clear. I think we do not have to go through and reiterate those items. But we are not only enhancing or providing an additional support package in the areas that we had announced because we had also recently updated, some of our structural schemes, structural programmes that are helping the groups that Mr Edward Chia talked about. For example, we have recently enhanced our Home Caregiving Grant. Or for that matter, we have been continuing to update our subsidies and help for healthcare. Even as fees go up, healthcare costs go up, we continue to review and update these subsidies and programmes, including for the Pioneer Generation, for the Merdeka Generation. Even more recently, we had updated some of our structural schemes for Workfare and for ComCare assistance too.

So, it is more than just what is in the package alone that is one off, providing targeted relief. We are also quite aware that there will be groups – the elderly, parents with special needs children – who will be finding it difficult to cope with higher prices. And for some of these groups, the way to go about helping them is not just a one-off relief, but to adjust our underlying funding for the various programmes to make sure that they keep pace with inflation and higher prices. This we will continue to do on a regular basis.