2.1 Inflation is the other major uncertainty in the global
economy and a concern for us. After a period of very low inflation
over the last ten years, it has re-emerged and is now an economic
problem everywhere in the world1.
2.2 Oil prices have risen by 50% over the last year. Raw
food prices at the end of January 2008 had risen by 55% globally,
compared to a year ago. Commodity prices in general have risen
by 31%2. All these increases in raw material prices
have cascaded down into higher transport costs, more expensive
manufactured goods, and costlier consumer foods.
2.3 The basic factors which have led to these price increases
are not expected to go away soon. The demand for food especially
has continued to rise globally with the rapid growth of the
middle classes in China and India. This is part and parcel
of expanding global prosperity, but it is happening at a time
when food supply is constrained because of bad weather, and
more agricultural land is being converted from producing food
crops to producing bio-fuels.
2.4 We therefore have to brace ourselves for a period of
relatively higher inflation globally, which will affect the
prices of the goods we import. We cannot say how long it will
last, but we have to expect that it will remain high, particularly
in the first half of this year. For example, China’s
worst winter in 50 years will likely add pressure to prices
of certain foods in the next six months.
Inflation in Singapore
2.5 Singapore has already been affected by this recent rise
in global inflation. Inflation was about 2% for 2007 as a
whole, but it was much higher towards the end of the year
than it was at the start. Consumer price inflation reached
4.4% in December 2007. Overall, we currently expect inflation
at 4.5% to 5.5% in 2008, but with inflation being higher in
the first half of the year than the second.
2.6 The relatively high ‘headline’ Consumer Price
Index (CPI) numbers that we are now seeing, like in December,
are partly due to the GST increase in July last year. The
CPI inflation figure continues to show the impact of the GST
change, because it is comparing prices this month with prices
twelve months ago, i.e. before the GST increase in July 2007.
But if we compare prices today with prices say in September
last year, there has been little further increase due to the
GST change. The GST change has caused only a one-off increase
in prices, and not continuing price inflation.
2.7 Singaporeans have also not been materially affected by
the GST increase, because the Government has provided the
majority of citizens with substantial offsets, which more
than make up for the increased spending on GST by most families.
Lower-income families are in fact receiving offsets which
are several times larger than their higher GST payments.
2.8 There is also a technical reason, due to the rising values
of homes, that is leading to high headline CPI numbers. The
increase in the assessed Annual Values (AV) of homes will
contribute significantly to inflation this year [more than
1.0% of the expected 4.5% to 5.5% inflation]. However, here
too, most Singaporeans are not materially affected, as 95%
of citizens own their own homes and do not pay rentals.
2.9 Nevertheless, even if we exclude this technical factor
due to home values, and the one-off effect of the GST increase,
inflation today is higher than what we have been used to in
Singapore for many years.
2.10 The rising cost of living that Singaporeans face is
a major concern for the Government. Prices of certain essential
items like cooking oil, bread, milk and other dairy products
have gone up significantly over the past year.
2.11 We must start by recognising that the key problem we
face going forward is that of imported inflation caused by
high global prices, especially of food and oil. Some of our
inflation does reflect domestic factors. I have just mentioned
the GST increase, which has been compensated for, and the
Annual Values of homes, which have no material impact on Singaporeans.
The rapid growth of our economy has also pushed up wages and
rental costs. However, our CPI inflation is not due to domestic
inflationary expectations, causing wages to go up to compensate
not only for inflation experienced, but even for future inflation
expected, resulting in higher costs for businesses, higher
prices for consumers, and an upward spiral of wages and prices.
We must not let domestic inflationary expectations set in,
because it will entrench inflation in Singapore even after
external inflationary pressures have subsided.
2.12 Our strategies will ensure that Singapore continues
to have lower inflation than the rest of the world over the
medium term. We have achieved that for many years now, and
will keep it that way in future. The Government is also helping
lower-income Singaporeans and those in need directly with
the immediate problems they face.
2.13 Our strategies to help Singaporeans cope with inflation
essentially comprise five planks.
2.14 First, we seek to moderate imported inflation
through our Singapore dollar exchange rate policy. This has
been MAS’s consistent policy objective. For several
years, MAS’s policy has been a modest and gradual appreciation
of the Singapore dollar. In October last year, MAS increased
slightly the slope of the currency band, meaning that it allowed
a slightly faster appreciation of the Singapore dollar. Our
exchange rate policy has helped to keep inflation down. Had
the MAS not allowed the Singapore dollar to appreciate over
the last two years, our CPI inflation in the last quarter
would have averaged 6.5%, instead of the 4.1% that was actually
recorded (MAS estimates).
2.15 However, there is a limit to how fast the Singapore
dollar can appreciate without hurting our economic performance
and growth, and eventually causing wages to fall. An overly
strong Singapore dollar can bring inflation down, but at the
cost of lower growth and higher unemployment. This is why,
while we can mitigate imported inflation through MAS’s
exchange rate policy, we cannot insulate ourselves completely
from the effects of global inflation passing through to the
2.16 Second, we are stepping up diversification of
food sources so as to minimise spikes in the prices of foods
we import which would otherwise happen when there is a disruption
in supply from any one country. The Agri-Food and Veterinary
Authority of Singapore (AVA) is facilitating private importers
buying from new sources overseas, where the foodstuffs meet
our standards. For food products that are already imported
from well-diversified sources, the Government will continue
to work with retailers to increase public awareness of cheaper
food choices and substitutes.
2.17 These policies of mitigating imported inflation, through
exchange rate policy and source diversification, have helped
to lower food inflation in Singapore.
2.18 The third way in which Government policies help
Singaporeans cope with inflation has been our support of home
ownership as a key pillar of society, and especially the heavy
subsidies that we provide for lower-income Singaporeans to
own a home. Even lower-income Singaporeans therefore have
substantial equity in their homes which rises over time and
is generally protected against inflation. We have become used
to this in Singapore. But it in fact insulates Singaporeans,
especially our retirees, from increases in rental costs which
are a significant long-term concern in other countries. In
the US for example, about a fifth of older Americans rent
their homes. The rental costs make up close to one-third of
their expenditures each month.
2.19 Fourth, the Government provides assistance directly
to Singaporeans who face problems coping with the cost of
living. This approach of helping those in need directly is
better and more sustainable than taking reflex actions, such
as imposing price controls on essential goods. Everything
we see in the countries that have tried price controls, even
today, tells us that these are not real solutions, and will
only lead to hoarding, black markets, and even more problems
for ordinary people over time.
2.20 Our fundamental approach to helping Singaporeans in
need is to help them to get a good income for themselves.
The best way to do so has been and remains to help needy Singaporeans
get a job, and to encourage them to stay at it, upgrade themselves,
and support their family members.
2.21 Last year we introduced the Workfare Income Supplement
(WIS) scheme, to add to the income and savings of Singaporeans
at the lower end of the wage ladder. It provides a significant
incentive to work. For a worker above 45 years of age and
earning a wage of $1,000 or below, the scheme will supplement
his wages by 10% to 20% each year. 287,000 workers have received
their first payouts in January this year, receiving a total
of $150 million from the Government. For those who are truly
unable to work, for example because of disability, we have
the Public Assistance (PA) Scheme.
2.22 We will continue to complement these institutionalised
schemes, by providing discretionary assistance to those in
need. This is why we have boosted the ComCare Fund, which
now stands at $600 million, and Medifund which has reached
2.23 Further, where we make good surpluses on the Budget,
we have redistributed benefits back to Singaporeans, with
more going towards the elderly and the needy. For example,
the GST Offset Package last year provides benefits spread
out over four years. For a lower-income household, what they
will receive this year alone from the GST Offset Package,
together with the WIS, will be substantial.
2.24 HDB two-room households will this year receive, on average,
continuing benefits from the GST Offset Package and the WIS
that will in fact be equal to 12% of their annual incomes.
Even if we exclude the benefits that they cannot use to meet
their immediate expenses – in other words exclude the
Post-Secondary Education Account top-ups for their children
who are still in school, and the CPF component of WIS - the
benefits add up to an average of 8% of their incomes. 8% exceeds
any increase in their overall cost of living that might be
expected this year3, and this is before
counting any additional benefits that this year’s Budget
will provide them, and any growth in wages that they may get
2.25 Even four-room and five-room households will receive
significant benefits this year as a result of what was announced
last year, which will offset at least a good part of
the increase in costs of living they experience this year.
2.26 Later in the speech, I will lay out additional benefits
to Singaporeans that this year’s Budget will provide
as part of our sharing of last year’s Budget surplus.
2.27 The fifth plank of the Government’s strategy
is the most fundamental to how we cope with rising global
inflation. Our strategy is to keep our economy competitive
and build up our capabilities so that we can enjoy good economic
growth. This is the best offset to global inflation, which
will be with us not just for a few months but possibly a few
years – to educate and train up our people, attract
new investments, create jobs, and sustain good growth of incomes
for our whole population.
2.28 This is indeed why most Singaporeans experienced good
growth in real incomes last year, even as inflation went up.
Even lower-income households – if we look at the non-retiree
households i.e. those that do not solely comprise retirees
- those in the bottom 20%, they saw significant real growth
of 5% in their total incomes (7.1% in nominal terms). The
main reason was that more members of these households obtained
2.29 If global inflation stays high, all countries will be
affected by it and we will not be able to totally insulate
ourselves. But there is no reason why we cannot keep growing,
and keep outperforming. And because our economy has done well
and we have healthy surpluses, we now stand from a position
of strength. We have the resources and the capacity not just
to deal with our immediate problems, but to look ahead and
position ourselves to deliver more years of good growth and
quality jobs for our people.
1 Average inflation in industrial countries was about 9% in the early 1980s, but dropped to between 2% to 3% in the early 1990s and to a low of 1.8% in the early 2000s.
2 The Economist commodity-price index, February
3 No significant difference is expected in the rate of increase of the cost of living for lower-income households compared to middle- and higher-income households in 2008. Although the lower-income group will be more affected by rising food prices, they will be less affected by the higher cost of fuel.