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Singapore
unveils budget amid rising inflation
John
Burton
Fiancial Times
16 Feb
08
http://www.ft.com/cms/s/0/86165a92-db67-11dc-9fdd-0000779fd2ac.html
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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