Wednesday, August 06, 2008

The right time to step in?

From TODAY, Business
Monday August 4, 2008

Hurt by rising costs, SMEs and man on the street would welcome every bit of help


THE current economic slowdown brought about by the United States’ sub-prime crisis and high oil prices is causing much hardship to the less well off and to many businesses, especially smaller ones. So, is it time for the Government to step in and come up with measures to alleviate their suffering?

The public at large would say yes, while the Government continues to stress that one shouldn’t panic and tweak the economy at the first sign of a storm. But then again, when is it a good or right time?

Inflation, at 7.5 per cent in June this year, is currently running at the highest level in more than 26 years. As a result, many have called for a cut or rollback of the Goods and Services Tax (GST) from 7 per cent now to its previous level of 5 per cent.

The Monetary Authority of Singapore (MAS) in April helped ease the pain somewhat by allowing an immediate jump in the value of the Singapore dollar by moving up the range in which it allowed the local currency to fluctuate. This should bring about cheaper imports, but not all the gains have been passed down to the consumer.

But Trade and Industry Minister Lim Hng Kiang see the present situation as a momentary setback and he said as much a couple of months ago: “It is not useful to tweak the GST rate in response to short-term phenomena and we have adopted an approach aimed at the medium term.”

Yes, it’s true that the present slowdown is not as bad as in 1997, when the regional financial crisis caused the stock market to fall sharply and the economy shrank by 2 per cent between the second quarter of 1997 and the third quarter of 1998.

The Government responded with an off-Budget package, injecting some $2 billion into the economy in June 1998 in an attempt to reduce business costs. The following year, another package of cost-cutting measures amounting to $10.5 billion was implemented, including a 10-percentage-point cut in employer CPF contributions.

There were two other periods when the Government introduced off-Budget measures to bring relief to the economy. First was during the 1973 oil crisis when the Organization of Petroleum Exporting Countries suddenly raised oil prices sharply. Then the Government allowed the Singapore dollar to float to help reduce prices of imports. It also lifted import controls on essential commodities, and took measures against profiteering.

If we reduce the GST by even 1 percentage point, that might help (people cope) with inflation.
The Hour Glass founder Jannie Tay

The National Trades Union Congress came in with “Welcome” supermarkets, where many items, especially essentials, were much cheaper than elsewhere.

Then in 1985 — following the Pan-Electric Industries scandal where the financial problems of the group threatened the whole economy because of illegal share trading and borrowings — the Government intervened with wage cuts and other reductions to business costs.

But during the Sars crisis of 2003, the Government largely stood its ground and introduced little by way of off-Budget measures, except for some pay cuts for government servants and a $430-million package (including $200 million from the Singapore Tourism Board) for the hospitality and travel industry, which was the worst hit.

Now, high inflation, rising transportation costs and sky-high oil and commodity prices have sharply reduced the purchasing power of the average Joe.

It is also hurting many small and medium-sized businesses.

Hopefully, the present downturn will not last too long.

Yes, the Government has introduced some measures to help the very poor among us. But then again, some tweaking of the economy to ease the burden of the man in the street would be most welcome. A cut in the GST will certainly help. As Singapore Retailers Association president and The Hour Glass founder Jannie Tay recently said: “If we reduce the GST by even 1 percentage point, that might help with inflation.”

In any case, it will not be a total loss to the Government, as increased spending should put some money back into the Government’s coffers and should bring the smiles back to retailers — and the gesture of a Government that cares will be noted.

After all, Hong Kong unveiled a package last month worth some HK$11 billion ($1.9 billion) to try and ease the effect of rising prices. The measures targeted lower- and middle-income groups and include transport subsidies for students, an electricity subsidy for every household and extra allowance for pensioners.

With more and more wise men predicting that the worst of the sub-prime crisis is still not over, the time has come to start thinking of a package of off-Budget measures.
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