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Fight inflation with CPF, GST: economists

Cool labour demand by raising employer contribution, roll back July GST hike

(SINGAPORE) The government should restore some of the CPF employer contribution cuts as a way to cool labour demand, which in turn will moderate growth.

That should help ease inflation and help people cope with runaway prices that are biting into the lives of most Singaporeans, said Chua Hak Bin, Citi economist.

Another way to help people cope with higher prices is to target the punitive 2 percentage point increase in the Goods and Services Tax, other economists added. This is because when the 2 per cent GST hike was pushed through on July 1, the government had not reckoned on food and energy prices shooting up the way they have done.

‘Higher CPF (Central Provident Fund) contribution rates will help cool labour demand and moderate growth,’ said Dr Chua.

Economists expect the government to soon announce more specific measures to help the poor, who are especially hard hit by inflation.

But Dr Chua thinks more has to be done for the wider population, and restoring CPF employer contribution cuts will go a long way towards tackling the problem.

Inflation jumped to a shocking 3.6 per cent in October – a 16-year high – and the projection is that it could go as high as 5 per cent early next year, before easing.

Standard Chartered economist Alvin Liew said while the policy of having a stronger Singapore dollar can ‘quite effectively deal with import inflation, it is less effective against domestic price pressures such as rising rents and higher wage expectations’.

‘We are likely to see more government measures to moderate rental increases, business costs and wage expectations,’ said Mr Liew.

Some measures could be to increase property tax rebates and raise the corporate tax exemption threshold, said Mr Liew.

Dr Chua thinks it’s strong growth that must be tackled, and one way would be to restore the CPF contribution cuts by one percentage point and more for older workers .

‘Job growth is running at too strong a pace, given such a tight labour market,’ he said.

Job growth is running at 200,000 a year, or at an 8 per cent pace and the unemployment rate is now down to below 2 per cent. Easing the rules on hiring foreigners is not the solution, he said.

‘Where will you house the foreigners?’ Dr Chua asked.

Higher CPF rates will also help the middle class cope with rising living costs, by giving them more cash to pay for things which have become too expensive, he said.

When the CPF rates were cut, many had to dip into their disposable income to help with their monthly mortgage payments.

CPF cuts over 2003-06 (which brought the employer’s rate to 13 per cent) were probably overzealous, especially for older workers, Dr Chua said.

This year, the government restored by 1.5 percentage points the employer’s rate to 14.5 per cent, bringing the total CPF savings to 34.5 per cent for younger workers. But for employees past 50, the contribution rates are much lower to encourage employers to hang on to these older workers.

Suan Teck Kin, economist at United Overseas Bank, thinks the government will not restore CPF rates because it will add on to the wage pressure.

And companies enjoying strong growth will just hire more, he said.

To reduce some of the cost pressures, the government should do more to defray the punitive 2 per cent hike in GST, Mr Suan said.

Dr Chua agrees.

‘With the benefit of hindsight, hiking the GST by 2 percentage points was probably unnecessary, given the fiscal windfall and inflation impact,’ he said.

Dr Chua listed the windfalls.

The Ministry of Finance had projected tax revenue to increase by only 7.9 per cent, according to the 2007 Budget, but actual tax revenue increase may be more than double that rate.

The government projected income taxes to rise by 7.5 per cent. But income taxes for the first 6 months of the fiscal year actually rose by about 20 per cent.

The government expected GST revenue to rise by about 23 per cent. But GST collected (for the first 6 months of the fiscal year) has risen by about 49 per cent.

The 2 percentage point GST hike was expected to raise $1.5 billion, and the government was projecting a primary deficit of about $600 million (with the 2 per cent GST hike).

‘But even without the $1.5 billion proceeds from the 2 percentage point GST hike, back-of-the-envelope calculations suggest the government will likely run a small primary fiscal surplus,’ Dr Chua said.

 

Source: Business Times 10 Dec 07

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