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COST SPIRAL: Rising prices, bigger handouts

Rising costs for individuals and businesses, a growing ‘gimme’ mentality and the dangers of the ‘green-eyed’ syndrome in society were among the concerns raised at a Straits Times roundtable, chaired by deputy editor Warren Fernandez, ahead of next week’s debate on this year’s Budget

THEIR big looming worry is how fast costs for both individuals and businesses will keep rising, and for how long.

Their reading: No reprieve any time soon, even if economic growth were to moderate this year due to a global slowdown, as the momentum of economic activity will mean that competition for land, labour and other resources will remain red hot.

The six panellists fired off tough questions for the Government on why it pushed ahead with last July’s hike in the goods and services tax (GST) from 5 to 7 per cent, and the increase in Electronic Road Pricing (ERP) tariffs from April this year, at a time when the inflation rate is high and rising.

Citigroup economist Kit Wei Zheng said: ‘I think the real danger here is that this could risk entrenching inflation expectations – therefore making the inflation problem even more persistent than it otherwise would be.’

OCBC economist Selena Ling agreed. She observed that inflation has both external and domestic sources and said government fee hikes can have a significant impact on costs over the medium term.

But panel members were divided on how best to tackle the issue of rising costs for businesses.

At one end were Mr Kit and MP Inderjit Singh. They argued that this year’s Budget should have done more to help businesses tackle rising costs, with some short-term reliefs.

Mr Singh, who chairs the Government Parliamentary Committee (GPC) for Finance and Trade and Industry, said cost increases for materials, rentals and manpower have been ‘too steep and too fast’, catching many businesses off-guard.

‘So businesses will struggle for a while. And I thought that this was the best time, with the kind of surplus that we have, to also address this short-term problem,’ he said.

The Government logged a whopping $6.45 billion Budget surplus last year, due to record levels of stamp duties from a red-hot property market and higher- than-expected income tax receipts.

Its 2008 Budget measures for businesses, however, focused on developing local enterprises over the longer term, through new tax deductions and incentives to spur research and development.

But Mr Singh said what businesses urgently need are measures such as rental and corporate tax rebates, to provide immediate relief from cost pressures.

Mr Kit questioned if the Government should go ahead with this year’s planned ERP hikes, which will further raise business costs.

Businessman Zulkifli Baharudin and MP Sin Boon Ann took a different view.

They argued that Singapore’s open economy limits what the Government can do to buffer businesses and individuals against high costs. They believe the focus should be on channelling resources to raise productivity.

Mr Zulkifli, managing director of logistics company Global Business Integrators, said: ‘If you want to be a London or New York, then it’s going to be very costly. But there’s the other side of the argument, which is productivity. If your productivity is high, you can mitigate against high costs.’

High costs have hit individuals too.

Taxi driver Raymond Lo, 68, a regular contributor to the Forum pages of this newspaper, said the public feels ‘Singapore is a very expensive city to live in’.

He related a recent incident which brought home to him how prices are shooting up.

He stopped at a petrol station to pick up his favourite lotus paste bun, only to find that the price had gone up from 60 cents to 80 cents.

‘I got a shock. That is a 33.5 per cent jump,’ he said.

Mr Lo welcomed the Budget measures to help the lower-income cope with rising costs but says more needs to be done to combat profiteering. Amid a buoyant economy, businesses believe they can get away with raising costs by more than the rise in GST.

Others round the table, however, noted that costs have risen in part because of global factors beyond anyone’s control, such as oil prices hitting US$100 a barrel, and skyrocketing food prices worldwide.

Mr Singh pointed to how wages had been rising significantly, with some bankers, for instance, drawing $8,000 starting salaries. Such rises feed into higher prices for rentals and housing, adding to inflationary pressures.

Last week, Finance Minister Tharman Shanmugaratnam announced a $1.8 billion surplus-sharing package that included personal income tax rebates, cash grants in the form of Growth Dividends and top-ups to Medisave.

Those on lower incomes and the elderly received more Growth Dividends and larger top-ups.

Mr Tharman also gave the assurance that the Government has in place strategies to ensure Singapore continues to have lower inflation than the rest of the world, over the medium term.

In assessing how the Government is helping Singaporeans cope with inflation, the six cited two main concerns. The first is Singaporeans may develop a ‘subsidy mentality’ and expect handouts in every Budget.

The second is the social tension arising from a growing income gap.

Mr Singh noted that the Government has felt compelled to dish out goodies three Budgets in a row: this year because of the ‘unbelievable’ surplus and rising costs, last year to offset the GST hike, and the year before because ‘it was a good time to do it for the Government’.

Singapore went to the polls in 2006.

OCBC economist Selena Ling said the Government could better manage expectations of handouts if it could find a more accurate way of estimating its tax receipts.

She suggested a mid-year review of its budgetary position.

‘ That’s something they really need to look into because it’s all about managing expectations, at the end of the day. If you project a small deficit and in the end, you get a huge surplus, the political pressure will be there,’ she said.

Mr Sin, who chairs the GPC for Community Development, Youth and Sports, was concerned that people’s expectations will always outstrip the Government’s ability to help them cope with rising costs.

The challenge, he said, is to manage expectations in the midst of a rich-poor divide that cuts across local-foreigner lines.

The double blow of rising costs and a widening income gap on low-income Singaporeans is causing Mr Singh to wonder about the Government’s strategy of making a dash for growth in good years.

This approach had given rise to the present situation in which the economy is racing ahead, but running into major constraints in terms of labour shortages, a housing crunch, and crowded public transport.

He plans to make that a focus of his speech during next week’s Budget debate.

‘A couple of years ago, the PM – when he was the Finance Minister – said that his model is going to be grow as fast as you can in good years to make up for the bad times, and so therefore, we created an overheated situation,’ he says.

Others, like Mr Kit, pointed to how attempting to ease the shortage of workers could give rise to more pressures on housing and places in schools.

While no one was wishing for slower growth – which might come this year anyway – panellists believed that more could be done to help businesses and individuals cope with the downside of a boom economy.

Source: The Straits Times 23 Feb 08

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