Discuss the view that fiscal policy is the best method to promote economic growth in Singapore

Fiscal Policy

Fiscal policy is 1 of the 2 instruments of macroeconomic policy. It comprises public spending and taxation(including tax breaks to the private sector). The goal of fiscal policy is to influence the level of demand in the economy, with the twin goals of getting unemployment as low as possible without triggering excess inflation

Fiscal policy in Singapore is directed primarily at promoting long-term economic growth, rather than cyclical adjustment or distributing income. To meet its objective, the Singapore Government is guided by the following principles in its conduct of fiscal policy in Singapore:

i. the private sector is the engine of growth, and the government's role is to provide a stable and conducive environment for the private sector to thrive;

ii. tax and expenditure policies should be justified on microeconomic grounds and focus on supply-side issues, i.e. incentives for saving, investment and enterprise;

iii. the counter-cyclical role of fiscal policy is limited, due to high import leakages.

The success of Singapore's fiscal policy over the years lies in the government's prudent expenditure patterns and conducive taxation policies that have complemented monetary policy in promoting sustained and non-inflationary economic growth.

The main focus of the Government's expenditure is on the delivery of essential public goods and services to Singaporeans. The government spends to assure the nation of a secure future. Therefore, key areas of expenditure are on education, public housing, health care and national security. The Government is also committed to building and maintaining world-class economic infrastructure and services. This is evidenced by the fact that development expenditure accounted for around one-third of government expenditure on average over the last three decades.

Singapore's tax policies, although providing the main source of funding for the government, seek to enhance its economic competitiveness and attract foreign investments to Singapore.

This combination of fair tax policies and prudent expenditure programmes, augmented by high economic growth has enabled Singapore to enjoy consistent budget surpluses over the years. Such a prudent fiscal policy has also contributed to Singapore's high savings rate and allows it to achieve one of the highest investment rates in the world without having to incur foreign debt. High domestic savings have, in turn, contributed to Singapore's high level of foreign reserves, which has served to boost investor confidence and provided a buffer against adverse economic shocks.

With this ethos of fiscal rectitude, which extends throughout the public sector, the MAS has been able to focus on its primary goal of ensuring price stability and preserving confidence in the domestic currency through the appropriate management of the S$ exchange rate, without needing to balance this against the requirements of deficit financing.

The key objective of Singapore's monetary policy is to maintain price stability for sustained economic growth. Since 1981, monetary policy in Singapore has been centred on the exchange rate. This reflects the fact that in the small and open Singapore economy where imports and exports amount to more than twice GDP, the exchange rate is the most effective tool in controlling inflation.

The MAS manages the Singapore dollar (S$) exchange rate against a trade-weighted basket of currencies of Singapore's major trading partners and competitors. The composition of this basket is reviewed and revised periodically to take into account changes in Singapore's trade patterns. This trade-weighted exchange rate is maintained broadly within an undisclosed target band, and is allowed to appreciate or depreciate depending on factors such as the level of world inflation and domestic price pressures. MAS may also intervene in the foreign exchange market to prevent excessive fluctuations in the S$ exchange rate.

Monetary policy is reviewed on a semi-annual basis to ensure that it is consistent with economic fundamentals and market conditions, thereby ensuring low inflation for sustained economic growth over the medium term. The MAS publishes a semi-annual Monetary Policy Statement (MPS) in April and October which explains its assessment of Singapore's economic and inflationary conditions and outlook, and sets out its monetary policy stance for the following six months. Singapore's exchange rate-based monetary policy system and its experience since its adoption are reviewed in MAS' monograph on Singapore's Exchange Rate Policy .

In the context of Singapore's open capital account, the choice of the exchange rate as the focus of monetary policy would necessarily imply that domestic interest rates and money supply are endogenous. As such, MAS' money market operations are conducted mainly to ensure that sufficient liquidity is present in the banking system to meet banks' demand for reserve and settlement balances. The key aspects of MAS' monetary policy operations, viz. foreign exchange and money market operations, and the various factors and considerations underlying them, are discussed in MAS' monograph on Monetary Policy Operations in Singapore .