Growth will make tackling inflation easier

SO all eyes will be on the Budget next Friday, when Singapore’s finance minister will apparently be disbursing ‘a little hongbao’, especially to help the needy cope with rising costs - arguably the issue of the day.

At the rate that the consumer price inflation rate has gained momentum of late - surging from a 2007 first-half average of 0.8 per cent to 2.6 per cent in July, and steadily on to 4.4 per cent by December - there’s finally no more quibbling about whether there’s been any ‘uptick’ in inflation, core or overall, and the focus is now squarely on addressing the cost concerns.

While rising food prices are a major source of imported inflation in Singapore, it doesn’t help, unfortunately, that several domestic policy decisions will add to further hoist the consumer price index - or other costs - in the months ahead, and basically enlarge the hole in consumer pockets. Higher cab fares and driving costs; higher hospital expenses with means testing; higher taxes with revalued property valuations - even as they enjoy higher wages and bonuses at the start of the year, many middle-income Singaporeans will likely need to also factor in such increases in their household budget. But at least they have a salary and bonus to be thankful for.

Those who barely eke out a living or are jobless (some 45,000 residents were unemployed in December) would well be in dire straits - and, it would be appropriate if it’s largely this group that the anticipated Budget rebates and other fiscal goodies will be aimed at. But it shouldn’t hurt the national coffers, too, to trim the personal income tax rate (instead of providing a temporary tax rebate) - and put some money into the pockets of taxpayers as well.

That said, much as people will always want more, the government’s approach to help Singaporeans tackle rising costs is right: diversify Singapore’s food sources, but no subsidising of essential products, no price fixing, as that would mess up market signals and encourage overconsumption. And, beyond handouts for the needy, as the prime minister put it, ‘we cannot just distribute money and make the problem go away’. Indeed, putting cash directly in the hands of consumers could help them cope with rising costs - but it would not bring down inflation. Especially not when a sizeable portion of inflation here is imported.

The single most relevant tool to deal with imported inflation remains, in Singapore’s case, a stronger currency - not just against a weakening US greenback but other key currencies too. But, with lingering uncertainties about the economic growth outlook, the central bank’s hand could be constrained in nudging up the Sing dollar, what with some exporters already feeling the heat.

The question, then, is: which is the bigger worry - Singapore’s growth prospects or soaring costs? It’s not an easy call, but this much seems clear: with strong sound growth, the economy and its people will be better girded to deal with the challenges, including inflation.

Source : Business Times - 6 Feb 2008