A Summary: Singapore’s 2017 Budget Statement Aims to Build Singapore's Future Economy

This economics summary of Singapore's Budget 2017 is contributed by a former economics lecturer

What Happened? A Brief Summary of Budget 2017

In his 90-minute speech to Parliament on Monday, 20 February 2017, Singapore’s Minister for Finance, Mr. Heng Swee Keat, focused on future economic challenges facing Singapore.

With economic growth surpassing some economists’ expectations last year in 2016, Singapore's Budget 2017 looks to the future by earmarking S$2.4 billion to roll out multi-year economic schemes. 

These economic programmes are in addition to the industry-level transformation initiatives, totalling S$4.5 billion, rolled out in 2016’s budget.

But at a time of slowing economic growth in recent years, some S$1.4 billion is also set aside to help firms and workers, and provide additional economic support for individuals, households, and the disadvantaged, to help promote an inclusive society in Singapore. Even with economic support measures, the Singapore government still – nevertheless – wants to continue promoting a sense of self-reliance in companies, workers, and families, and encourage partnerships to drive the Singapore economy forward.

Some Economic Figures – Economic Stimulus

Broad economic stimulus measures were avoided, and instead the government aimed for targeted economic measures in 2017. As Minister Heng commented, "Budget 2017 is an investment in our economic transformation and social resilience." This is an important point. Budget 2017 is expansionary, with total expenditure coming to S$75.07 billion, some S$3.68 billion more than for FY2016.

The Singapore budget surplus, lifted by S$14.11 billion in net investment returns, is expected to be at S$1.91 billion, or 0.4 per cent of Gross Domestic Product (GDP). This is S$3.27 billion smaller than the FY2016 surplus. Nonetheless, Minister Heng reassured the House that "this budget position is prudent, while supporting firms and households in the midst of continued economic restructuring."

Singapore is Undergoing a Key Transition as Our Economy Matures

Budget 2017 comes at a time when Singapore is undergoing a "key transition" as the economy matures. Singapore’s open and trade-dependent economy reported 2 per cent growth for 2016, one of the slowest years since the 2008 global financial crisis. Structural economic shifts towards economic productivity are also weighing on companies and the labour market.

And the International Context is Changing and Evolving  

At the same time, deep economic shifts and economic uncertainties are happening rapidly and globally for trade and investments, businesses and jobs. In fact, Minister Heng commented that at the last Budget, issues like Brexit seemed remote and the US had just started the process of electing their new President. He further said that events since then were a stark reminder of how quick and unpredictable change could be.

Expand Overseas - Go, Go, Go 

Minister Heng unveiled a S$2.4 billion response, spread over four years, to execute the Committee of the Future Economy (CFE) recommendations. The report laid out economic strategies to help Singapore remain relevant amid a fast-changing world. Rejecting the inward-looking economic mood of some advanced economies, Mr Heng said that a key thrust is to help Singaporeans and companies tap overseas economic opportunities. In that vein, a S$600 million fund will be set up to support firms expanding overseas. Called the International Partnership Fund, it will co-invest with Singapore-based firms to help them scale up and internationalise.

Digital Economy – and Digital Economies

There will be economic help for small and medium enterprises to gain digital technological capabilities, and to use them effectively. Plans were also drawn up for research agencies like A*Star in Singapore to help companies tap innovation or co-develop intellectual property so that companies can grow.

But Singapore Will Support Firms and Workers in the Short Run

However, in a nod to the slow economic growth environment, Budget 2017 also responded to the near-term economic concerns of firms and workers. To tackle cyclical concerns, foreign worker levy increases for the marine and process sectors will be deferred by one more year, while S$700 million worth of public-sector infrastructure projects will be brought forward to support the construction sector. In addition, there will be enhanced corporate income tax rebates, while eligible businesses, especially smaller ones, will receive help in coping with higher wage costs. Some S$26 million per year will be set aside to help train workers looking to take new jobs or go for work attachments. Economic measures were also unveiled to support families, including more public housing grants and a personal income tax rebate of 20%, capped at $500, which is definitely a welcome measure in such tough economic times.

Sustainability – Spending Caps, Taxes, Carbon Taxes, and Water Taxes

With increasing spending demands, Budget 2017 put in place measures to ensure fiscal sustainability, while pointing to longer-term tax policy changes. For example, Minister Heng said that all ministries and organs of state will lower their budget caps by 2 per cent permanently. And a new carbon tax on emission of greenhouse gases was proposed, while water prices will be hiked by 30 per cent in two phases to reflect the increased cost of producing water, and to signal the importance of water to Singapore’s survival.

And What’s Next?

Singapore’s Parliament will convene on 28 February 2017 to debate the Budget, and then after the Budget Debates are concluded, the Committee of Supply 2017 debates will begin.

JC Economics Essays - Singapore Budget 2017 special. This short summary and opinion piece will help A level economics students understand the issues surrounding budget and the parliamentary process better. Thank you for reading and cheers! 

Should governments always intervene when free markets fail to allocate resources efficiently? [15]

It should be recognized that free markets often fail due to allocative inefficiency, and there are various ways where governments can intervene to improve the outcome of resource allocation. However, governments should not always intervene as there are instances where intervention results in a less desirable outcome. This essay thus aims to analyse the pros and cons of the various ways of government intervention, and instances of government failure.

Yes, governments should intervene to improve the efficiency of free markets. Firstly, government policies to bring down the output level to the socially optimal output level can be divided into two categories, one market-based and another of direct control. A per unit output tax of the good raises production cost, thus reducing the output to the socially optimal outcome when there are negative externalities or demerit goods.

[Insert diagram for tax]

By imposing a per unit tax equivalent to MEC, MPC shifts to the left, thus bringing the output level down to Qs, coinciding with socially optimal output level. Hence, there should be intervention as it allows allocative efficiency to be achieved. 

On the flipside, an output subsidy would lower production costs, thus raising production to an output level coincidental to the socially optimal outcome, bettering the situation where there are positive externalities or merit goods.

[Insert diagram for subsidy]

By giving an output subsidy equivalent to MEB, MPC is shifted to the right, thus bringing the output level forward to Qs, the socially optimal level. Thus, allocative efficiency is similarly achieved.

While controlling output directly is a faster and more straightforward method, some may argue for the use of emission charges in the case of negative externalities as it advocates specific actions to cut down on the externalities which seem to some as a more long term solution. For example, in the case of pollution, emission charges induce firms to directly reduce pollution by the addition of a filter or the switch to less polluting production methods. However, there are limitations to such a policy as it gives high administrative costs due to the difficulty faced in monitoring emissions as compared to output.

When market-based policies fail to work, it may be sensible for the government to intervene with direct controls. An output ban could be used to forcefully bring down the output level to the socially optimal one. 

[Insert diagram on total ban]

An output ban will be advisable in the case where MEC is so large that the socially optimal output occurs at Qs = 0. In this case, a ban will be allocatively efficient. However, it should be noted that in a case where the MEC is relatively small, government intervention is not advisable as the outcome is even more allocative inefficient. As seen in the diagram above, when the government does not intervene, the area of welfare loss is smaller than when the government chooses to impose a total ban where quantity will be brought to zero. Hence, output bans are very extreme and thus governments should only intervene with a ban if MEC is large.

Another form of direct control would be direct free provision by the government to bring the output level to one that is socially optimal.

[Insert diagram on free provision]

For free provision, the MEB is so large that the socially optimal outcome occurs at Qs. Thus output has to be subsidized to such a large extent that the price of the good effectively becomes zero.

However, just like an output ban, free provision is very extreme and should only be used when the extent of MEB is very large. 

Where MEB is relatively small, MPC needs to be shifted to the right in order for socially optimal outcome to be achieved. Therefore, if the good was to be provided for free, the good will be over-consumed, resulting in a deadweight loss, implying that the outcome is worse than before intervention. Hence government should not intervene. 

In conclusion, despite substantial pros brought about by government intervention, the government should not always intervene as there will bound to be cases of government failure when the extent of intervention required is wrongly judged as seen from the examples above. Furthermore, the extent of administrative costs of some of the methods of intervention outweighs their benefits, translating to the view that the government should not always intervene.

JC Economics Essays - H1, H2, H3 Economics Essays - tutor's comments: While there is a lot of good economics material in this generally well written essay, the main problem is that it could have addressed the examination question more directly and targeted the answer better to the economics question specifically. Having said that, there are some saving graces to this economics essay. There is great use of varied economics diagrams, a lot of explanation, solid economic reasoning, and generally good application of economic principles and ideas, concepts, and logic. These save the essay quite a lot. However, better use of essay technique and more direct answering of the question would be great and would raise the grade achieved - also, lots of economics examples should also have been used. What other ways could be used to improve this essay? Think of how you could make this economics paper even better than it already is. 

Economics Question on the "Fat Tax": “Unhealthy foods should be taxed.” Discuss. [25]

“Unhealthy foods should be taxed.” Discuss. [25]

This paper discusses if a “fat tax” should be imposed. What is a fat tax? Generally, a fat tax is a tax on the producer of unhealthy foods, for instance fast food or fatty food producers, and in particular a fat tax is an indirect tax that aims to reduce the supply of unhealthy food. A fat tax is considered by and levied by the government. This Economics paper argues that a tax on unhealthy food will raise equilibrium prices and lower the equilibrium quantity transacted, and hence will save lives by both saving private individual lives and also by addressing the societal market failure of negative externalities; yet on the other hand, there are certain other economic and non-economic perspectives that governments should also consider before implementing such a tax.

Arguments for a Tax on Unhealthy Foods: Personal Cost of Obesity – A Fat Tax Saves Lives

First and foremost, eating unhealthy foods increases the likelihood of obesity, early death, depression and a whole range of health problems. A fat tax will raise the price of such foods. Higher prices caused by such a tax would discourage people from consuming unhealthy foods. It may not stop people eating fatty foods completely, but this is not the primary aim. Reducing consumption of fatty and salty foods would have a significant benefit in improving health and personal wellbeing. Currently, many people from all around the world die from heart attacks and strokes each year. As well as saving lives, reducing obesity will also improve consumers’ quality of life. According to the diagram below, a tax will shift the supply curve to the left, and thus raise the price of the good and lower the quantity transacted. This translates into less unhealthy foods consumed.

Arguments for a Tax on Unhealthy Foods: Externalities of Unhealthy Foods

Unhealthy eating has an impact, not just on consumers, but also on the rest of society. An externality is a third party spill-over effect, and can be classified as negative or positive. Fatty foods, by harming consumers, have massive external costs to society and as such produce negative externalities. For instance, there are medical costs for treating obesity, and worse still these explicit costs also come with opportunity cost, the cost of the next best alternative forgone, which means that other patients could potentially receive less attention and other more pressing diseases receive less funding. Also, there would be lost productivity at work not just due to obesity but also to illness, premature death, and a whole host of health-related problems that affect society negatively and have to be paid for. Therefore, the government should collect sufficient taxes from the producers of unhealthy foods to pay for the external costs that they create. It is the same principle as to why cigarettes are taxed, because cigarettes cause pollution, and harm or kill consumers and third parties alike.

While it can be argued that the external cost of unhealthy foods is not easy to calculate, due to imperfect information, this is not a reason to avoid having a fat tax. The idea is that at the moment society is effectively subsidising the consumption of unhealthy foods, and ultimately it is the taxpayer who has to pay for this in terms of healthcare, workplace, and productivity costs to society.

Arguments against a Fat Tax: A Tax on the Poor

On the other hand, a fax tax could be seen as politically unacceptable, because it could be perceived as just another scheme to raise government revenue. Thus, a tax on unhealthy foods should be revenue neutral and not about raising total tax revenue, but about switching the tax burden. The revenue raised from the fat tax could be used to subsidise healthy foods, pay for healthcare services, or reduce other types of taxes.

Also, a fat tax can be seen as a tax against the poor, who tend to eat fast food or are unable to afford more expensive healthier food. The argument is that those on low incomes are more likely to consume unhealthy foods and therefore this tax will increase inequality as it targets the poor. However, it can be argued that if a tax on fatty foods saves lives, we should not avoid implementing it because, in fact, it is the poor who will mostly benefit because their lives will be saved. If the government is concerned about the impact of a fat tax on equality, the revenue can be targeted to the poor by redistribution, for example by transfer payments. Thus, an increase in inequality need not occur from a fat tax.

Arguments against a Fat Tax: Paternalism

Some people argue that a fat tax smacks of paternalism (what is sometimes known as the “nanny state”). Who is the government to tell people what to eat? It would seem that on the surface the government is telling people what to do. However, the whole point is that consumers are still free to consume as much salty and fatty foods as they like. It is just that now consumers have to pay a fairer reflection of the true cost to society, which means that they have to internalise the negative externality, the negative harm to society which results from their health problems caused by such foods. Thus, society has a right to make consumers pay for the economic cost of unhealthy food. Also due to imperfect information, consumers may not know the full damage done by unhealthy food. Hence, paternalism might actually be good for them. As an additional benefit, consumers will probably live longer, and healthier, and also feel happier.

Arguments against a Fat Tax: Inelastic Demand

Some detractors could argue that the demand for fatty foods could be inelastic, and as such a tax would not reduce the quantity demanded by a lot. This is because, ceteris paribus, a relatively inelastic demand curve means that a huge increase in price would lead to a small fall in quantity demanded. However, while demand may be inelastic for fatty foods, they will still reduce consumption by a certain amount, and this is the intended effect. For example, a huge tax on a fast food meal may reduce consumption by say 30%. Instead of eating ten burgers a week, some consumers may only consume seven burgers a week after the tax is imposed. This reduction of 30% will have a big impact on improving the consumers’ health. The aim is not to stop consumers eating unhealthy foods, but reduce excessive consumption, because in moderation fatty and salty foods do not cause a fundamental health problem.

Conclusion

In conclusion, a fat tax should be imposed to save individual lives, and, above all, to reduce the massive negative externalities of illness and lowered productivity imposed upon society. The fat tax will force consumers to internalise the negative externalities whilst allowing them to enjoy, in moderation, fast food, and therefore in the final analysis unhealthy foods should indeed be taxed. 

JC Economics Essays: Tutor's Comments - This Economics paper is about an interesting and current topic that many countries worldwide have discussed: should they implement a fat tax, or a tax on unhealthy foods? How should this fat tax be implemented? This essay makes interesting and easy reading, and covers a lot about inequality and other related issues, that you should definitely study and write about during an Economics examination on this topic of the fat tax. However, my usual tutor's comment applies: other than a diagram or two, how would you make this paper better? What would you write differently here? What other Economics materials and points could you add in to make this Economics paper better? Remember to give it a good, critical viewpoint as well. As an Economics tutor, one major improvement would be that the conclusion could be a little bit more evaluative and considered - which means that the student should have an opinion (or two) and a justification that weighs up arguments, and is nuanced, balanced, and perhaps even "personalised". Thanks for reading, and do give this serious thought!

Discuss the advantages and disadvantages of Electronic Road Pricing in the United Kingdom. [25]

Discuss the advantages and disadvantages of Electronic Road Pricing in the United Kingdom. [25]

Tutor's Note: My site will start having more and more Economics materials and interesting Economics topics from around the world, rather than just purely having material from Singapore or from pure Economic theory only. See here, as an illustration, for an example of an Economics essay on China's economy on JC Economics Essays. 

Introduction

This paper discusses the economic advantages and disadvantages of Electronic Road Pricing (ERP) in the United Kingdom (the UK). First, a few definitions are in order: what is ERP? ERP is the idea of congestion charges, where a charge is imposed on cars that drive within a restricted zone during certain times of the day. This paper discusses the economic advantages and disadvantages of ERP in the United Kingdom’s context.

Advantages of Electronic Road Pricing in the UK

First, ERP raises revenue for the UK government effectively, because the demand for road trips is relatively inelastic, especially during peak hours during the day. According to economic theory, relatively inelastic demand suggests that when prices are raised, revenue will increase, ceteris paribus. If the UK government gets more tax revenue, other taxes can be decreased, the government can spend more on public transport, or the budget deficit in the UK can be reduced. Hence, this method of raising revenue can be considered a major advantage.

Second, ERP can increase social efficiency. In a free market, the consumption of car trips is heavily over-consumed. This is because when people are driving, they ignore the negative externalities of congestion and pollution, and only consider their own marginal private costs and benefits. Externalities are third party spill-over effects, and can be negative or positive. In the case of cars, they produce many negative externalities to other people who are not involved in the use of private cars. The marginal social cost of driving is thus much greater than the marginal private cost of driving. 

In fact, empirically, congestion costs the UK economy billions every single year in lost output and wasted time. Pollution from cars is also a significant contributor to carbon dioxide emissions in the UK. Road charging should encourage people to look for other forms of transport which do not pollute as much. Therefore it makes sense for the government to charge a much higher price of driving in congested areas because this will make drivers internalise the externality.

Disadvantages of Electronic Road Pricing in the UK

On the other hand, there are of course certain disadvantages of ERP in the UK. First, it seems to be an intrusion on liberty. To drive one will need countless documents or be monitored by technology. The driver’s movements on the roads and whereabouts might be tracked, which could affect his freedom.

However, this point does not seem rather strong because most times when consumers use electricity or Internet access, their movements and usage are tracked as well, and hence this cannot be considered an infringement of liberty.

Secondly, the government seems to be just using ERP to raise money, which may not be politically acceptable. There could be the perception that this idea does not tackle negative externalities, but is instead a new method of raising revenue from the people.

However, that is indeed one of the reasons for the existence of income tax, Value Added Tax, and every other type of tax. Raising money from a new tax enables other taxes to be lowered or spending to be increased, and therefore this need not necessarily be negative.

Thirdly, ERP increases inequality in the UK. This is true to an extent. This is because a road pricing charge is a higher percentage of a tax for those with low incomes, relative to those with higher incomes, and as such impacts the poor more than the rich who can easily afford to drive, even with congestion charges.

However, buying a car and paying for petrol also affects inequality in the UK. If concern about the equality of income distribution is an issue, the government can alter other taxes and benefits, by taxing differently and redistributing the proceeds. A tax which increases efficiency – in this case solving the market failure of negative externalities – need not be stopped on equity grounds. It is always possible to compensate the effects to others by different redistributions of income, which is outside this paper’s arguments.

Conclusions

In conclusion, ERP clearly has both advantages and disadvantages for the UK government. First, ERP raises revenue for the UK government effectively, because the demand for road trips is relatively inelastic, especially during peak hours during the day. Second, ERP can increase social efficiency and force drivers to internalise their externalities, thus solving a market failure. On the other hand, there are of course certain disadvantages of ERP in the UK. First, it seems to be an intrusion on liberty. Secondly, there could be the perception that this idea does not tackle negative externalities, but is instead a new method of raising revenue from the people. Thirdly, ERP increases inequality in the UK by impacting the poor more than the rich.

In the final analysis, however, given that the core economic issue here seems to be the market failure of negative externalities affecting the socially efficient level of output, then ERP is indeed a good method of solving a particular market failure in the UK, and all other considerations seem to be secondary rather than primary to the core issue. 

JC Economics Essays: Tutor's Commentary - As promised, this site offers more than just topics of interest to Singapore, but also other countries and international events, situations, and much more material. Hopefully this will help you in your Economics revision, and at any rate you can get to learn more about other countries and their economies, or their economic situation, and see how general Economics concepts can be applied to different countries' contexts, and the international context as well. Observe that from a student's viewpoint (as well as an Economics tutor's viewpoint), solving congestion utilises general economic principles that apply not just to Singapore, but to other countries' contexts as well. In other words, always think of how you can APPLY Economics to DIFFERENT contexts, topics, and subjects. As usual, the usual tutor's comments apply: think of what the relevant diagrams should be; how would you improve on this answer, and how can you approach this Economics question other than using this approach? Thanks for reading, and cheers! (Acknowledgement: This Economics essay was written by a student who worked with me.) 

(b) How far would the knowledge of demand elasticities be useful to a govt in devising policies that discourage the use of private cars? [15]

(b) How far would the knowledge of demand elasticities (PED, YED, XED) be useful to a government in devising policies that discourage the use of private cars? [15]

To discourage the use of private cars, there are a few policies that the government can implement. The government can implement policies to curb car ownership, curb car usage, or encourage the use of public transport. This paper argues that the knowledge of demand elasticities is useful to help governments in terms of car ownership, car usage, and public transport strategies, and to a large extent this knowledge is quite useful for helping the government make good decisions to tackle road congestion.

Firstly, car ownership can be reduced through a variety of measures. Car ownership can be discouraged by taxing the purchases of new cars, thus making them more expensive, thereby reducing the quantity demanded. Taxes shift the supply curve of cars to the left, thus reducing the equilibrium quantity demanded. Alternatively, an equivalent policy is to set a quota below the free market equilibrium quantity. A quota is a mandatory number of cars that limits the car population. By controlling car ownership, the population growth of cars is curbed and with a smaller car population, there will indirectly be fewer cars on the road.

Alternatively, car usage can be controlled directly using road pricing whereby motorists are charged for using congested roads. For example, in Singapore we have ERP. Electronic Road Pricing is a road toll system that reduces the usage of cars. This reduces the number of cars on that road, hence lowering the extent of traffic congestion.

Finally, lowering the fares or improving the quality and accessibility of public transport, for instance, lowering the fares of SMRT trains or raising the quality of SBS buses, encourages people to switch away from driving private cars to using public transport, hence reducing the usage of cars and traffic congestion in the process.

The knowledge of PED, YED, and XED are quite useful in helping governments devise policies to discourage the use of private cars. PED can be applied here. If demand is price elastic, a low tax rate is able to significantly reduce the quantity demanded. Hence an indirect tax is a suitable policy to curb car usage or ownership. However, if the demand is price inelastic, a very high tax rate is required to significantly reduce the quantity demanded. Hence indirect taxes are likely to be politically unpopular because the imposition of a very high tax rate can result in the government being perceived as being more interested in raising revenue rather than in curbing car usage. Hence a quota is probably politically more acceptable because the government is perceived to be controlling the quantity directly rather than trying to raise revenue. However if the government were to auction off the quota permits, they might again be accused of trying to raise revenue rather than fight traffic congestion.

YED can also be applied here. Knowing the income elasticity of demand enables the government to estimate the extent of the change in demand in response to a change in income. So as income rises with economic growth, the government is then be able to better determine how much car taxes should be raised so as to prevent car population and usage from rising. If the demand for cars is income elastic (i.e. normal luxury), car ownership and usage taxes have to be raised frequently and/or substantially as the country experiences economic growth. Again, the government might be seen as being more interested in raising revenue than in curbing traffic congestion so indirect taxes are likely to be politically unpopular while a quota is likely to be politically more acceptable.

Cross elasticity of demand (XED) measures responsiveness of the demand for a good to a change in the price of another good. It is calculated by taking the percentage change in the demand for the good over the percentage change in the price of the other good. XED can be applied here as well. Since public transport are substitutes to private cars, knowing the cross elasticity of demand for cars with respect to the price of a public transport enables the government to know whether cutting public transport fares is an effective way of curbing car usage. Alternatively, by improving the quality and accessibility of public transport, this makes it a closer substitute to private cars, hence raising the cross elasticity of demand between the two goods. Hence, for a given reduction in the price of public transport, there is a greater impact in curbing the demand for car usage.

In conclusion, knowing the various demand elasticities is to a certain extent quite useful in helping a government decide on which policy to choose. However, it is probably less useful in helping the government decide how much to tax or what fares to charge for public transport. This is because elasticity figures are estimated based on pass data, so they are not fully applicable to the current context as economic conditions tend to change over time. Hence, all elasticity figures should be considered carefully.

JC Economics Essays - Tutor's Commentary: This essay paper was written under exam conditions, and is still well structured, much like the companion complementary part (a). However, as usual, the usual questions apply: how can I make this essay better? How can I use an economics diagram to make this paper better? It has a good structure and is well crafted, yes. May I use this approach in my other Economics essays, or is this only applicable to this type of questions or only to elasticities? A quick word of advice here: please do not swot/ mug/ memorise Economics essays - try to understand the underlying structure, pattern, and system of writing, and always think to yourself - how can I make this essay better and more structured? Why do I prioritise the points this way? Why do I write like this? And how can I be better than I am already? Think hard and you will succeed.