Cognitive Dissonance: Singapore Fiscal Policy

I kept getting this promoted tweet on my Twitter feed over the last couple of days, from the Lee Kuan Yew School:

2 principles shape SG's fiscal policy: balancing the budget and keeping government small. #SG52 #SGpublicpolicy https://t.co/VLrH1Sg2Ud pic.twitter.com/mJzJRc0Uny

— Lee Kuan Yew School (@LKYSch) August 8, 2017

I usually don’t bother with promoted tweets, but curiosity eventually won over and I read the article. It’s a fair description of Singapore’s fiscal policy framework, although the part on the management of past reserves could have been expanded for clarity (there’s no mention of GIC or Temasek in there for example, or the endowment funds the government set up).

There is however, one part I’m in violent disagreement with (excerpt; emphasis added):

First, the Singapore economy is extremely open and heavily reliant on imports. This limits the scope for counter-cyclical fiscal policy, as a large part of any fiscal stimulus would be “leaked out” through increased imports. Singapore’s public spending—at less than a fifth of Gross Domestic Product (GDP)—is also very low by the standards of most developed economies. This suggests that pump-priming measures aimed at increasing aggregate demand when growth is below potential are likely to be of limited effectiveness.

Rather than employing Keynesian measures of lower taxes or higher public spending to deal with negative shocks, the government has tended to rely more on direct cost-cutting measures, especially in the form of lowering employers’ contribution rates to the Central Provident Fund (CPF), Singapore’s fully-funded social security system.

Since by the author’s admission Singapore’s private consumption is highly dependent on imports of goods, whether fiscal stimulus is applied through direct government spending or tax cuts or via reduced pension contributions should be irrelevant. All of it will “leak”.

If the concern is to avoid “leakage”, then the internally consistent answer is not to support the economy at all and totally ignore negative shocks. Since almost all the additional spending will be on imports which are supposedly “leaks”, why bother? Why allow people to reduce the rate of pension savings, if those resources just “leak” from the domestic economy?

Just as important, the whole notion that imports are “leaks” from the economy is at best misplaced. Imports enter the national accounts identity as a negative only to avoid double counting, as the consumption figures will include both domestic and imported goods and services. It wouldn’t appear in the national accounts at all otherwise, since it represents foreign value-added. The important number to focus on (and what matters for demand management) is consumption and national income as a whole, not the ratio between domestic and imported goods.

Put it like this: it’s like refusing to help a family feed itself because they might spend the money on food from a store (a trade deficit from the household perspective), instead of growing the food themselves. Plenty of people both in Singapore and here in Malaysia like to think of government budgets in household terms, wrong as that may be. However, it might profit them to think of trade and the relationship between government and its citizens in those terms as well.

What the article is really saying (especially if you read the rest of it), is that Singapore’s fiscal philosophy puts primacy of the government budget balance over that of households, and that companies (the supply side) are also more important than households. The welfare of households is achieved through indirect rather than direct means. But sometimes, that’s not the optimal policy choice.