The recent financial crisis saw Singapore’s exports plunge as the global recession has affected almost all major economies in the world, including the USA.

Discuss the effectiveness of fiscal policy in sustaining economic growth and stability in Singapore. [15]

Question Analysis
Sources of Information
1) Mechanism of fiscal policy
2) Evaluation of fiscal policy in the context of Singapore
3) Concept of Sustainable Economic Growth

Skill Application/Structure
1) Explanation of the mechanism of fiscal policy
2) Use of AS-AD diagram to show how sustainable economic growth is achieved through fiscal policy
3) Evaluation of the fiscal policy in achieving the aim of economic growth and stability (sustained economic growth)

Introduction

Economic growth and stability of the economy refers to the actual and potential growth of the economy while the economy maintains price stability. In achieving this, the economy will raise the real GDP and the production capacity without any change in price level. To do so, it is natural for Singapore to conduct expansionary fiscal to raise production and expand availability of resources. However, the fiscal policy have limitations under certain conditions.

Main Body

1) Explain the mechanism of the demand and supply-side policies

In seeking to raise real GDP, it is essential for the government to raise aggregate demand through the use of expansionary fiscal policy to expand resource capacity and raise the efficiency of production to keep cost of production low to allow sustained economic growth.

i. Expansionary fiscal policy

Increase in government expenditure → increase aggregate expenditure directly through infrastructural development and provision of public services.

Tax reduction → increase disposable income → raise consumption and increase return on investment, (lower tax on corporate earnings) contributing the rise in investment expenditure → rise in aggregate expenditure/national income (multiplier effect).

These will close up the deflationary gap and thus curb recession.

ii. Supply-side policy

Through the implementation of the expansionary fiscal policy, the government can expand the availability of resources (supply of resources) and increase the utilization of resources (productivity of wage), thereby increasing the supply of the goods and services to raise actual and potential growth without incurring rising cost condition. It involves the implementation of policies to increase the rate of utilization of resources so as to raise actual production capacity and the expansion of the availability of resources to raise potential production capacity.

These supplies can be seen in terms of manpower development, infrastructural development, technological advancement and capital accumulation. Through manpower development, the government will raise the skill development of the workers to meet the needs of the industries so that there will be no rising cost condition. With infrastructural development and technological development, the efficiency of the industries can be raised to develop the productivity of the industries and the availability of resources can also be expanded to ensure lower cost condition. Lastly, these policies can be only made possible with source of funding to finance these developments.

2) Draw diagram and describe how sustainable economic growth is attained through the increase in AD and outward shift of LRAS

To achieve sustained economic growth, there is a need or government to raise both potential and production capacity. This can be achieved with the use of demand management policies, trade development policies and supply-side management policies to raise both AD and AS respectively.

As seen from the diagram, the increase in aggregate demand from AD0 to AD1 will raise Real GDP from Y0 to Y1 but price level will increase from P0 to P1. With corresponding supply will expand from AS0 to AS1, and thus, lowering cost condition to decrease price which will induce increase in AD on a quantity basis. Consequently, the real GDP will increase from Y1 to Y2 while price falls from P1 to P2 without incurring inflationary effect where sustainable economic growth is attained.

3. Evaluation of these policies in attaining the aims of sustainable economic growth

i. In Singapore, the fiscal policy faces the problems of small multiplier which will limit the capacity on the extent of effort of the increase in AD on the rise in Real GDP

ii. The fiscal policy is also unable to induce excessive rise in AD to compensate the loss of AD due to fall in export demand and FDI when there is global economic downturn, given that external demand is 2.5 times of FDI and FDI is a large portion of GDP.

There is also the concern of the usefulness of fiscal policy in expanding infrastructural development when Singapore is considered to have attained saturation in this aspect and thus, there is a limitation in the degree of infrastructural development the country can embark on.

Lastly, for supply-side implication, its focus on trying to expand availability of resource and on keeping cost of production low is undermined by the inherent restriction of the Singapore economy. The lack of natural endowment will mean that the capacity of resources in Singapore cannot be easily expanded although we can enhance the rate of utilization of these resources to increase the efficiency of utilization of resources. This will help keep cost of production low for Singapore as we are a price-taker in the resource market, implying that the rise in price of oil will have great impact on the cost of production in Singapore, undermining the supply-side policy to lower cost condition. Furthermore, supply-side policies like manpower development are often hampered by the time lag due to its long duration required for implementation and complexity in implementation.

Given these limitations of the demand management policies and supply-side policies, it is not surprising that Singapore policies focus on exchange-rate management policies to achieve an economic growth and stability as this policy can help to raise aggregate demand and expand the availability of resources since exchange rate management can affect the price of exports and imports to enhance price and cost competitiveness of Singapore in raising export demand and expanding supply of resources through import.

Conclusion
In sum, the demand and supply-side policies adopted by the government have shown that they are effective in achieving the aims of the economic growth and stability. However, to overcome the hindrances and limitations of the Singapore’s economy in achieving these aims, there is a need to use other policies like exchange rate management policies.

Economics Tuition: Discuss the effectiveness of fiscal policy in sustaining economic growth and stability in Singapore. [15]