In spite of the S$20.5bn stimulus package,the unemployment rate could increase to 5.6 per cent by 2010. About 200,000 foreigners workers are expected to return home.
Singapore needs to implement a comprehensive safety net that supports workers including unemployment insurance, government-funded health insurance, and public assistance. An effective safety net would ease the pain and, by so doing, speed up the adjustment.
Singapore unveiled a S$20.5bn stimulus package yesterday as the wealthy city-state confronts its worst post-war recession, with the economy expected to shrink up to 5 per cent this year.
"The resilience package will not get us out of recession. But it will help avert an even sharper downturn and more lasting damage to the economy," said Tharman Shanmugaratnam, the finance minister.
The programme's main aim is to save jobs and prevent the current unemployment rate of 2.2 per cent doubling, according to economists. A sharp increase in the jobless rate could provoke a political backlash against the People's Action party government, which celebrates its 50th anniversary in power this year.
The aggressive S$20.5bn ($13.7bn, €10.6bn, £9.7bn) spending plan is rare for Singapore, which normally has a strict policy in limiting budget deficits. This year's budget deficit of S$8.7bn is expected to amount to 6 per cent of gross domestic product and will be financed for the first time by tapping into the government's reserves, which are estimated at about $300bn.
Corporate income tax will be cut one percentage point to 17 per cent to encourage recruitment. Companies will also receive financial support to keep workers. Infrastructure building will be accelerated to provide new jobs and tax rebates and other subsidies given to households.
The finance minister warned that the recession, which began in mid-2008, could last into 2010 and said "recovery, when it comes, will be weak".
Chua Hak Bin, research head at Citigroup in Singapore, said the measures would be of little help to the economy. "Unfortunately, Singapore is the most open economy in Asia. Its fortunes are tied to global growth and trade. So the budget is not going to make that much of a difference."
The city-state cannot depend on domestic consumption to offset a sharp decline in exports, the main economic engine, because of the open nature of the economy and Singapore's relatively small population of 4.8m people. Consumer spending is also curbed by a government requiring forced savings into state-run pension funds.
Credit Suisse believes that the biggest impact of the economic downturn will be on foreign workers, who will be forced to leave Singapore as their employment permits expire. It estimates that 200,000 foreigners could depart, which "would have far-reaching implications for the economy" by depressing private consumption and property prices. The bank said the unemployment rate could climb to 5.6 per cent by 2010, the highest in more than 20 years, in spite of the budget measures.
Sources and Relevant Links:
Financial Times Singapore reveals S$20.5bn economic stimulus package 23 January 2009
Bloomberg Singapore May See 200,000 Foreigners Leave, Credit Suisse Says 20 January 2009
Think Centre Think Centre 2007 New Year Message 3 January 2007
Think Centre New Challenges: A dark cloud is looming in our horizon! 09 August 2008