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Suggested answer for case study
a]
What evidence is there that Singapore is in recession?
[2]
A recession may be defined as 2 consecutive quarters of negative GDP growth.
Chart 1 RHS shows Singapore with negative GDP growth from Q4, 2008,
which is estimated to continue in 2009.
1 mark for the definition, 1 mark for appropriate evidence
b]
i. Explain with an example what is meant by Automatic Stabilisers.
[2]
Automatic Stabilisers have the effect of moderating fluctuations in National
Income without specific or discretionary fiscal policy measures. Singapore’s
mildly progressive income tax acts as an Automatic Stabiliser.
1 mark for the definition, 1 mark for appropriate example
ii.
With the aid of an example, show how the limitations of
Fiscal Policy may reduce its effectiveness in Singapore.
[4]
Fiscal policy refers to the use of government expenditure and taxation to
achieve macroeconomic goals. In times of recession the operation of a budget
deficit (expansionary fiscal policy) in the form of Resilience Package totalling
$20.5 billion will, cet par, lead to a multiplied increase in National Income via
the multiplier process. In Singapore, however, the relatively high marginal
propensity to import and high marginal propensity to save due to high volume
of imports of raw materials and final goods and services and the high saving
rate, CPF respectively, is likely to significantly reduce the increase in real
national income as the value of multiplier is small.
1 mark for the definition of Fiscal Policy,
1 mark for appropriate example of discretionary fiscal policy in
Singapore.
2 marks for identification of limitation of fiscal policy & elaboration
c]
With reference to Chart 1, comment upon the relationship
between the Overall Budget Balance and GDP growth.
[4]
Chart 1 clearly illustrates the counter-cyclical nature of budgetary policy in
Singapore over the period shown. In the years of negative and falling GDP
growth for instance in 2001, 2003, 2008, 2009, budget deficits (expansionary
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fiscal policy) was implemented. In years where there was positive and rising
GDP growth for instance in 1999, 2000, 2005, 2007, budget surplus was
adopted. These seems to mark a direct relationship between overall budget
balance and GDP growth. However, there are some years which show
anomalies for instance in 1998 and 2004.
1 mark for identifying the nature of the outcomes of the budget
balance and changes in GDP.
1 mark for identifying the counter-cyclical nature of budgetary
policy in Singapore.
2 marks for supporting evidence from the data & elaboration
d]
i.
Mr Tharman argued that the Budget adopts “mainly a supply-side
approach”
Discuss what evidence there is to support this claim.
[4]
S-side policy refers to measures intended to boost Aggregate Supply rather than
Aggregate Demand.
Evidence of this can be seen in the components of the Resilience Package eg
enhancing business cash-flow and competitiveness via stimulating bank lending
and announcing corporate tax cuts from 2010 and $4.4b infrastructure
expenditure. Such measures have the effect of increasing the economy
productive capacity and hence increasing AS in the long run. However, there
are also D-side measures eg the budget deficit (also an expansionary fiscal
policy with measures like $2.6 billion to support households etc) which will
stimulate the increase in AD and rise in national income via the multiplier effect.
Thus it cannot be said to be an entirely S-side budget.
2 marks for identifying the nature of S-side policy & supporting
evidence from the data
2 marks for D-side measures and elaboration
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ii.
With the aid of appropriate diagrams, show how this approach is
intended to work and consider what else Mr Tharman might
have done.
[6]
Draw AD-AS Diagram (with AS curve shifting to the right) to show the
intended impact of Resilience Package measures noted in above (qn di).
Explain how the measures will boost AS and thus increase NY without the
threat of inflation thus generating economic growth and reducing umeployment.
Evaluate also the effectiveness of such supply-side measures.
Other measures open to the Finance Minister include a more substantial fiscal
boost to AD eg through a larger budget deficit (given that Sg k value is small, a
larger budget deficit would probably help). Suggest also what other possible
fiscal measures government can include.
Draw AD-AD diagram to show how a larger budget deficit could increase AD
further to the right and hence stimulate a more than proportionate increase in
real NY. Evaluate the fiscal measures you have proposed (do not mention small
k value again as it has been mentioned prior, write abt other limitations)
It is also possible to advocate monetary policies such as easing credit controls,
for eg removing restrictions on deferred mortgages or by depreciating the S$.
Explain how such expansionary MP may lift the Sg out of recession by
stimulating real NY and employment. Brief evaluation of MP.
1-2 marks for explanation of S-Side measures.
1-2 marks for explanation of other measures
1-2 marks for diagram[s]