Supply side policy

(Please include this under Pg 15 of your “Compact Revision Notes 2006” I gave out via email)

Recall: Supply side policies are long term measures intended to increase the productive capacity of the economy. This can be done through rapid technological advances, accumulation of capital stock, and continuous rise in labour productivity, which will shift the AS curve to the right.

Other than measures targeted at increasing labour productivity (i.e. through promoting quality education; and constant training & upgrading of the workforce), supply side policies would also include those targeted at increasing investment (including inflow of foreign direct investment), encouraging entrepreneurship; and encouraging technological advancement (i.e. R&D). Govt spending on infrastructure for the economy (e.g. highways, transport and communication networks) is also part of supply side policies.

The chief characteristics of supply-side economics (in Singapore) are:

• Cuts in tax rates: This is done with the intention of encouraging work effort (i.e. people to work harder, for longer hours) and to increase savings, as well as to encouraging firms to invest. In Singapore, corporate tax was reduced from as high as 40% many years ago to the recent 20%.

• Use of tax and financial incentives: Used for a variety of reasons, e.g. tax holidays (of up to 10 years) for high-tech firms or headquarters operations to be set up in Singapore, loans for capital investment, financial grants for innovation and R&D, as well as grants for workers’ training & upgrading.

• Work Incentives: Various types of incentives, bonus or profit-sharing schemes are used to encourage labour to work harder and become more skilled, e.g. the NWC encourages firms to tie annual wage increases for workers to increases in their productivity.

• Encouraging the entrepreneurship spirit by relaxing the bankruptcy act, and by promoting enterprise in schools and tertiary institutes.

• Building and maintaining world-class economic infrastructure and services. This is evidenced by the fact that development expenditure accounted for around one-third of government expenditure on average over the last three decades

• To reduce the role of the government so that the private sector will play a greater role: This is done by deregulation.

In Singapore, government expenditure is directed primarily at promoting long-term economic growth (supply side policies), rather than cyclical adjustment (fiscal policies) or distributing income (e.g. unemployment benefits).

However, as with limitations of policies to encourage workers to upgrade and retrain, the above policies may also have their limitations. These include:

• “Tax incentive war” between countries as they compete fiercely for foreign investment. For example, besides Singapore, Malaysia, Hong Kong, Thailand, Australia, China and even Vietnam are offering similar tax incentives to attract foreign investment. Hence, a low tax rate as well as a range of tax and financial incentives alone is not sufficient to encourage FDI. Other factors such as political stability and having a conducive business environment are just as critical, if not more so.

• Encouraging entrepreneurship to raise the AS is a slow long-drawn process. Due to the high comfort zone that Singaporeans have enjoyed as a result of continuous increases in living standards over the past 30 to 40 years, individuals may be reluctant to take the risks of being entrepreneurs, especially if they can find work easily in multinational corporations (MNCs) or as civil servants. A mindset change in society is hence needed to bring about the risk-taking spirit among the population.