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No suggestion that pay hikes will harm economy

28 Jul 2008

MS HONG Wai Leng ('Small pay rises won't stoke inflation', July 16) had the misimpression that Finance Minister Tharman Shanmugaratnam said any wage increase could contribute to inflation in Singapore, in his speech to the Singapore Industrial and Service Employees Union Delegates Conference Dinner on July 9.

Mr Tharman had not suggested that wage increases in general would contribute to inflation or would harm the economy. A sustained increase in wages is, in fact, the objective of economic growth.

What he cautioned against was wages rising faster than productivity in order to keep pace with local inflation. If wages grow faster than the underlying trends in productivity, employers would have to pass on the higher costs to consumers. This would lead to a second round of inflation, beyond the first round we have seen because of higher import prices of oil and food. It would also reduce the competitiveness of our exports and employers' ability to create jobs. In both cases, workers will ultimately be worse off.

However, Mr Tharman highlighted another important reason why wage increases do not have to fully compensate for inflation this year. The Government is providing substantial assistance directly to citizens that will offset the increase in cost of living for most Singaporeans caused by this year's higher inflation. On top of this, the National Wages Council has asked employers to provide one-off lump-sum payments to help workers through these difficult times.

The benefits most low-income households receive from the Government this year, in the form of GST Credits, Growth Dividends and rebates on utility and service & conservancy charge bills, will exceed by many times the increase in household costs caused by inflation. Many will also receive the Workfare Income Supplement and other benefits in their CPF accounts.

For example, a low-income household comprising a middle-aged worker and two elderly parents will receive a total of $5,000 this year, well above the increase in cost of living. A typical middle-income household living in a four- or five-room HDB flat will also receive benefits that at least match extra expenditure due to higher inflation.