Joint Ministerial Statement by Minister for Finance Lawrence Wong on Inflation and Business Costs on 4 April 2022, 3pm in Parliament

Mr Speaker Sir

1. The Minister for Trade and Industry last updated the House on the economic impact of the conflict in Ukraine during the Budget debate at the end of February. Today, I will give an update on the macroeconomic situation, and explain the Government’s approach on inflation, fuel duties, and support for households. The Second Minister for Trade and Industry will then speak on energy costs, supply chains, and support for businesses, as well as the Committee Against Profiteering. Together, our Ministerial Statements will answer Oral Question Nos. 1 to 15 and Written Question Nos. 14 to 16 and 29 to 30 in today’s Order Paper.

2. Several members, namely, Mr Christopher de Souza, Dr Wan Rizal, Mr Liang Eng Hwa, Mr Gerald Giam, Mr Darryl David, and Mr Alex Yam, have filed Oral and Written Questions scheduled for future Sittings on these issues. As today’s Ministerial Statements will address these questions, I would like to invite these Members to seek clarifications on these issues after the Ministerial Statements, if need be. If their questions are sufficiently addressed, it may not be necessary for them to proceed with the questions for future Sittings.

Global Inflation and Macroeconomic Outlook

3. The increase in prices we have been experiencing over the last few months is not unique to Singapore. It is happening worldwide. In fact, global prices were already rising last year. There are a few reasons for this:

a. Major economies like the US and the Eurozone have pursued expansionary macro-economic policies. This was to stimulate their economies since the pandemic hit. This contributed to a surge in demand, including for energy, especially after these economies began to ease up on their COVID-19 restrictions.

b. But supply was unable to catch up with demand. In particular, there were more unexpected gas production outages during this period. The supply constraints were exacerbated by the under-investment in fossil fuel production over the past few years, due in part to the global push for greener sources of power. But these renewable sources of power have not been able to scale up quickly enough.  

c. There have also been continued supply chain pressures due to COVID-19, such as port congestion and freight capacity constraints. These pressures have impacted all industries, some more than others. Furthermore, several major advanced economies face labour tightness, which have driven up labour costs, and these have in turn passed through to inflation.

4. All of these factors led to a rise in inflation in the major economies last year. At the start of 2022, there were some initial hopes that global inflationary pressures would ease over the course of the year as the supply situation improved. But with the war in Ukraine, it is now likely that global inflation will be higher for longer. There are several reasons for this:

a. One, global energy supplies will remain tight, given that Russia is one of the world’s largest oil and gas exporters. For now, Russian gas is still flowing into Europe.  But this may not continue for long. Countries like Germany and Austria, which are highly reliant on Russian gas, are already putting in place their first phase of rationing of gas, in anticipation of a disruption of supplies from Russia.  The US is releasing a record amount of oil from its emergency reserves, and exporting LNG to Europe. But this may not be sufficient to make up for the potential supply loss from Russia.  Furthermore, it will take time for any new infrastructure to be built and additional oil and gas production to be brought to market. We must therefore expect oil and gas prices to remain high for some time.

b. The tightness in the energy market will also have downstream impact on other related sectors. For example, many refineries in Germany rely exclusively on piped gas from Russia for their operations.  If the Russian gas supply is disrupted, these refineries will have to shut down their operations, and there will be adverse impact on the downstream production of chemicals products, from plastics and fertilisers to fibres and solvents.

c. Several members asked about food prices. The war has impacted global food supplies, resulting in higher food prices. Russia and Ukraine are major exporters of agricultural products like wheat, corn, and barley, as well as fertilisers.  In fact, Ukraine is sometimes called the “bread basket of Europe”. With the war, food exports from these countries will be significantly impacted. Fertiliser shortages will also reduce crop yields elsewhere, resulting in a smaller harvest in the coming year. As a result, prices of a range of agricultural commodities, not just wheat and corn, are now at cyclical highs, pointing to potentially tight stocks this year.

d. Besides the two key areas of energy and food, production is affected in other areas too.  For example, Russia is a significant exporter of important industrial metals like palladium, used in catalytic converters for cars, and nickel, used in steel and batteries.  About half of the world’s neon, which is used in the chip production process, is produced in Ukraine.

5. In short, the war has contributed to a further spike in inflation experienced around the world. Inflation in Germany and America has already risen to nearly 8%, the highest in 40 years. No one can tell how the war in Ukraine will unfold. We all hope that attempts to de-escalate are successful, and a diplomatic solution can be found at the negotiating table. But we must be prepared for a prolonged conflict, or even further escalation, which will cause further supply disruptions and additional inflationary pressures.

6. Besides the war, there are other factors contributing to rising prices.

a. The global economy is continuing to grapple with supply chain issues due to COVID-19. The recent lockdowns in Chinese cities like Shenzhen and Shanghai have worsened strains in shipping and supply chains. If there are continued periodic lockdowns in China or other major economies in the coming months, for example, to prevent the spread of a new and more dangerous variant, then we can expect further supply disruptions.

b. Furthermore, both the pandemic-related disruptions and the Russian invasion of Ukraine have prompted companies to take supply chain risks more seriously. There is renewed momentum to re-shore production, either back to the home countries of multinational corporations, or to more locations across different markets, so as to avoid single points of failure. In other words, the highly efficient, just-in-time global supply chain network is being reconfigured to account for once-unimaginable tail risks. This can help make supply chains more resilient, but will add to production and transport costs.

c. In the longer-term, global warming and increased adverse weather events could affect agricultural productivity and reduce food production, putting upward pressure on prices. Over time, the global economy will also have to internalise the cost of carbon in our overall consumption, as part of the green transition.

7. Amidst this backdrop, the central banks of several major economies have shifted their position to take a stronger stance against inflation. The US Federal Reserve and the Bank of England have raised interest rates to tackle inflation, with the European Central Bank expected to follow suit.

8. But central banks in these major economies also face a very difficult dilemma. If they were to raise interest rates too sharply to tackle inflation, they will slow down economic activity or even trigger a recession. On the other hand, if they do not raise interest rates sufficiently, they will find it hard to anchor longer-term inflation expectations. They will then risk prices drifting persistently higher, and becoming harder to control over time.

9. This is why some economists have drawn analogies between the current situation and what happened in the 1970s.  At that time, there was also excess demand, as the US had pursued expansionary policies to push for economic and employment growth. When the oil crisis hit in 1973, the effect was immediate and dire. Oil prices shot up, and inflation rose sharply. It took the US Federal Reserve many years to bring inflation under control, and this was eventually achieved only at great cost to the economy.  

10. History does not repeat itself, but as the saying goes, it often rhymes. No doubt the global economy today is very different from what it was in the 1970s, and central banks and market institutions have evolved greatly in sophistication since then. But the downside risks of higher inflation and slower growth for the global economy have increased significantly. If these downside risks were to materialise, they will have a major impact on Singapore as a small and open economy.  

Implications for Singapore

11. We had earlier anticipated some of these risks, and had taken prompt actions through both monetary and fiscal policies.

12. In particular, MAS had pre-emptively raised the rate of appreciation of its exchange rate policy band in October last year and also in an off-cycle move in January this year, to help dampen inflationary pressures.

13. Monetary policy will continue to do its part to ensure medium-term price stability. MAS is watching closely the impact of geopolitical and pandemic related shocks on the Singapore economy and inflation, and will be putting out its monetary policy statement as scheduled later this month.

14. Where fiscal policy is concerned, we had taken into account the risks in the global economy and rolled out an expansionary budget this year. We had also implemented very comprehensive and substantial support packages to help households and businesses cope with higher prices.

Immediate Actions

15. Several Members asked whether the Government will consider enhancing the support measures announced in the Budget. The measures in the Budget have just been announced and will be implemented soon. We will need time to allow these measures to take effect, and feed through the economy, before we monitor their impact, assess the overall situation, and then consider what additional steps we might want to take.

16. Nevertheless, I understand the concerns that many households and businesses have about the current situation, and have decided to take the following immediate actions:

17. First, where possible, I will bring forward the implementation of our Budget measures. In particular, the $100 CDC Vouchers for every Singaporean household will be disbursed by the middle of next month. This is on top of the $100 disbursed four months ago in December last year, and will help Singaporeans with their daily expenses.

18. The Budget also included rebates for Service and Conservancy Charges (S&CC) and utility bills. We will disburse the first tranche of S&CC rebates and U-Save rebates to eligible households this month. This will address a key cost of living component which several Members asked about. To illustrate, households living in 4-room HDB flats will receive $150 in U-Save rebates this month. That is equivalent to about a full month’s worth of their utility bills on average.

19. The rest of the U-Save and S&CC rebates will be disbursed in the coming quarters – in July and October this year, and in January next year. For the whole of FY2022, households living in 4-room HDB flats, to give an illustration, will receive about four months of rebates on their utility bills – and that is even accounting for the higher electricity prices – and two and a half months of rebates on their S&CC.

20. We also have other forms of help for households, including top-ups to the Child Development Account, Edusave Account, or Post-Secondary Education Account of every Singaporean child, as well as the GST Voucher in terms of cash and Medisave top-ups. We will continue to ensure that these are disbursed to Singaporeans in a timely manner. Mr Speaker, with your permission, I would like to distribute a handout, which will provide a schedule of the various support measures that households can expect in FY2022. Members may also access the handout through the SG Parl MP mobile app.

21. For businesses, I will bring forward the disbursement of the Small Business Recovery Grant. This provides up to $10,000 for SMEs most affected by COVID-19 restrictions over the past year. Most eligible businesses will be able to receive the grant by June. The recent easing up of Safe Management Measures should also provide some additional revenue support for local businesses, especially in the retail and F&B sectors.

22. Second, we will provide more help for lower-income households, who will be more impacted during this period of higher prices.

23. In particular, the Social Service Offices, or SSOs, will provide a minimum duration of six months’ support for all new ComCare Short- to Medium-Term Assistance (SMTA) clients who apply between April and September this year. Households who are already on ComCare SMTA can also have their assistance extended for at least another three months if they require further assistance. SSOs will continue to exercise flexibility to provide those in need with financial assistance and support. This includes providing ComCare recipients with more cash assistance during this period to cope with inflationary pressures.

24. The COVID-19 Recovery Grant is also in place until the end of this year, and this will help lower- to middle-income households experiencing job losses or sustained income losses.  

25. Families who need help can also approach their Community Centres or CCs, and the Self-Help Groups. As announced at Budget 2022, I will top up the CCC ComCare Fund by $5 million over five years, and provide a total of $12 million over four years to our Self-Help Groups. These schemes complement our national schemes, bringing more help closer to residents.

26. Third, we will do more to help the lower-income groups with their public transport fares. We had earlier disbursed Public Transport Vouchers or PTVs to every household that received a PTV in the last exercise, including over 30,000 ComCare beneficiaries. We will do another round of disbursements this month for these ComCare recipients. So they will receive $60 of PTVs, which will roughly cover the additional fares paid by a family of four this year arising from the fare increase last December.

27. Besides these ComCare recipients, PTVs are also available to all households whose monthly income per member does not exceed $1,600.  Applications for the PTVs are open from now to 31 October this year. Eligible households who had already received the first voucher, and who need a second voucher can also apply again.  

28. Lower-income persons with disabilities who require point-to-point services to commute can also apply for the Taxi Subsidy Scheme, which covers up to 80% of the taxi fares that they pay going to school, work or training. This cushions them from the impact of recent fare surcharges introduced by taxi and ride-hailing app operators.

29. Next let me respond to the queries raised by several members on fuel duties and road tax rebates. We collect fuel duties and road taxes for revenue, and also to price the negative externalities of vehicle transport, such as the impact on public health and environment.

30. Fuel duties collected averaged $920 million a year over the last five years. The revenue from these duties and taxes adds to the pool of resources available for various programmes and subsidies that directly benefit Singaporeans. This includes spending on public transport, for which we provide significant capital investments, as well as operating subsidies to ensure an affordable and world-class public transport system.

31. Given the recent increase in pump prices, I can understand why some members have asked to reduce or suspend fuel duties, or to provide road tax rebates. But doing so effectively amounts to a subsidy on private transport, and will have counter-productive effects. Let me explain.

a. Fewer than four in ten households in Singapore own cars, and amongst the lowest quintile, the bottom 20 per cent of households by income, only about one in ten do. Such subsidies on private transport would therefore benefit a relatively small but generally better-off group.

b. Cutting fuel duties also means that some of the subsidies will flow back in part to producers and suppliers themselves, not just to consumers, as the pump price may not fall as much as the reduction in duty.

c. More importantly, such subsidies will reduce the incentive to switch to more energy-efficient modes of transport, which is a critical element in our plans for sustainable living.

32. I recognize that there are several groups like taxi and private hire car drivers and delivery riders, who are affected by the increases in petrol and diesel prices. Various taxi and private hire car operators have implemented temporary increases in fares to help cushion the higher fuel prices for drivers, and to have consumers share the burden. They also have tie-ups with petrol companies to offer fuel at discounted prices, to help drivers and riders manage higher fuel costs. As I mentioned earlier, those whose incomes are impacted and are in need of financial assistance can approach the SSOs, the CCs, or the Self-Help Groups for more help.

33. Overall, the better way to help Singaporeans cope with the rise in petrol prices, as with inflation in general, is to provide them with the support measures that we have catered for in the Budget. Through these measures, we are extending concrete, tangible help directly to Singaporeans to cope with their different areas of need, including their utilities bills, children’s education, and daily essentials, and we are providing more targeted help for the lower-income groups.

34. Sir, I have outlined some specific actions we will be taking to help Singaporeans cope with higher prices. We will continue to monitor the external situation, and the risks for our economy closely – risks both in terms of growth and inflation. And where inflation is concerned, we are monitoring this closely, not just the headline figure, but also the impact of inflation on different income groups, and even the issue of shrinkflation which Ms He Ting Ru asked about. As the Government has assured this House previously, if the situation worsens, we will not hesitate to take further actions to protect jobs, and to help households and businesses deal with the increased costs.

Pressing ahead with Economic Restructuring and Transformation

35. Sir, we are now dealing with a war-induced increase in prices, especially in electricity and fuel. But even without the war, we would eventually have to adjust to a secular increase in energy prices, as we seek to decarbonise our economy.   Likewise, on the manpower front, we will continue to face a tight labour market, given our rapidly ageing population.

36. In short, labour and carbon are permanent – not temporary – constraints for our economy. Therefore, we cannot offset these costs perpetually. Instead, a better approach, a more viable approach, is to redouble our economic restructuring and transformation efforts, to become more innovative, more productive, and more energy efficient. These efforts will help our economy become more resilient to external shocks. This is also how we sustain continued income growth for Singaporeans, with earnings rising faster than inflation, so that we can retain and grow our purchasing power, and achieve higher standards of living.

37. Sometimes it does take a crisis to jolt all of us into action. Because for many years, to illustrate, the Government had highlighted the importance of digitalisation, but take-up rates for digitalisation schemes were uneven. Then when COVID-19 struck, businesses had to adjust quickly. Within two years, we managed to achieve much more in our digitalisation efforts than all the combined efforts over the past decade.

38. In the same way, I hope that the current increase in business costs and energy prices will motivate firms to change their mindsets, their processes, and their practices. The Government has put in place many schemes, in this Budget and in previous Budgets, to help companies improve their productivity and energy efficiency. Minister Tan See Leng will elaborate further on them later. I urge businesses to make full use of this support, and to accelerate their restructuring and transformation efforts. Doing so will strengthen their abilities to withstand shocks and position them well for the future.

Conclusion

39. Mr Speaker, this is not the first time we have had to deal with such challenging external economic conditions.

a. During the oil crises of the 1970s, Singapore’s inflation rate peaked as high as 30% year-on-year in the first half of 1974, and around 10% in the second quarter of 1980. These events underscored our vulnerabilities to inflation, as a price-taking small and open economy. In response, in the early 1980s, we developed a unique exchange rate-centred monetary policy that helped tame imported inflation.

b. The Labour Movement played a vital role in stabilising prices with the establishment of NTUC Welcome, which evolved to become the NTUC FairPrice of today. By buying essentials like rice in bulk and passing on the savings to consumers, NTUC not only tackled profiteering among wholesalers, but also helped workers and Singaporeans beat inflation. NTUC FairPrice continues to help mitigate cost of living pressures, through various initiatives and discount schemes.

c. In the 2008-09 Global Financial Crisis, we acted quickly to save jobs amidst a global recession, implementing the Jobs Credit Scheme, which is the precursor to our more recent Jobs Support Scheme. As a result of this and other interventions, our economy rebounded swiftly in 2010.

d. Of course, all of these crises paled in comparison to the Covid-19 pandemic and also our worst recession since independence in 2020. Our swift and decisive action to protect lives and livelihoods enabled resident employment and incomes to quickly recover to pre-COVID levels by 2021 while keeping COVID-19 deaths low.

40. Now, before we have had the chance to see through the pandemic, we are faced with yet another economic challenge. After many years of relative price stability, the recent surge of higher inflation has understandably come as a shock to many.  But when viewed against the global context and our own experience, I hope we can better understand the causes of higher prices and what we can do to manage this together.

a. We must not let this become a blame game – of Government versus people, of sellers versus buyers, of hawkers versus consumers.

b. Or worse, think that if Singapore were to lie low and remain silent on the war in Ukraine, we could somehow all enjoy lower pump prices today.

c. What we are experiencing today in Singapore is the result of external forces that impact the entire global economy.  We cannot do very much to change this. But what we can do is to continue to keep faith with one another, as we have done over the last two years – look out for each other, help those in need, and never waiver from the conviction that we will always have each other’s backs.

41. Mr Speaker, let me end by assuring all Singaporeans once again: help from Budget 2022 is coming.  If the situation worsens and more support is needed, the Government stands ready to do so. There are dark clouds over the horizon. But we will get through this together, as we have always done, as one united people. Thank you, Sir.