From 2008 to 2008, Singapore government applied expansionary fiscal policy because economy crisis. This policy successfully stimulated the economy growth during the recession. First of all, through this expansionary fiscal policy, this can encourages industrial development and also the exports of the country. During the economy crisis, the price of manufacturing and agricultural fell. In order to balance the economy, manufacturers are encouraged to produce more goods so that it can use their own goods instead of import. Singapore government also did industrial research to the manufacturers so that they can get the information to improve the industrial development. The government also establish programmes and agencies to assist the manufacturers and so can encourage exporting.
In addition, expansionary fiscal policy successfully develops Singapore as an international financial centre. The government invent and sustains Singapore's niche by adaptive the preservation of internationally competitive tax and thus form a stable financial system, this transform Singapore as an international financial centre in the financial market. The corporate governance and tight regulation are the key element that is part of the causes to Singapore's position as international financial centres. The tax concession that implement by the government is reducing the tax of loan interest and income tax. To solve the problem of unemployment and boost the economic growth, Singapore government increase the aggregate demand by spending more on goods can services.
Moreover, by implement expansionary fiscal policy, this can directly increase the confidence of investors in consumers. When the consumer confidences tend to be increased, the household sector will thus raise to spend without restraint especially on durable assets like houses, cars and some properties. People will spend more when they have more income. Normally people will spend on convenience goods like groceries and household items first like clothes and furniture and then go after the necessity items like clothes and furniture. This will raise the business expenditures, this is because factories will need to buy more raw materials and process into final goods for consumer consumption. This will result in increase in consumption, investment and employment sectors in the economy. This will promptly cause in the increase in consumption expenditures and shift the aggregate demand curve to the right, which means increase in aggregate demand. Consequently, this can shows the government is putting effort in saving the economy.
Other than that, the increased in the investments for both private and public sectors can provide more jobs. If there is a building construction project need to be accomplished, so construction workers and staffs will be needed, so this will decrease the unemployment rates. Additionally, these projects have need of raw materials and also finished goods from suppliers, so this will lead to increase in production shifts and more staffs will need to be hired in order to satisfy the demand of the market. Singapore government also implementing job training programs to reduce the unemployed workers by teaching them those new skills and technologies to fulfil the demand of the market.
Nevertheless, this brings some negative impacts to Singapore too with the implementation of expansionary fiscal policy. Firstly, Singapore's economy is considered small but very open. Singapore need to import raw materials and intermediate goods in order can produce their own goods and export to other countries as the natural resources of Singapore is limited. Some necessities for consumption also imported because they unable to produce for consumer consumption. This means high income taxes, high imports and high savings will lead to a small multiplier. This small multiplier will regulate the effect of the fiscal policy in few sectors like inflation, unemployment and national income. As a result, the size of multiplier is small because the import leakage is large.
The other shortcoming is the lag time to put expansionary fiscal policy into practice. Singapore needs to take a long time to adopt and show effect of such policy. This is because it needs to take time to realize the economy got problems. An economy recession is not easily recognize until there have been two quarters of continuously negative growth. For the reason that Singapore need time to plan, discuss and implement an expansionary fiscal policy, so it takes time. By the time the government have make decision on the money and taxes, the condition of the economy maybe become worse and changed radically, this new policy maybe will destabilizing the economy. The problem of lag time will cause the recession already self-corrected before the government apply the policy. This may overheat the economy and make the economy worse than before.
Another problem that will arise is crowding out effect. This effect stated that expansionary fiscal policy will reduce the investment in public sector. The government is safer compared to corporate debt, so the investors and potential investors will prefer government debt. Another reason is the interest rate of government debt is lower than the corporate debt. When the government expenditure is increase spontaneously, this will cause a budget deficit. To implement the expansionary fiscal policy, government need to provide government bonds by raising more money. Circuitously, this will boost the interest rates of government debt and more investors will be attracted to buy the government bonds. Conversely, the growth of private sector will be affected and the demand for corporate debt will decrease. When the investment and consumption expenditure decline, this will offset the increase in government expenditure.
Furthermore, this will increase the deficit levels of Singapore. Expansionary fiscal policy that financed by debt only can solve the economy recession temporary. When the Singapore economy back to normal, the government should take actions like increase the taxes and decrease the expenditure to end the expansion. However, this is hard to accomplish. Consumers may adapt with the current situation which is higher government spending and lower tax rates, and they will refuse to make any changes. Due to political issue in Singapore, there is always a risk to apply temporary fiscal expansion. The big amount of government spending will deteriorate deficit and will lead to long-term debt.
Last but not least, the expansionary fiscal policy will lead to the problem of inflexibility of the government expenditure and also taxation. A high degree of inflexibility is needed when boosting the government expenditure and makes a change in taxation, this is because this issue need to pass through the parliamentary debates and approve, which may be take a few weeks for the whole progress. This is decision time lag. The government expenditure also tough to decrease drastically as it involves all the important areas in a country like healthcare, education, national defence and infrastructure.
In a nutshell, expansionary fiscal policy with the limitations that we mentioned does not means that it is ineffective in Singapore because it also stimulating the economic growth in different sectors.
