“Governments should play active roles in managing short-run instability in the economy caused by unemployment and inflation problems”.
The economic development in Singapore is generally referred to as “growth with equity”. The rapid growth in the GDP of the country has also been accompanied by an increase in the distribution of income and the rise in the standard of living of the people in the country (Amadeo, 2016). The country has also made significant advancement on various social parameters in a brief period. One of the primary roles that were played in this impressive economic growth of the country lies in the fiscal policies that have been adopted by the government of Singapore for maintaining macroeconomic stability to provide support to the economic growth and also for promoting social equity in the country. There is significant importance played by the government actions in reducing instability in the economy which is caused due to the rise in unemployment and the rate of inflation (Amadeo, 2016).
During the time of short-run economic instability, the government spending and the deficit raises automatically as a result of the demand on social safety net provisions and the fall in the tax revenues. Such kind of spending has a stabilising impact on the economy since it happens automatically instead then to legislative acts and the money that is being invested at times when it is needed the most (Labonte, 2016). The short run Macroeconomic instability can be caused due to several factors. For example, in the short run, there could be an unanticipated fall in the aggregate demand which can lead to the Excess supply of the resources that would end up in decreasing the prices of the resources. It will cause a rise in unemployment and the prices we go down however the output would also be reduced. Over an extended period, the lower cost of the resources will also result in the shift of the aggregate supply towards the right (Labonte, 2016). This will end up in the economy shifting towards producing an equal level of output which is consistent with the full employment but at a lower level of prices. In another case, if there is an “unanticipated increase in the aggregate demand in the shorter than it can also result in the output level which is greater than what is consistent with the full employment”. This mainly takes place since the level of the prices is not similar then what was anticipated by the resource providers. The unemployment will come down then the natural rate of unemployment. There would be upward pressure on the prices of the resources and their rate of interest which would over a long time result in the decrease in the aggregate demand (Parkin, 2016). For this purpose, the resource providers have to make changes concerning the new levels of the prices, and there would be a decline in the output concerning what is being consistent with the full employment. It would also result in the development of a new market equilibrium which would take place at a higher level of price points, in the long run, the high rate of inflation will have a significant impact in raising the aggregate demand.
In the short run, if there is any unanticipated decrease in the SAS, it will cause a decrease in the availability of resources. This food also increases the prices of the resources which would cause the curve for the aggregate supply of goods and services to shift up towards the left. Reduction in the level of output will also be produced at Higher prices (Parkin, 2016). If the cause related to the unanticipated decrease in the SAS is temporary, then it will not cause any changes in the prices or the outputs over a long run. However, if because is more critical, then there would be a shift in the long run supply curve towards the left. In this situation, the economy would generate a lower level output at the higher prices. Also in the case of an unanticipated increase in the aggregate supply in a short run would cause to shift towards the right in the SAS (Parkin, 2016). This will cost to expand the “output and income beyond what is regarded as full employment at a lower level of price. If the cause for the increase in aggregate supply is temporary, then the SAS will come back to its normal levels, and the prices and outputs will return to earlier status. However, if the cause of the change is permanent, then both the SAS and the LAS will shift towards the right”. This will cause a higher amount of output at lower prices (Parkin, 2016).
The Government of Singapore adopts a medium-term orientation approach for managing the short run economic instability which is caused due to unemployment and Rise and inflation. The economic policies that are adopted by the government in Singapore have mainly emphasised more on the enhancement of the supply side conditions for sustainable growth in the case of short-term demand management objective (Pettinger, 2011). This approach is also beneficial for the government over the long haul as it helps the government to emphasise economic growth as well as various other contacts in which the fiscal policy of the country operates. The economy of Singapore is a highly Open Economy which is heavily reliant on imports (Pettinger, 2011). Hence this reduces the scope for any countercyclical fiscal policy since a significant part of the fiscal stimulus would get leaked out due to the increase in imports. The public spending of Singapore is meagre as compared to the other developed economies since it is only one-fifth of the total gross domestic product of the country. This indicates that the pump priming measures that are directed towards increasing the aggregate demand when the growth is below the Effective potential level would be having minimal effectiveness (Pettinger, 2011).
One of the most critical aspect of management of the short-run economic instability in Singapore is that the government instead of adopting the Keynesian measures related to lowering the taxes on increasing the public spending for dealing with the adverse economic shocks the Government of Singapore has adopted the policy to focus more on direct cost-cutting measures like reducing the contribution rates of the employers to the central provident fund which is the fully funded social security system of Singapore(SEOW, 2015). During the time of short-run economic instability the Government of Singapore generally uses expansionary fiscal policies for increasing the economic growth, for example, the Government of Singapore adopted the resilience package which comprises of increasing the expenditure on infrastructure for raising the aggregate demand during the 2008 global financial crisis (Economics Discussion, 2015). In Singapore, the fiscal policies are mainly used for supply-side effect for enhancing the capacity of production in the economy and hence increasing the aggregate supply which is also referred to as adopting of fiscal policy with intent towards supply side (Singapore Budget, 2009).
The Government of Singapore generally spends on education and training during the time of recession for increasing the human capital and hence would enhance the skills and knowledge of the labour in the economy. It has set up various institutes of technical education for providing Higher Education and Training to the people (Economics Discussion, 2015). It also increases spending on research and development for enhancing technological advancement and increase the efficiency of the capital in the economy. By increasing the capacity of production in the economy and increasing the knowledge and skills of the labour in the economy and enhancing the efficiency of the capital, it would be possible to increase the labour productivity and decrease the cost of production in the economy (Singapore Budget, 2009). When the production capacity of the economy increases and the cost of the production in the economy decreases automatically the aggregate supply would increase. Considering that the aggregate demand is increasing in a healthy economic state the increase in the aggregate supply would also result in higher economic growth and would keep the inflation levels down (Pettinger, 2011).
From the analysis, it can be said that the government of Singapore adopts three main aspects for stabilising the economy during the short-run economic instability that is caused due to inflation and rise in unemployment (Lopez, 2015). The first approach is to change in the prices of the resources as if there is any instability in the unemployment rates in the economy simultaneous changes in the prices of the resources can have an impact on the short-run aggregate supply. Another approach that is taken by the government of Singapore during the time of stabilising the economy for short-run economic instability is to change the real interest rate (Hall, 2005). By lowering the rate of interest can help in stimulating the consumers for purchasing large items and the cost of business investment projects also comes on which increases business investment spending. The third measure that is taken by the government of Singapore is to ensure relative stability of consumption (CHIA, 2015).