EC4352: Growing Incomes for All Singaporeans In Budget 2011, the Minister of Finance, Mr. Tharman Shanmugaratnam Articulated the Government’s long-term Goal of Growing Incomes: Singapore Economy: Practice and Policy Assignment, NUS, Singapore

Part I: Growing Incomes for All Singaporeans

In Budget 2011, the Minister of Finance, Mr. Tharman Shanmugaratnam articulated the government’s long-term goal of growing incomes for all Singaporeans, including those at the lower end of the income ladder. The aim is “to raise incomes by 30% in real terms over this decade.”

Real income growth measures the improvement of consumption and standards of living. (MOF, Budget Statement 2011, p.9) Following the Budget announcement, in a post-budget panel discussion, an economist asked “will
the rising tide of economic growth really lift all boats?” The economist questioned if those in the lower-income groups could see their real income grow at 30% in the next decade.

For this to be possible, real incomes need to grow at 2.66% annually. The target is thus achievable only for those living in 4-room HDB flats and bigger homes. From 1998 to 2008, those living in smaller homes experienced income growth that was below 2.66% per year. (The Straits Times, 23 February 2011).

Economic Tide May Not Lift All Boats Verify the claims made by the economist using the same data set that was used (published data that were publicly available at that time). The data is given in Figure 1. The CPI time series is the first worksheet in the excel file (Part I CPI).

Show the following:

[a] The annualized real income growth rate is 2.66%.

[b] The annualized real income growth rate over the period 1998 to 2008 for 5-room HDB dwellers was above 2.66%.

[c] The annualized real income growth rate over the period 1998 to 2008 for 2-room HDB dwellers was below 2.66%.

[d] Compare the annualized real and nominal growth rates (1998 to 2008) by housing type to the targeted real income growth rate of 2.66%.

[e] Assuming that those living in 2-room HDB belong to the lowest two quintiles and those in

Average Household Income by Flat Type

5-room HDB is in the top two income quintiles, what can you infer on income equality during this period 1998 to 2008. What are some possible economic reasons/happenings during this period which led to the observation that “economic tide may not lift all boats”.

PART II: Median wage to grow from $2420 to $3100

Reference:

https://www.mof.gov.sg/news-publications/parliamentary-replies/30-per-cent-income-rise-foraverage-Singaporeans-over-next-10-years

A parliamentary question was posted on 19 July 2010 requesting the then Minister for Finance Mr Tharman Shanmugaratnam) to elaborate on his statement of “a Singapore being an economy with top quality skills that will raise incomes for average Singaporeans by 30% in the next 10 years,
from a median wage of $2,400 to $3,100.”

Part of the written response is extracted and reproduced below:
The median wage in 2009 was $2,420 per month. Achieving 30% growth in wages discounted for inflation, will take this to about $3,100 in 10 years. Including inflation, assumed at 2% per year, the median wage in nominal terms would reach about $3,800.

This will imply significantly higher growth of median wages compared to the last decade. The median wage grew by 1.4% per year in real terms over the last 10 years (1999 to 2009), or by a cumulative 15% over the period (discounted for inflation).

a) Show your how these numbers are derived, that is:

i. To achieve a 30% growth in wages discounted for inflation, $2420 in 2009 would have to be $3100 in 10 years.

ii. Assuming inflation at 2% per year, the median wage in nominal terms would be $3,800.

b) Using actual CPI, calculate the median wage in nominal terms in order that it ($2420 in 2019) has grown by 30% in real terms. Do you agree that the median wage has grown 30% in real term compared to a decade ago? Explain why the median wage has/has not grown.

[The CPI series can be found in the second sheet Part II CPI in the excel data file. The data are culled from the Department of Statistics, Household Income Trends and IRAS Annual Reports. CPI data is downloaded from Singstar.]

PART III: Tracking Real Income Growth, Income Inequality

This part of the assignment seeks to track the government’s long-term goal of growing incomes for all Singaporeans, including those at the lower end of the income ladder; with the aim “to raise incomes by 30% in real terms over this decade.” Analyze the following:

a) Evaluate the real household income growth by housing types since Budget 2011. Compute the annualized change in real income across these periods from
a. 2011 to 2015;
b. 2015 to 2019;
c. 2011 to 2019;
d. 2011 to 2020

b) How close is Singapore to achieving the target of 30% real income growth by 2019 for all Singaporeans?

c) How has the Covid-19 pandemic affected the target set out in Budget 2011 to achieve 30% real income growth in a decade? Has the pandemic affected income inequality?

d) Some economists opined that categorizing households by housing types is a “Singapore way”, and deviates from the convention of categorizing households by income deciles.

Which data set will better track income trends for Singaporeans? Explain your choice.

e) Will your answers to parts [a] and [b] change if income deciles are used? What is your inference on income inequality and what policy innovations have been introduced to reduce income inequality? You may generate the 90/10 ratio (the ratio of the 90th percentile to the 10th percentile) as well as the 50/10 ratio to track changes in income inequality from 2011 to 2020?

f) Does use the 90/10 ratio yield a consistent income equality trend compared to using the Gini coefficients?

g) The Straits Times ran this headline on 20 February 2020 – “Income inequality in Singapore falls to the lowest level in almost two decades as household incomes rise”. The reporter (Toh Wen Li) reported that the improved income inequality is due to an increase in household income from work across all income deciles. Do you agree with this statement? Explain

PART IV: Tackling Tax Progressivity

Chart 7 shows that against the backdrop of Covid-19, the Gini coefficient fell to its lowest since 2000 because of the government transfer program. As the Singapore government has dipped into the past reserves to support lives and livelihood due to the pandemic, there is a need to increase tax revenue productivity. Among other measures, one option is to introduce a more progressive tax structure as an option to deal with income inequality.

a) A progressive tax system is one where a richer person pays a higher percentage of his income in tax than someone less well-off. Those below an income threshold may pay no tax.

One way to evaluate the progressivity of the tax is to compare the proportion of tax paid by the richest 10 percent of the taxpayers over time. Compare also the tax paid by tax-payers in different assessed income groups during the year of assessment.

Evaluate the income tax progressivity from 2011 to 2019, using data for Year of Assessment YA2012, YA2016 and YA 2020.

Note: Year of Assessment’ (YA) refers to the year in which income tax is calculated and charged. The assessment is for the income earned in the preceding year, starting on 1 Jan and ending on 31 Dec. Example: For YA 2020, the assessment is for income earned from 1 Jan 2019 to 31 Dec 2019.

b) Suggest ways to make the tax system more progressive and the trade-offs involved.