SG Budget 2023: An inflation paradox

Beware of second-order impact

In Budget 2023, the Singapore government has noble intentions to fight inflation.

However, the Budget measures could drive up inflation instead of bring it down. This is due to the second-order impact from measures such as cash handouts and higher taxes.

Here are my insights:

Inflation Drivers

• Demand-pull inflation
• Wage-push inflation
• Higher HDB Grant
• Higher property taxes
• Higher tobacco tax

Disinflation Driver

• Boosting innovation and productivity

Inflation Drivers

Demand-pull inflation

Singapore's 2023 Budget plans to give up to S$9.6 billion in handouts. Total cash distributed to eligible residents would be up to S$1,300 in 2023. In total, S$600 worth of CDC vouchers will be granted to Singapore households in 2023 and 2024. This will benefit listed grocery companies such as Sheng Siong and DFI Retail Group, as well as suburban mall proxies such as Frasers Centrepoint Trust.

In total, the Singapore government has set aside a S$104-billion spending plan to help residents in a post-Covid reality. This is a laudable move.

However, higher government spending could drive up prices due to higher demand for goods and services. This could be especially problematic in an open economy like Singapore's, where prices are highly sensitive to changes in demand.

Wage-push inflation

The monthly salary ceiling for CPF contributions will be progressively raised from S$6k to S$8k, with increases done in phases over the next 4 years. This will result in higher labour costs due to the 17% mandatory CPF employer contribution. Hence, such measure will affect listed Singapore companies such as OCBCand ST Engineering (both have high 28% labour cost-to-revenue).

In addition, platform workers such as private car hire drivers and delivery workers will be required to make increased CPF contributions. This measure also affects platform companies such as Grab as they will be required to pay CPF contributions for these platform workers.

Hence, as a result of higher labour costs, the net impact of these measures could be higher inflation.

Higher HDB Grant

For eligible first-timer families buying a four-room or smaller resale flat, the CPF Housing Grant for resale flat buyers would be raised by S$30k to S$80k. For first-timer families buying a five-room or larger resale flat, the grant will go up by S$10kto S$50k.

While this measure will alleviate the concerns of young families, it could indirectly lead to higher HDB resale prices, and impact inflation.

Higher property taxes

The Singapore's 2023 budget plans to raise buyer’s stamp duty rates. This measure will affect listed property agencies such as APAC Realtyand PropNex.

For residential properties in excess of S$1.5 to S$3 million, the tax will be 5%. For those in excess of S$3 million, the tax will be 6%.

For non-residential properties in excess of S$1 to S$1.5 million, the tax will be 4%. For those in excess of S$1.5 million, the tax will be 5%.

It is estimated that over 44% to 78% of transactions in the OCR, RCR and CCR regions are above S$1.5m. Hence, the higher stamp duties will increase transaction costs and contribute to inflation.

Higher tobacco tax

To discourage smoking, the Government will raise the excise duty on all tobacco products by 15%. This will affect listed grocery companies such as Sheng Siong and DFI Retail Group.

The increase in tobacco tax is expected to generate about $100 million in additional revenue per year for the Government. This means that it will result in a $100 million hit to the pockets of smokers.

This will lead to higher inflation because of more expensive cigarettes.

Disinflation Driver

Boosting innovation and productivity

To encourage innovation, the Government will provide tax deductions of up to 400% (previous 250%) of qualifying innovation expenditure under the new Enterprise Innovation Scheme. In addition, there will be a $4 billion top up to the National Productivity Fund for supporting investment promotion.

Such measures are positive for the Singapore economy in helping companies to be more innovative. Such companies could include Nanofilm and Venture Corp , where R&D expenses account for 5% of their total revenue.

The boost to innovation result in more efficiency and helps to bring inflation down in the long term.