(2020) A Level H2 Econs Paper 2 Essay Q5

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5. In Singapore in 2018, the resident population below the age of 20 fell by 1.5%, while the resident population over 65 grew by 6.0%. If these population changes continue into the future, there are likely to be significant consequences for Singapore’s economy.

Source: singstat.gov.sg, accessed 22 June 2019

(a) Explain the likely economic consequences of these population changes for Singapore’s economy in the future. [10]

Impacts on AD 

1. As the population starts to age, more workers will start retiring without the corresponding number of workers replacing them 

2. Retired individuals tend to have less disposable income as they are not working 

3. This may cause a fall in purchasing power → fall in Consumption → fall in AD (reflected by leftward shift in AD from AD0 to AD1) → fall in real NY → lower economic growth 

4. This may not have a significant economic impact on Singapore due to domestic consumption being relatively small & high import leakages to begin with. 

Impacts on LRAS 

1. As the population starts to age, more workers will start retiring without the corresponding number of workers replacing them 

2. This may cause a reduction in the working population should there be no increase in total number of foreign workers to augment the labour force 

3. This could cause in a fall in productive capacity → shifting LRAS to the left (reflected by leftward shift of AS from AS0 to AS1) 

Impacts on budget position 

1. An increasingly elderly population will result in an increase in demand for healthcare & elderly facilities → this increase the need for increased government expenditures on social spending & transfer payments → worsens the budget position 

2. The proportion of the population paying taxes will start to decrease if more workers retire from the workforce and cease paying personal income taxes → fall in government tax revenues → worsens the budget position 

3. A worsening of the budget position could result in Singapore starting to incur persistent budget deficits → increased drawdowns on reserves & a reduction in the available Net Investment Return Contribution (NIRC) which will reduce the available fiscal capability for the government to carry out spending 

(b) Discuss the policy measures that Singapore’s government should take to address the economic consequences of these population changes on its economy. [15]

Fiscal Policy 

Raise tax revenues 

1. To address the potential worsening budget position, the government can find ways to raise tax revenues 

2. The government can raise tax revenues by raising personal income taxes, corporate income taxes or the GST 

3. Raising personal income taxes would unlikely be ideal given the already shrinking working population, causing an even greater burden on the working population 

4. Raising corporate income taxes could potentially discourage investments 

5. The Singapore government plans to increase GST from 7% to 9% and this number can potentially increase in the future 

6. Raising GST to increase tax revenues can potentially address the worsening budget position - however, GST is also a regressive tax that has a greater burden on lower income households 

7. Transfer payments can be made to lower income households to help offset the impact of any increase in GST 

Targeted infrastructure spending 

1. The government can increase infrastructure spending in targeted areas e.g. building of more elderly care facilities, hospitals as well as childcare centres 

2. Such infrastructure spending can help to meet the needs of the increasingly aged population while increasing childcare centres may also boost birth rates / encourage increased female labour force participation as working mothers receive more support from the government in the form of subsidised childcare → increase in size of labour force → increase LRAS → rightward shift of AS 

3. The increase in government spending will also result in an increase in AD → increase real NY → higher economic growth 

4. Increasing government spending may however contribute to a further worsening of the budget position 

Supply Side Policies 

Boost export competitiveness / increase productivity 

1. The fall in AD caused by a fall in domestic Consumption can be addressed by increasing Singapore’s net exports 

2. Supply side policies can focus on boosting export competitiveness through increasing productivity 

3. The government can provide subsidies to encourage firms to adopt the use of technology / automation → increase productivity → lower cost of production → increase export competitiveness → increase (X-M) 

4. An increase in productivity can also increase the productive capacity of the economy → increase LRAS → shifts AS to the right  

5. Policies to increase productivity can however take a long time to see effects

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