Assess the relative effectiveness of supply-side versus demand-side policies in achieving inclusive growth in Singapore.
b. Assess the relative effectiveness of supply-side versus demand-side policies in achieving inclusive growth in Singapore. [15]
Introduction
Inclusive growth refers to economic growth that is sustained over time and equitably distributed across all segments of society. For a country like Singapore—characterised by a high-income economy, an open labour market, and rising income inequality—achieving inclusive growth requires more than simply raising GDP. It demands a deliberate policy mix that ensures the benefits of growth are shared broadly, especially by the lower-income groups. Both demand-side (especially fiscal policy) and supply-side policies can play a role, but their relative effectiveness depends on the objectives, timing, and challenges involved in their implementation.
Effectiveness of Demand-Side (Fiscal) Policies in Achieving Inclusive Growth
Expansionary fiscal policy can be used to boost aggregate demand (AD), especially during periods of underutilised resources. The government can increase G (government spending) or reduce taxes to encourage C (consumption) and I (investment), thereby increasing AD. As AD rises, there is a multiplied increase in real national income, leading to higher economic growth and a fall in cyclical unemployment.
If the economy is operating below full employment, this rise in AD can lead to non-inflationary growth, thereby addressing growth without immediate inflationary pressures. However, while higher GDP raises average incomes, demand-side policies on their own do not guarantee inclusive outcomes. Growth stimulated by fiscal spending or tax cuts can be skewed toward higher-income earners or capital owners, depending on how the benefits are distributed.
For instance, a tax cut across the board may disproportionately benefit high-income individuals who already contribute more in absolute tax dollars, while an increase in government infrastructure spending may benefit construction firms without necessarily uplifting low-income households directly. Hence, without complementary redistribution efforts, demand-side policies may raise GDP without narrowing inequality.
To enhance inclusiveness, fiscal policy can be designed to be more progressive. This can be done by:
Increasing the marginal tax rates for the top income brackets (e.g. beyond the current 22%).
Introducing new forms of taxation such as a capital gains tax, which currently does not exist in Singapore, to tap into wealth accumulation among the affluent.
Using the additional tax revenues to expand transfer payments, housing grants, Workfare income supplements, and healthcare subsidies targeted at lower-income groups.
These measures would redistribute income and directly reduce inequality. However, there are trade-offs. Raising taxes for high-income earners may reduce their incentive to work or invest more. There is also the risk of capital and talent outflows, especially in a globally mobile economy like Singapore’s, where high-income individuals and businesses can relocate to jurisdictions with more favourable tax regimes. If this happens, the tax base may shrink, ironically reducing government revenue and undermining the very goal of redistribution.
Effectiveness of Supply-Side Policies in Achieving Inclusive Growth
Supply-side policies can address the root causes of inequality by improving the productivity and earning potential of low-income workers. This includes investing in education, skills upgrading, and retraining programmes that target low-skilled workers.
As these workers acquire new skills:
Their labour productivity rises, increasing their ability to contribute to higher-value tasks and command higher wages (reducing income inequality)
The economy’s productive capacity expands, leading to a rightward shift in the Long-Run Aggregate Supply (LRAS) curve.
This allows the economy to grow without inflationary pressure, making such growth sustainable.
Singapore has implemented such policies through programmes like SkillsFuture and sector-specific training schemes. A more skilled workforce also attracts more foreign direct investment (FDI), which further boosts AD and raises GDP.
This approach tackles inequality by helping lower-income groups become more competitive in the job market rather than just redistributing income to them. However, its effectiveness hinges on several factors.
While theoretically sound, skills upgrading is neither simple nor immediate. Training and education policies:
Take time to yield tangible results, particularly in industries where re-skilling is complex.
Rely heavily on the willingness and motivation of workers to participate—many of whom may be older or less receptive to change.
Risk misalignment if training programmes are not market-relevant, resulting in underemployment or continued wage stagnation despite certification.
Moreover, supply-side policies require long-term fiscal commitment, even when results may only be realised years later. Despite being less distortionary than redistribution through taxation, the political and social patience required to see results may be difficult to sustain.
Conclusion: Which Policy Is More Appropriate for Singapore?
In practice, neither policy alone is sufficient. Fiscal policy that aggressively targets inclusiveness through higher taxation can backfire by reducing work incentives or driving away mobile talent, leading to lower tax revenues and weaker economic growth. Meanwhile, supply-side reforms take time, and their success depends on a complex interplay of institutional quality, labour market demand, and worker participation.
A pragmatic approach is to first use demand-side fiscal policies to stimulate growth, without overly focusing on whether the immediate gains are equitably shared. Once growth is achieved and tax revenues increase, the government can implement targeted redistributive measures (such as transfers or grants) and invest in longer-term supply-side interventions to ensure the gains from growth are eventually shared more equitably. This sequential strategy balances short-term responsiveness with long-term structural improvements.
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