Speaker 1: money talks is brought to you by OCBC Bank
Speaker 1: in a few words. Could you give us your quick
Speaker 1: thoughts on the following GSD hike?
Speaker 2: Painful but necessary. Hopefully short term impact
Speaker 1: higher price is
Speaker 2: going to impact everybody. But let's hope we can cut
Speaker 2: down our spending
Speaker 1: spending habits very
Speaker 2: sticky. We want consumers to change them and be more prudent.
Speaker 1: The year 2023.
Speaker 2: It should be a better year than 2022.
Speaker 1: Thank you so much.
Speaker 1: Hi, I'm Sarah Alcalde and thanks for joining us on
Speaker 1: money talks. If you're feeling the pinch from higher prices,
Speaker 1: brace yourself because items are about to get more expensive.
Speaker 1: The goods and services tax, or GST, is such an
Speaker 1: increase from 7% to 8% next January
Speaker 1: and another rise is scheduled for 2024. It's happening as
Speaker 1: inflation creeps higher and is expected to stay high in
Speaker 1: the first half of next year. Add to that higher
Speaker 1: mortgage rates, which have squeezed budgets and tighter rules on
Speaker 1: property purchases. All these factors have likely made you rethink
Speaker 1: your spending and how much you set aside for different needs.
Speaker 1: So with expenses increasing all around, how should you manage
Speaker 1: your finances? And what are the best ways to cope
Speaker 1: with the upcoming GSD increase? To help us make sense
Speaker 1: of this GSC hike, I'm joined by Sumit Agarwal, professor
Speaker 1: of finance economics and real estate at N. U S
Speaker 1: Business School
Speaker 1: Professor Sumit. Thanks so much for joining us today and
Speaker 1: talking about this very important topic.
Speaker 2: You're welcome.
Speaker 1: It seems like there is really no escaping higher GSD, right?
Speaker 2: Yes. I mean, I think the government was trying to
Speaker 2: push it off by as much as they could because
Speaker 2: they had announced it already 34 years ago. And then
Speaker 2: because of covid,
Speaker 2: they try to kind of push it back. They try
Speaker 2: to do it in stages now that they will do
Speaker 2: it in two steps, but it's inevitable it has to
Speaker 2: go up.
Speaker 1: Inflation is high. Mortgage rates are creeping up to Why
Speaker 1: do we need to raise taxes now?
Speaker 2: It's a complicated answer, so clearly, if you believe inflation
Speaker 2: is high, which it is right now, you want to
Speaker 2: actually slow down spending
Speaker 2: the governments around the world through the monetary policy through
Speaker 2: the central banks, raise the borrowing rates of the banks.
Speaker 2: That raises the rates of lending to consumers that causes
Speaker 2: consumers to not buy things like houses.
Speaker 2: If you raise the interest rate on mortgages, they are
Speaker 2: not going to buy a house. Similarly, if you raise
Speaker 2: the taxes or your ability to go out and spend
Speaker 2: money for dinners or shopping for handbags or luxury goods
Speaker 2: through the GST, you're not going to go out and
Speaker 2: buy those things, and so you will curb inflation. But
Speaker 2: on the other side, you also raise an important point.
Speaker 2: If you are going to raise GST, you still have
Speaker 2: needs for necessary goods like food and other items that
Speaker 2: are important to you. So raising the GST when inflation
Speaker 2: is already high will also hurt people,
Speaker 2: so you can see it can go both ways. Raising
Speaker 2: GS Steve Inflation is high is a good thing, but
Speaker 2: raising GS Steve and inflation is high can also be
Speaker 2: a bad thing because taxes on your necessary items can
Speaker 2: hurt your pocketbook.
Speaker 1: But this GSC increase was announced before inflation was an issue.
Speaker 1: So why is GSD being increased? Where will this extra
Speaker 1: taxes go?
Speaker 2: If you think about a GSD itself,
Speaker 2: it's kind of a regressive tax because a progressive taxation
Speaker 2: structure you will raise the marginal tax rate for the
Speaker 2: highest earners. So the richest people pay higher taxes. It
Speaker 2: makes sense.
Speaker 2: GST is an increase in tax for everybody, from the
Speaker 2: poorest person to the richest person. You would think that
Speaker 2: the burden will fall more on the poor person in
Speaker 2: paying taxes through GST. But what the government is doing
Speaker 2: then is taking all the revenue additional revenue they're going
Speaker 2: to earn through GST taxation. And part of that they
Speaker 2: will give in terms of kickbacks are rebates to the
Speaker 2: low income people.
Speaker 2: So they're trying to make it more progressive by taking
Speaker 2: part of the GST money and giving it to the
Speaker 2: low income families. It's still not as progressive as you
Speaker 2: raising the income tax rate for the super rich, which
Speaker 2: the government has also done. Right now, they're raising 1%
Speaker 2: tax rate income tax rate for the most wealthy people.
Speaker 1: How do you think this will affect household budgets if
Speaker 1: everybody is going to face higher taxes, considering all the
Speaker 1: other things that are more expensive nowadays, households have to
Speaker 1: face higher mortgages, groceries, petrol is expensive. So how will
Speaker 1: this affect budgets?
Speaker 2: Yes, clearly, it will definitely affect the consumer budget.
Speaker 2: So the government's plan is to give back some of
Speaker 2: the money to the low income people. So what will
Speaker 2: end up happening is the middle class will be more
Speaker 2: squeezed than anybody else. And the middle class will feel
Speaker 2: the biggest pinch of the GST tax rate because they
Speaker 2: also spend a lot. They are spending not just necessary
Speaker 2: good but part on more luxury or travel and eating
Speaker 2: out so they will be affected. And they
Speaker 2: We'll either have to cut down consumption, which may be
Speaker 2: the right thing to do for them. Or they may
Speaker 2: end up borrowing or smoothing consumption through borrowing from their
Speaker 2: future Selves. If I assume my GST is going to
Speaker 2: go up, but inflation will come down in the future,
Speaker 2: I don't want to cut down my spending habits because
Speaker 2: I love what I do and I don't want to
Speaker 2: go out to a cheaper restaurant. I still want to
Speaker 2: go to the same restaurants every day or every week.
Speaker 2: I will just start borrowing more on my credit cards
Speaker 2: so we don't know how it will go. How consumer
Speaker 2: sentiment will be. Do the cut down consumption. Are they
Speaker 2: rational and saying GSD is going to hurt my pocket books?
Speaker 2: I should cut down consumption or do I keep consuming more?
Speaker 1: You keep consuming more. But put it on the credit
Speaker 1: card and get yourself into more debt. Basically, is the
Speaker 1: other option.
Speaker 1: What should we do then? To manage this GSD increased
Speaker 1: responsibly on a personal level. If I know that everything
Speaker 1: else is more expensive and it's about to get more expensive,
Speaker 1: what should we do?
Speaker 2: The prudent thing or the rational thing for the consumer
Speaker 2: is to say
Speaker 2: I have a basket of things I need to do
Speaker 2: every month. Part of that could be paying rent. Part
Speaker 2: of that could be paying my mortgage. It's also paying
Speaker 2: to Shin, which have gone up for my Children, uh,
Speaker 2: many other things there. I can't do much. There is
Speaker 2: not much room for me to change my lifestyle, but
Speaker 2: there are lots of other things which is eating out
Speaker 2: or going to more eateries or travel those I could
Speaker 2: cut down for the time being,
Speaker 2: mainly because this is going to be affecting my budget.
Speaker 2: My budget constraint is there, and GST is just going
Speaker 2: to make my budget constraint even tighter.
Speaker 2: Now I hope many people realise that this is good.
Speaker 2: GS TVs is inevitable because the government needs to raise
Speaker 2: more revenue because the government in the past few years
Speaker 2: had to have more expenses because of covid and going forward.
Speaker 2: They're also investing much more and the government ended up
Speaker 2: borrowing from their reserves.
Speaker 2: So the people may have to say I need to
Speaker 2: cut down my expensive, especially my discretionary expenses by nondiscretionary expensive.
Speaker 2: I can't change. I mean those I have to incur
Speaker 2: their inevitable.
Speaker 1: How about you professors to make you mentioned? How twisted
Speaker 1: and for your Children Now more expensive. Have you changed
Speaker 1: how you're spending? First
Speaker 2: you start dipping into your savings. Start dipping in your savings.
Speaker 2: So you say. Okay, Hopefully wages will go up in
Speaker 2: the future. Inflation will go away. So for now, let
Speaker 2: me try to dip on my savings. Second, you may
Speaker 2: start using your credit card. Third, you make consumption. So
Speaker 2: I'm trying to do all three.
Speaker 2: So actually cut consumption where it is frivolous. Try to
Speaker 2: say OK Let's not do certain things. Let's not go
Speaker 2: on certifications or more expensive vacations and also kind of
Speaker 2: dip in the savings. And we see that I can
Speaker 2: give you a very nice example on Singapore.
Speaker 2: Actually, a few years ago, when Singapore raised the marginal
Speaker 2: tax rate for the super rich, that increase the marginal
Speaker 2: tax rate by 2% was going to actually reduce consumption
Speaker 2: of the rich because now they pay higher taxes, so
Speaker 2: their disposable income is law. What we see in the
Speaker 2: data of rich Singaporeans they did not cut down consumption
Speaker 2: is that they just dipped in their savings, their savings
Speaker 2: balance goes down, the consumption doesn't go down
Speaker 2: and what the Singapore government did, then they took that
Speaker 2: money and gave it to the poor in terms of
Speaker 2: redistribution of their taxes. And you see the poor actually
Speaker 2: spend more because now they are getting free money or
Speaker 2: a tax rebate from the government. The poor end up
Speaker 2: spending so you can see the cycle in some sense,
Speaker 2: how redistribution works and also not hurt the rich consumption
Speaker 2: because they just use their savings.
Speaker 1: Yeah, but you need to have savings. Then that's also
Speaker 1: one key thing before all this happened. So you have
Speaker 1: something to pick up when you need it.
Speaker 2: I agree. Hence the government is being prudent. Realising the
Speaker 2: poor may not have the savings, so we need to
Speaker 2: give them back. The middle upper middle class may have
Speaker 2: some savings and they do. I mean, the pandemic caused
Speaker 2: a lot of people to save a lot of money.
Speaker 2: And that's why we are seeing inflation. And so now
Speaker 2: they'll just
Speaker 2: kind of spent a lot of their savings. I mean,
Speaker 2: a lot of the people who are upper middle class,
Speaker 2: they didn't go to work. They just didn't buy clothes.
Speaker 2: They didn't buy makeup, they didn't buy lots of things.
Speaker 2: So all that money was saved up for the last
Speaker 2: 34 years, and now they may end up either spending
Speaker 2: because Syria, rice Or actually, that's also the reason we
Speaker 2: had inflation. Because people realised that all the savings I
Speaker 2: can travel Let me spend all this money
Speaker 1: out.
Speaker 1: Yeah, and all that money we saved from not travelling anywhere, right? Yes.
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Speaker 1: It has been a while, though, since GST was last raised.
Speaker 1: If they look back last time or when other countries
Speaker 1: raised their GST, their taxes, what do you think we
Speaker 1: can expect after this GSD hike? And what lessons can
Speaker 1: we take from previous examples
Speaker 2: people have studied? Academics have been studying this thing. I
Speaker 2: have looked at GST tax rate changes in India, which
Speaker 2: just recently happened.
Speaker 2: I've looked at similar things in the U. S. And
Speaker 2: other countries. What happens? Typically, consumers consumption basket will shrink,
Speaker 2: so that's one thing. They will actually spend less. On average,
Speaker 2: in every 1% point, rates in GST may actually shrink
Speaker 2: the consumer basket from 5 to 7% so that's one thing.
Speaker 2: The other thing that happens. Typically there's a shift in
Speaker 2: the consumption basket.
Speaker 2: They will shift away from discretionary items to non discretionary
Speaker 2: items or in some sense, not take those vacations, not
Speaker 2: go out and eat at expensive restaurants. But focus on
Speaker 2: doing going to McDonald's more rather than going to an
Speaker 2: expensive restaurant so that we'll see both of those shifts.
Speaker 2: We have seen similar things in the data in other countries,
Speaker 2: and we should see something like that in Singapore as well.
Speaker 1: And when you look around at how we're spending, what's
Speaker 1: your sense of how Singaporeans are coping with the rising
Speaker 1: cost of living
Speaker 2: look? Cost of living has been going up in the U. S. Context.
Speaker 2: We are again looking at this, this effect of inflation
Speaker 2: and consumer spending that itself is going to moderate spending
Speaker 2: because inflation and how the government will respond. I mean,
Speaker 2: we see mortgage rates in Singapore have gone up dramatically
Speaker 2: when mortgage rates go up, then your budget constraint becomes
Speaker 2: tighter or your debt service burden goes up, and I
Speaker 2: have to pay more money to my bank in interest payments.
Speaker 2: When I have to do that, I can't spend money
Speaker 2: anymore on other things. I can't take vacation
Speaker 2: or I can't buy fancy clothes anymore, So people have
Speaker 2: been cutting down now. I don't have exact data for
Speaker 2: Singapore yet, but we will end up seeing similar results
Speaker 2: now on the GST is will be very difficult to
Speaker 2: quantify this because
Speaker 2: typically when GST raises by a significant amount, let's say 34%
Speaker 2: then you can actually study this in the data that
Speaker 2: consumption dropped. But GST going up by 1% is just
Speaker 2: very hard to pick it up in the data and
Speaker 2: see Look, I can show you
Speaker 2: how consumption is dropping because there are so many other things.
Speaker 2: Sometimes people just make smooth consumption through credit cards and
Speaker 2: other things, so it's difficult to pick this up.
Speaker 1: Prices are interest rates are it is a tough time
Speaker 1: financially for many.
Speaker 1: How long do you think this will go on for?
Speaker 1: Is this a new normal of prices going up so fast?
Speaker 1: Mortgage rates going up so fast as well?
Speaker 2: I don't think so. There are a few factors that
Speaker 2: caused this situation first. Clearly the pandemic that caused huge
Speaker 2: government fiscal stimulus plants around the world that caused inflow
Speaker 2: of money to the balance sheet of the consumer. Second,
Speaker 2: the supply chain issues that we are facing right now
Speaker 2: that is raising prices at the manufacturer level because they
Speaker 2: just can't produce goods as fast as they could. So
Speaker 2: it's the scarcity of goods raises prices.
Speaker 2: Third, what we have seen. The conflict in Russia and
Speaker 2: Ukraine has also reduced both food and grain coming into
Speaker 2: various parts of the world and also oil prices shooting
Speaker 2: up and oil prices going up is a necessary input
Speaker 2: for production of every,
Speaker 2: so that is also raising prices. So we have seen
Speaker 2: three or four things that are causing this inflationary pressure
Speaker 2: around the world and they are not going down despite
Speaker 2: the fact that monetary authorities in the US in Singapore
Speaker 2: everywhere else are raising interest rates.
Speaker 2: So we will see consumption go down, investments go down,
Speaker 2: infrastructure go down, slow down of all those will reduce inflation.
Speaker 2: The conflict in Russia eventually will go away. China will
Speaker 2: open up, so supplies constraints will also kind of go away.
Speaker 2: Hence inflation may be there until next year. But I
Speaker 2: just don't see that to be there much longer,
Speaker 1: if not much longer. How much longer when this thing
Speaker 1: is going to get better
Speaker 1: because we were hoping that Covid was going to go
Speaker 1: away this year and that we're going to go back
Speaker 1: to how things were then were slapped in the face
Speaker 1: by inflation, high property prices and all these things. When
Speaker 1: will things get better?
Speaker 2: We already at the end of 2022 governments, central banks
Speaker 2: around the world are working very hard. We just saw
Speaker 2: the Federal Reserve raised the interest rate by 75 basis point.
Speaker 2: And you are seeing the effect of that in terms
Speaker 2: of housing starts are a new development, construction or actually,
Speaker 2: new purchases of forms are dropping consumption levels where the
Speaker 2: data is available, at least for the U. S. You
Speaker 2: see consumption going down to answer your question more directly.
Speaker 2: I think we will be high
Speaker 2: having this issue all the way till 3rd, 4th quarter
Speaker 2: of 2023. So all of next year we are going
Speaker 2: to have inflationary pressure or prices go up, and as
Speaker 2: a result, interest rates go up and hopefully we will
Speaker 2: start seeing inflation to be dropped by the end of
Speaker 2: next year. So that's my prediction. So I'm taking a
Speaker 2: strong stand, and when I see this happening.
Speaker 1: Is this also going to be a case of when
Speaker 1: businesses raise prices coupled with the G S T increase?
Speaker 1: We're not going to see that go back down because,
Speaker 1: for example, tax affairs, they've increased tax affairs because of
Speaker 1: high oil prices. But I don't remember tax affairs going
Speaker 1: down when oil prices are down.
Speaker 2: That's true. So there's a lot of research that talks
Speaker 2: about how prices are sticky. When prices go up, they
Speaker 2: rarely rarely come down.
Speaker 2: But if you actually think about it, prices of electronic
Speaker 2: goods have only been coming down in the last 50 years.
Speaker 2: Your computer, your iPhone, you might say the iPhone price
Speaker 2: has been the same. Maybe 809 $100. But what is happening?
Speaker 2: The quality of iPhone every time is going up 1
Speaker 2: to 3 times the quality is improving. So essentially the
Speaker 2: price of iPhones have been going down. Your computers and
Speaker 2: everything else is going down.
Speaker 2: But taxi fares may be difficult because most of these
Speaker 2: kind of goods they adjust their prices every now and then.
Speaker 2: So imagine inflation has been there in the world. Every
Speaker 2: year we have inflation of 2%. Okay, which is reasonable.
Speaker 2: We want to live in a country where we have
Speaker 2: inflation because we don't want to live in countries where
Speaker 2: there's no inflation.
Speaker 2: But you don't see the price of chicken rice going
Speaker 2: up by 2% every year. What do the stars do?
Speaker 2: They keep the price constant, even though they know that
Speaker 2: inflation is higher by 2%. But every now and then,
Speaker 2: maybe five years, 10 years down the raid, they increase
Speaker 2: the price of chick
Speaker 2: and rise by maybe 30%. That adjusts for the inflation
Speaker 2: for the last 5, 10 years, and that's what we
Speaker 2: are seeing that is happening. This inflationary pressure is causing
Speaker 2: everybody to adjust. But now what we will not see
Speaker 2: is them adjusting prices for another 5 to 10 years.
Speaker 2: You are right. It may not come down, but it
Speaker 2: may not go up for the next 5 to 10
Speaker 2: years old. So
Speaker 1: I guess in the meantime, we have to get through
Speaker 1: the next year. It's
Speaker 2: one of those situations where there will be hard times
Speaker 2: to come, at least in the short run. But in
Speaker 2: the medium to long term, I don't think we should
Speaker 2: be that concern,
Speaker 2: especially for a country like Singapore, where the government is
Speaker 2: agile enough and they understand. And they can react fast
Speaker 2: enough
Speaker 2: in the US, where the policy making and politics is
Speaker 2: so convoluted that it will take years and there will
Speaker 2: be so many different fractions that nothing gets done. At
Speaker 2: least in Singapore, we will see reaction faster. And Singapore, luckily,
Speaker 2: also has a surplus. Unlike many other countries, they have deficits.
Speaker 2: So if they have to do any fiscal policy, they
Speaker 2: have to borrow.
Speaker 2: Singapore doesn't have to borrow. They can actually dipped in
Speaker 2: their surplus and reserves and actually help the consumers or households.
Speaker 1: Government is putting part of the revenue from this extra
Speaker 1: tax and putting that to the lower income households to
Speaker 1: help them cope with this rising G S t. But
Speaker 1: is that assurance package from the government
Speaker 1: enough to help the low income group in the long term?
Speaker 1: Or do you think that this will be a short
Speaker 1: term measure and after that, they'll have to figure out
Speaker 1: how to cope in the end?
Speaker 2: So I can't imagine this to be a permanent measure.
Speaker 2: Part of the measure is to help them because of inflation.
Speaker 2: Part of the measure is also to help them smooth
Speaker 2: their spending habits in steps as opposed to taking a
Speaker 2: big shock in reducing consumption. By allowing them to get
Speaker 2: some of the money back that they would have spent
Speaker 2: extra on GST payments. It gives them some breathing room
Speaker 2: to slowly bring down their consumption level. I think that's
Speaker 2: the right thing,
Speaker 2: but you don't want to make it permanent because essentially
Speaker 2: then you have not done any modification in consumer behaviour,
Speaker 2: a change in consumer behaviour on their spending because they
Speaker 2: realised there was no increase in GST. They just continue
Speaker 2: to spend the way they were. So you want to
Speaker 2: have an effect but the middle class or the upper
Speaker 2: middle class, where these rebates will be tiny or nonexistent?
Speaker 2: Those people will have to curb consumption or will have
Speaker 2: to think of other ways to smooth consumption
Speaker 1: before we let you go. Do you have any tips
Speaker 1: for us to manage this upcoming GSC hike?
Speaker 2: Yes, very simple tips make a budget figure out. What's
Speaker 2: your income? What's your expenses? How can you break down
Speaker 2: your expenses into necessary discretionary non discretionary expenses.
Speaker 2: Try to spread out the pain everywhere. So you can
Speaker 2: say I'm not going to just say we're not gonna
Speaker 2: take vacations. But we're going to continue eating out. So
Speaker 2: you want to cut down on all the things wherever
Speaker 2: you can because you are going to be experiencing this
Speaker 2: pain for another year or so. So it's not going
Speaker 2: to go away in the next two months. Three months,
Speaker 2: and I don't see wages to go up as fast anymore.
Speaker 2: So you want to make sure that your prudent and
Speaker 2: too expensive
Speaker 2: the other thing is do not try to smooth out
Speaker 2: consumption by taking on credit card debt because that's really bad,
Speaker 2: because then you are taking on new debt at 24%
Speaker 2: just because you think I want to continue and inflation
Speaker 2: will go away and things will be back to normal.
Speaker 2: So do not take our debt. Try to cut down
Speaker 2: as much of consumption as you can.
Speaker 1: Yeah, this period really reminds us of the need for savings.
Speaker 1: So when times are tough, we have something to go to.
Speaker 1: Thanks so much. Professor. Summit.
Speaker 2: Thank you very much.
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