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