What this lesson teaches
I can explain fiscal, monetary and supply-side policy and judge how well each works.
Syllabus 9570, 3.2.3(b). Macroeconomic Policies: Policy measures and their effectiveness in achieving macroeconomic objectives:; Fiscal policy - How discretionary fiscal policy can influence the level of economic activities and living standards through government spending and taxation; Monetary policy - How monetary policy can influence the level of economic activities and living standards through the management of exchange rates (case of Singapore) and interest rates; Supply-side policies - How supply-side policies can improve quantity, quality and mobility of factors of production to increase the productive capacity of an economy and hence affect living standards
Make a guess
GST rises from 7% to 9%. Which households pay the largest share of their income in GST?
- Higher-income households, because they buy more.
- Each household pays the same share, because the rate is the same.
- Lower-income households, who spend most of what they earn.
Show the answer
Lower-income households, who spend most of what they earn.
GST is charged on spending. Households that spend a bigger share of income pay a bigger share in GST.
Progressive taxes and targeted transfers reduce inequality and help lower-income households share in growth.
Transfers are payments from the government to households, such as cash payouts, that are not payment for goods or services. They are not part of G, but raise AD when households spend them.
Progressive taxes take a larger share of income from people with higher incomes. Combined with transfers, they reduce inequality in disposable income.
Singapore raised GST from 7% to 9% in 2023 and 2024, and paired it with the Assurance Package of cash and vouchers to cushion lower-income households.
Transfers help incomes now. Education and training help people earn more in future. Both support inclusive growth.
- Transfers
- Not part of G; affect AD when spent.
- Singapore
- GST rise paired with the Assurance Package.
Worked example: Following a $500 transfer
A low-income household receives $500. It spends $300 on local services, $100 on imported goods and saves $100.
- AD rises by the $300 spent locally, plus the multiplier effect.
- The $100 on imports and $100 saved do not add to domestic demand right away.
- The household's living standard rises, reducing inequality.
- If some eligible households fail to apply, the transfer misses part of its target.
Watch out for this
Cash transfers are part of government spending (G) in AD.
Transfers are not purchases of goods and services. They affect AD only when households spend them, through C.
Check your understanding
Why can a higher GST worsen inequality without other measures?
- Higher-income households buy more goods, so they pay more GST in dollar terms.
- GST falls mainly on luxury goods, which households with lower incomes rarely buy.
- Poorer households spend more of their income, so GST takes a larger share of it.
Show the answer
Poorer households spend more of their income, so GST takes a larger share of it.
Right. GST is regressive as a share of income, which is why the Assurance Package was added.