COVID-19, the Circular Flow, and Whether Government Spending Significantly Affects Inclusive Growth and Unemployment

Answer

Part (a)

COVID-19 lowered two injections into Singapore’s circular flow of income: exports $(X)$ collapsed as global demand and travel fell, and investment $(I)$ fell as firms turned pessimistic. Injections now fall below leakages, so planned spending is less than current output and the flow contracts.

With injections below leakages, firms face unplanned stock build-up, cut production and demand fewer workers — so demand-deficient (cyclical) unemployment rises and the lower factor income paid to households induces a fall in consumption. In the next round, lower induced consumption causes a further unplanned stock rise, more output cuts, more job losses and lower income again. Each round is smaller as some of the fall leaks into lower saving, taxes and imports, until the induced fall in leakages equals the initial fall in injections, at a lower equilibrium national income. Through this reverse multiplier, the fall in $X$ and $I$ produces a magnified fall in real national income — negative actual growth — and a cumulative rise in cyclical unemployment.

Part (b)

Inclusive growth is actual and potential growth whose benefits are shared across the population, especially the low-income. The thesis is that the $100bn of government spending can have a significant impact on both inclusive growth and unemployment given Singapore’s circumstances, but the significance is conditioned by the small multiplier, the root cause of the unemployment, and the funds’ design — so the effect is real but not unqualified.

How government spending helps. As a direct injection, higher government spending raises AD and, via the multiplier, national income and the derived demand for labour, lowering cyclical unemployment and restoring actual growth. Crucially for inclusiveness, the COVID budgets were targeted: larger cash payouts and wage support to lower-income and vulnerable groups raise their incomes directly, narrowing the income gap and making the growth inclusive; wage subsidies (e.g. the Jobs Support Scheme) help firms retain workers, containing job losses; and training subsidies for lower-skilled and older workers raise their employability, letting them move into expanding, higher-wage sectors — reducing structural unemployment and further sharing the gains.

Why the impact may be limited. Several factors qualify the significance. First, Singapore’s small multiplier — high import and saving leakages — blunts the income and employment effect per dollar spent. Second, government spending tackles demand-deficient unemployment well, but where COVID accelerates structural change (digitalisation, permanently shrunk sectors such as aviation and tourism), demand management cannot create the right jobs — only supply-side retraining can, and that acts with a lag. Third, the spending draws on reserves, which are finite; persistent deficits are unsustainable if the external shock is prolonged. Fourth, if households and firms remain pessimistic, transfers may be saved rather than spent, weakening the multiplier.

Judgement. An increase in government spending is likely to have a significant impact on both inclusive growth and unemployment in Singapore — but its significance rests on design and context rather than on size alone. The decisive considerations are the root cause of the unemployment and the targeting of the spend. Against the demand-deficient unemployment and the income shock to vulnerable households that COVID inflicted, well-targeted transfers and wage support are highly effective and genuinely inclusive — that is precisely what the Resilience, Solidarity and Fortitude budgets were built to do. But the impact is bounded by the small multiplier and is weakest against the structural dislocation the pandemic also caused, which requires complementary retraining that bites only over time. The defensible stand is that government spending is significant and appropriate as the immediate, inclusive response, provided it is paired with supply-side measures to address the structural component and kept within the bounds of fiscal sustainability.