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Preparing Singapore for a world of uncertainty (Amended)
IN 2016, Singapore had its largest calendar-year fiscal deficit since 2003, although this was very modest by global standards at 1.2 per cent of GDP - and before taking account of the net investment returns contribution (NIRC).
Given the pervasive gloom about a supposedly imminent "technical recession" in August-September, the counter-cyclical stimulus was perfectly timed - with a quarterly deficit of 2.5 per cent of GDP in Q4 2016 (compared with 1.6 per cent in Q4 2015, implying a year-on-year stimulus of 0.9 per cent of GDP for the quarter). Aided by that, and cyclical tailwinds in the semiconductor sector, real GDP accelerated to 2.9 per cent year-on-year growth last quarter.
That propitious backdrop allowed Finance Minister Heng Swee Keat to focus on the long term in the Budget for the year ahead, putting flesh on the strategic skeleton sketched out by the Committee on the Future Economy (CFE). Not only did he emphasise key infrastructure initiatives like Changi's Terminal 5 and the High Speed Rail to Kuala Lumpur, he also spoke of building a Jurong Lake Garden that would enhance lifestyles and create new social spaces in the heartland.
Most vitally, the industry transformation maps (ITMs) are carefully designed to bolster the prospects of 23 separate sectors, through cooperation between employers, workers and government. Of these, six have already been adumbrated and 17 more will be in the year ahead, spending S$4.5 billion across these initiatives. A further S$2.4 billion will go toward implementing the CFE strategy over the next four years, with a focus on spurring the Skills Future movement, particularly with a focus on leadership development, and continued support for innovation, research and productivity enhancement.
SMEs will get substantial support for Internationalisation (through the Global Innovation Alliance bringing together San Francisco, Beijing and major Asean cities) and digitalisation. The continuance of the Wage Credit scheme enables SMEs to cope with rising wages, while the Special Employment Credit encourages them to employ older workers.
While budgets of a decade ago provided tax rebates to all, these are now capped - in order to channel the benefits to those who most need them (and exclude those perceived to be earning enough). So the corporate income tax rebate of 50 per cent is capped at S$25,000 and the personal income tax rebate of 20 per cent at S$500.
Similarly households in the lowest quintile of incomes receive the greatest support for meeting their expenses, and the next quintile receives slightly less, for a total assistance package of S$850 million. The Budget also provides thoughtfully for people with disabilities, creating a masterplan to integrate them more seamlessly into the workforce.
These and other redistributive steps adopted over the years help reduce the inherently regressive quality of the Goods and Services Tax.
This year's Budget also begins to lay out the basis for a regime of carbon taxation that will help address the long-term environmental challenges to which an island nation is especially vulnerable.
The cyclically-challenged offshore/marine sector continues to receive some relief (including no increases in foreign worker levies), but the construction sector is going to see its levies rise - precisely as the improvement in construction contract awards over the past half-year has improved the prospects of that sector.
Overall, the budget is still mildly expansionary, with the "basic" deficit (before NIRC) slated to increase to 1.9 per cent of GDP.
It is always worth remembering that Singapore does not count the substantial proceeds from land sales as an item of government revenue (as Hong Kong prominently does, as do most cities in China). Including the NIRC (just over S$14 billion this year and last), Singapore will have a surplus of S$1.9 billion in the year ahead (versus a surplus of S$5.8 billion for the current fiscal year).
So fiscal policy will remain mildly expansionary, and real GDP will rebound to more than 3 per cent growth in 2017 after three unusually sluggish years. Three cheers to Heng Swee Keat: not only did he personally overcome a stroke in the past year, he has also delivered a Budget that prepares the island-republic for a world of uncertainty and potential strife.
Amendment Note: An earlier version of the article stated that the "basic" deficit (before NIRC) was slated to increase to 1.6 per cent of GDP. This is incorrect. The figure should be 1.9 per cent. The article has been amended to reflect this.
- The writer runs REAL-Economics.com, an independent economic consultancy, and contributes to the independent research portal, Smartkarma
- For more Budget 2017 stories visit bt.sg/budget17