Return to surplus expected for Singapore Budget in FY2022

Singapore

WITH government revenues staying strong and Covid-19 support winding up, the new financial year may be one of building the public coffers back up.

This builds on progress made in soon-to-end FY2021, with a much smaller expected shortfall than FY2020's record S$64.9 billion deficit, and some economists even seeing the chance of a surplus.

One consideration is the government's obligation to run a balanced budget over its full term, which will end in 2025 at the latest. Citi economists Kit Wei Zheng and Ang Kai Wei expect this to be "the overarching priority" for the rest of its term.

Better than expected

The path back into surplus may get an early start with FY21.

Though the official projection as of July is for a deficit of S$11 billion or 2.2 per cent of gross domestic product (GDP), Barclays economist Brian Tan expects a surplus of 0.4 per cent of GDP instead.

"Revenue collections look set to vastly outperform the government's earlier projections," said Tan in a Jan 7 note.

Other economists still expect a deficit, but a smaller one than estimated. OCBC chief economist Selena Ling estimates it at S$7 billion; UOB economist Barnabas Gan S$5.75 billion; DBS senior economist Irvin Seah S$4 billion to S$5 billion; while Maybank Securities analysts Chua Hak Bin and Lee Ju Ye see a budget deficit of S$1.1 billion.

Revenues for FY21 have been running ahead of official estimates, driven by higher-than-expected corporate and personal income tax takings, economists observed.

Total government operating revenue for the first 8 months of the fiscal year - April through November 2021 - was S$55.05 billion, according to data from the Accountant-General's Department, available on the Singapore Department of Statistics' website.

Collected in the first two-thirds of the FY, it already represents 72 per cent of the government's S$76.4 billion full-year estimate.

The 8-month figure is also 42.2 per cent higher than the S$38.7 billion collected in the year-ago period, and 5.2 per cent above the pre-pandemic S$52.3 billion figure in the corresponding 2019 period, the Maybank analysts noted. They expect full-year operating revenue to come in at S$83 billion.

As for spending, UOB's Gan expects this to come in as budgeted, but others think it could be lower.

Tan notes that in the first half of the FY, government spending was S$40 billion, less than half the full-year estimate of S$101.1 billion.

"Expenditure has been coming below budget projections due to lower operating and development expenditure, partly due to underutilisation arising from Covid," said the Maybank analysts.

Building back up

For the new financial year, the fiscal position is expected to shift further out of deficit, though views vary as to the extent of this.

"Importantly, as economic conditions are expected to improve, policymakers may be inclined to build up the fiscal coffer again," said Seah, who expects the fiscal stance to turn "modestly contractionary" in Budget 2022, implying a small surplus.

The balanced budget requirement has historically "incentivised surpluses in the first half of the term, with accumulated fiscal bullets to fund a deficit closer to elections", said the Citi economists in a December note.

They "do not expect the current cycle to be any different", and tentatively expect a small surplus of 0.7 per cent of GDP or S$3.5 billion.

The Maybank analysts similarly expect a balanced budget or small surplus, saying: "With the strong growth recovery, we expect the government to restore its finances and balance the books, unwind its job support programmes and raise the GST (goods and services tax) to shore up its revenue base."

Barclays' Tan has the most optimistic view, of a 3 per cent surplus. This incorporates an expected 7.8 per cent rise in revenue collection as the recovery continues, with a likely GST hike and possible increases in real estate and motor vehicle taxes. He also expects spending to fall 6.5 per cent as Covid support wanes.

In contrast, UOB's Gan expects a deficit of S$2.75 billion, though agreeing that "the spirit of the upcoming Budget is likely going to be one of fiscal consolidation, and the focus will likely be on medium- to long-term goals rather than immediate Covid-19 measures".

Some economists had previously argued that better-than-expected tax takings could provide grounds for delaying the planned 2-percentage-point GST rate hike. But the view has shifted to expecting the hike to kick in this year, with GST being a major contributor in the return to a surplus.

Consumption may not take much of a hit, thanks to offsets, and could even be boosted if consumers front-load spending before the hike takes effect, said Gan.

There is much speculation about when the rate will be raised, and whether in steps or all at once, with the government having signalled that Budget 2022 may answer these questions.

OCBC's Ling's baseline scenario is for the GST rate to be raised by 1 percentage point on July 1, which could then mean a "modest" budget surplus of around S$2 billion or 0.5 per cent of GDP.

The Citi economists think a 2-point hike could generate up to S$3.5 billion in additional revenue, while the Maybank economists put it at a similar S$3.6 billion.

In any case, one change should make it "technically easier" to achieve a balanced budget in years ahead, said the Citi economists: revised fiscal accounting rules thanks to the Significant Infrastructure Government Loan Act (SINGA).

"Previously, the entire upfront cost of an infrastructure project was expensed in the first year," they noted. Under SINGA, this upfront cost will be capitalised instead, with only interest costs and depreciation expenses included in development expenditure.

This reduced development expenditure will widen a fiscal surplus or narrow a deficit - which could be helpful for the government's balancing act, with just three years to go until 2025.

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