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Singapore Budget 2018: Tackling challenges of next decade

With real GDP growing 3.6 per cent in 2017, and property prices beginning to stir anew, Finance Minister Heng Swee Keat was able to report a revenue bonanza that gave him enormous fiscal headroom.


WITH real GDP growing 3.6 per cent in 2017, and property prices beginning to stir anew, Finance Minister Heng Swee Keat was able to report a revenue bonanza that gave him enormous fiscal headroom. Compared with a budgeted overall surplus of 0.4 per cent of GDP, the actual outcome was a surplus of 2.1 per cent of GDP (S$9.6 billion).

In 27 years of writing about Singapore's Budgets, I remember only three years where the fiscal balance was worse at the end of the year than the projection at Budget time. Most years, the outcome exceeded the projection by a wide positive margin. So FY2017/18 was seemingly little different.

But after three years of unusually-weak real GDP growth around the 2 per cent handle, Singapore broke free of its economic malaise in 2017. Evidence of the impending turnaround was clear by 4Q 2016, albeit aided by a mild fiscal stimulus. But when a mature economy like Singapore's resumes productivity-led growth, the revenue implications are eye-popping.

So Mr Heng chose to look far ahead into the decade of 2021-30, to try and address the challenges that will face the next prime minister. Of the S$9.6 billion fiscal surplus this year, a hefty S$5 billion will be set aside for a rail infrastructure fund, to help defray the future costs of large projects such as the high-speed rail to Kuala Lumpur.

The rest of the revenue bonanza will be shared by citizens, who will each receive a one-off hongbao of S$300 for those with an assessable FY2017 income of S$28,000 and below, and a minimum of S$100 for the wealthiest. And the corporate tax rebate for YA2018 will rise to 40 per cent (albeit capped at S$15,000 to imply that the relief is aimed at aiding smaller companies).

That will still leave Singapore with a hefty surplus this year. From tomorrow, the buyers' stamp duty goes up to 4 per cent (from 3 per cent) for the value of each new property that is above S$1 million. If property prices remain buoyant, next year's surplus will be much larger on this account. But the signal is that the government wishes to discourage rapid property price appreciation. Those who were speculating on any dilution of the property curbs that have been in place since 2011 need to recalibrate their thinking.

Long-term tax increases

At a time of buoyant economic growth, most of the other tax increases are to occur well into the future. A carbon tax (of S$5 per tonne of carbon dioxide equivalent, tCO2e) will be payable in 2020 (based on 2019 emissions), rising to S$10-S$15 per tCO2e in 2030.

The well-telegraphed rise in the goods and services tax (GST) will not occur until 2021 (and possibly as late as 2025), but it will be hiked 2 percentage points to 9 per cent. My view remains that Singapore, with one of the highest savings rates on earth, does not need a tax on consumption (despite it being fashionable among economic policymakers worldwide for its ease of collection).

The current account is the gap between national saving and investment. Since it was introduced in 1994, the current account surplus has averaged a bit more than 20 per cent of GDP each year (a cumulative surplus of nearly five times annual GDP). The 2017 surplus was 19 per cent of GDP.

As a mature economy with world-beating physical infrastructure, Singapore has little need to invest more than 25 per cent of its GDP each year. Combined with obligatory savings through CPF, and hefty savings by corporates, the GST contributes to an enormous national savings rate that keeps the current account surplus permanently in the stratosphere.

For FY2018/19, Mr Heng has chosen to keep an eagle eye on Singapore's needs over the next decade. Demographics will indeed be more of a challenge then: In the past, Singapore augmented its workforce with hordes of foreigners, most of whom wouldn't stay on long enough to burden the nation in their old age. That option has been progressively reduced since 2011, and net employment growth was near zero in 2017.

Incentives for robotics are part of the mix to deal with that challenge over the longer haul, including the construction sector which is highly dependent on the itinerant foreign worker. And there's a host of incentives to boost innovation and creativity, and develop a maritime and aviation transformation programme. A hike in the proximity housing grant encourages children to live close to (and care for) their parents.

Provided ample fiscal headroom, Mr Heng has delivered on his vision of building a smart, green, liveable and innovative city, while fostering a cohesive society in a manner that is eminently sustainable fiscally.

  • The writer runs the consultancy Real-Economics, and is the author of Asia Reborn, a modern history of Asia



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