Budget 2023 a delicate balancing act between prudence and support as costs rise: economists

THE government is likely to be “caught in a bit of a bind” in the upcoming Budget 2023, said economists, given its need to be fiscally prudent and rein in expenditure, even as it helps to address rapidly rising costs.

“With Singapore entering the third Budget of its five-year fiscal term in FY2023, the need for a ‘balanced budget’ over the five-year term requires policymakers to account for an accumulated 1.4 per cent deficit in the first two years,” said RHB senior economist Barnabas Gan.

“On the other hand, there remains the need to address rising costs of living, especially given the elevated inflation rates seen in the last 12 months, coupled with the rise in goods and services tax (GST) to 8 per cent effective on Jan 1 and to 9 per cent effective on Jan 1, 2024.”

He added that it is also crucial to invest in Singapore’s medium to long-term needs for it to stay economically and technologically relevant in a post-pandemic world.

Rising inflation and slowing economic growth pose exceptional challenges for policymakers, said DBS senior economist Irvin Seah, noting that Singaporeans require support to cope with rising costs, but “overdoing it” in handouts may encourage spending and stoke demand-pull inflation.

Budget 2023 will be more similar to pre-Covid Budgets than those seen in recent years, Seah said, taking a longer-term view for businesses and focusing on raising productivity, even as it tackles near-term cost concerns.

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UOB economists Suan Teck Kin and Alvin Liew said there was a sharp and synchronised monetary policy tightening globally by major central banks, resulting in a weaker global economic outlook in 2023.

Singapore’s services industries may enjoy a brighter outlook even if there are “significant challenges”, they said.

Bearing the brunt of this negative outlook are Singapore’s manufacturing sector and trade-related industries.

Still, economists agreed that Covid-era support will likely be pulled back. OCBC chief economist Selena Ling believes support schemes will be “further unwound”; the UOB team added that they anticipate rollbacks to “conserve fiscal ‘fire power’”.

Said Ling: “There will be a need to keep some ‘dry powder’ in case the economic environment deteriorates further and a global recession materialises. Hence, it will not be prudent to roll out the heavy artillery now.”

But businesses continue to face challenges, such as manpower, the higher interest rate environment and in their sustainability journey.

The UOB economists said the government could, for example, temporarily increase the dependency ratio ceiling or introduce more incentives to attract locals to the services industries amid the labour crunch.

On sustainability, Ling believes that possible announcements include enhanced deductions for expenditures on environmental, social and governance, decarbonisation and energy transition, as well as incentives to further promote electric vehicle adoption and green financing.

Seah said that with the reopening of borders, businesses will be encouraged to internationalise to increase competitiveness. This may mean extending and enhancing initiatives such as the Market Readiness Assessment grant and the Double Tax Deduction for Internationalisation scheme.

To help small and medium enterprises (SMEs) cope with the sharp rise in interest rates, the government could explore co-sharing lending risk, especially for loans made for green or green-transitioning projects, the UOB team said.

RHB’s Gan believes Budget 2023 will be geared towards supporting SMEs, with operating costs now higher. Economists agreed that there is likely to be help for them to adopt digital and automation solutions, in the form of enhanced grant quantums, capital allowances and subsidies.

Gan suggested that there may also be tax incentives to attract and retain foreign talent for Singapore’s high potential industries, such as biomedical sciences, financial services and digital technology-related sectors.

More help may also be extended to the lower-income and vulnerable groups, possibly through unemployment support for retrenched workers, Gan and Ling agreed, with Gan adding that there should be a set of qualifying criteria if so.

Ling also believes that enhancements to Workfare may be coming.

Enhancements to initiatives to encourage workers to remain relevant through training or retraining was also a common expectation among economists.

Seah noted that, with the possibility of remote work, Singaporeans not only compete for jobs with foreigners entering the country, but also with those who may be able to work remotely from abroad.

The UOB economists said that the GST Assurance Package may be increased by S$500 million to S$1 billion, as the elevated inflation is likely to be more persistent.

But Ling reiterated that “the overarching principle of fiscal prudence cannot be ignored since that underpins the need for the recent 1 percentage point GST hike in January as the population is ageing and expenditure needs for infrastructure and healthcare continue to grow over the medium term”.

Immediate handouts through various channels such as the packages, rebates, vouchers or account top-ups “will likely be ad hoc just to tide through the current inflation storm”, she added.

UOB’s Suan and Liew said: “The government had also indicated in Budget 2022 that it understood ‘the concerns that Singaporeans have about the GST increase taking place at the same time as rising prices’ and therefore chose to stagger the 2-percentage point GST increase over 2023 and 2024.

“With the outlook of prices now being less favourable versus one year ago, there is potential for a further one-year deferment to the GST hike from January 2024 to January 2025.”