Saturday, February 12, 2011

Budget expected to deliver the goods

WHEN Finance Minister Tharman Shanmugaratnam walks into Parliament next Friday to deliver the Budget statement, he will be carrying the weight of the nation's expectations on his shoulders.

It seems that handouts are on most people's minds, and who can blame them, especially with the numbers that have been racked up over the past year.

For one thing, Singapore's record pace of economic growth - an estimated 14.7 per cent last year - has sent cash rolling into government coffers.

Economists from DBS, OCBC and Bank of America Merrill Lynch are all projecting record revenues for the Government last year, boosted by betting duties and levies, and higher personal and income tax collections.

This, combined with the prospect of an election this year, has raised hopes that individual taxpayers might get some cash handouts, say analysts.

'With election talk already in the air, the February Budget could be similar to the 'Progress Package' in 2006,' says DBS economist Mr Seah.

Then, the Budget - unveiled a mere three months before the polls - gave out $200 to $800 in cash to every citizen.

In 2001, just three weeks before the election, then Prime Minister Goh Chok Tong announced a round of off-Budget measures worth $11.3 billion.

Among other things, Singapore citizens received between $200 and $1,400 in cash, depending on their income level.

Companies, on the other hand, are clamouring for the Government to lower the costs of doing business. Many bosses are also worried about the availability of manpower now that it has become increasingly difficult and more expensive to employ foreign workers.

But beyond some expected one-off measures, the Budget will most likely focus on tackling the structural problems that continue to affect the economy, said Mr Inderjit Singh, an Ang Mo Kio GRC MP.

'One-off help will be much appreciated by the business community but what they need is solid help to raise productivity that will benefit for the long term,' he said.

Inflation and inequality

THE remarkable V-shaped recovery that Singapore experienced last year against the backdrop of impressive overall Asian growth is certainly cause for much optimism.

OCBC economist Selina Ling said the estimated 14.7 per cent economic expansion is 'probably no flash in the pan, but a reflection of a dynamic economy leveraging on strong regional growth'.

But the rapid pace of growth has also brought its own share of problems, namely, rising inflation.

Prices of key essentials such as food, housing and transport have shot up here and across Asia.

In Singapore, the inflation rate hit a two-year high of 4.6 per cent last December.Private sector economists anticipate inflation hitting 3.2 per cent this year, a tad above the official forecast of between 2 and 3 per cent.

Much of last year's inflation was driven by the rise in the cost of buying and owning a car, whether from soaring certificates of entitlement or oil prices.

This year, inflation, coupled with income inequality, is a threat on three main fronts.

First, those with lower incomes are the first to feel any increase in the price of essential commodities like food and energy.

For example, foodcourt chains like Kopitiam are planning to charge 10 cents more for a cup of coffee from March 1.

Energy tariffs are up by 3 per cent for the first three months of this year, compared with the last quarter of last year.

Adding fuel to the fire is the fact that incomes at the lower end of the scale have hardly moved over the past 10 years, said DBS economist Irvin Seah.

He noted that while incomes in the top 20 per cent rose by as much as 52.8 per cent from 1997 to 2008, incomes in the bottom 20 per cent actually fell by 2.7 per cent.

'While the income levels for the rest of the population continue to rise, particularly for the top earners, the lowest income group has struggled to stay afloat,' he said.

'Plainly, not everyone has benefited equally from the economic growth that has occurred over the past decade.'

A second area of concern is skyrocketing property prices. All the signs of a frenzied market are present: Last year, a record number of private homes were sold while a mini en-bloc fever seems to have taken hold.

The Government has moved to cool the red-hot real estate sector with a range of tighter lending regulations and stamp duty increases.

Property watchers expect these to have an impact on the market, although it is not clear to what extent.

Rising property prices have caused a dent in the aspirations of many young families and voters for whom upgrading has become part of the 'Singapore dream', notes political analyst Eugene Tan.

'There may be enhanced support for those looking to buy HDB flats but this support is unlikely to be extended to those seeking to purchase private property,' he says.

But he does not rule out further cooling measures to assure the younger aspiring voters that the Government is doing all it can to keep the market in check.

Third, rising costs for businesses will also pose a key challenge.

Mr Singh points out that inflation also hurts businesses, especially because of rising wages.

He hopes the Government can support businesses keen on raising productivity by implementing another Jobs Credit-type of subsidy for workers.

The Government paid for a portion of workers' salaries through Jobs Credit, which was introduced in 2009, to prevent firms from laying off workers.

'Productivity gains will take a while to set in but in the meantime companies, especially smaller ones, are struggling to find manpower,' says Mr Singh, noting that many firms have modelled their businesses around the availability of low-cost foreign labour.

'So if they can get some help in subsidising manpower costs while improving productivity, that will be welcomed.'

Expected measures

AGAINST the backdrop of inflation and inequality woes, it is no surprise that both Prime Minister Lee Hsien Loong and Mr Shanmugaratnam have said that there will be measures to help Singaporeans cope with rising costs.

But while the help will be tilted towards the lower income group, all Singaporeans can look forward to an 'inclusive Budget' which will look after every group, said Mr Lee during a Chinese New Year visit to workers.

He also said that there was a need to especially help those at the lower end of the wage and skills spectrum.

The best way to achieve that 'is to uplift their skills and redesign their jobs and improve what workers are able to do', he said.

Indeed, the Government's strong fiscal position should allow it to be more generous in helping the poor and even the middle-income group, say economists.

Citigroup's Kit Wei Zheng estimates that if this is the last Budget before the next election - it must be held by February next year - the Government may have $10 billion to $13 billion to spend.

This is because the Government aims to have a balanced budget at the end of every election term.

Cumulatively, between 2007 and 2010, the overall budget balances have shown a surplus of more than $10 billion, he notes.

Mr Kit adds: 'Given its fiscally conservative nature, buoyant growth backdrop and desire to replenish the fiscal reserves, we suspect an actual deficit of around $2 billion is more likely, although we do not rule out a larger announced figure, with the Government adding the rest of the cumulative surpluses to the fiscal reserves.'

Still, even if it just runs a modest $2 billion deficit, as opposed to a $10 billion one, the resulting fiscal position still gives the Government enough ammunition to enhance policies such as the Workfare Income Supplement and other such financial assistance schemes, says Mr Seah.

These will give much needed aid to workers on the wrong end of the wage scale and narrow the income gap.

Mr Seah also expects utility, rental and service and conservancy rebates to be on the cards.

Likewise, Central Provident Fund and Medisave top-ups will also feature prominently in any wealth redistribution exercise, economists say.

Training subsidies and schemes are also almost certain to be announced, given the importance the Government has placed on upgrading workers' skills in recent years.

OCBC's Ms Ling says the main course of action to help those with lower incomes in a concrete way will be through the Continuing Education Training scheme, which equips adult workers with new skills that are in demand.

On the business front, economists expect the Government to push ahead with its productivity drive by either rolling out new policies or enhancing existing incentives.

This could include relaxing the criteria for firms to be eligible for productivity-linked tax rebates, says Ms Ling.

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