Eye on the Budget

With an improved growth outlook, Budget 2018 will likely include tax hikes and streamlining of government spending. These measures will be necessary to safeguard Singapore’s longer-term fiscal h...
Irvin Seah25 Jan 2018
  • Budget 2018 will be presented on 19 February; amid an improved growth outlook…
  • …the budget will likely focus on refining restructuring-related policies and fiscal planning
  • Policy measures to promote innovation, deepen critical capabilities across industries, and…
  • …support the internationalisation of local firms are likely to be featured in the budget
  • Tax-rate hikes and streamlining of govt spending are likely; fiscal policy will turn contractionary
Photo credit: AFP Photo

This is an excerpt of a more detailed deep-dive into Singapore which we issued today. For the PDF of the report, please scroll to the bottom of the page or click on the tab on the right.

Finance Minister Heng Swee Keat will be announcing Budget 2018 on 19 February. This will be a highly anticipated budget, given an improved growth outlook and talk of recalibrating the fiscal position.
The external environment has improved significantly. Singapore’s economy has benefited from a synchronised recovery in the US and the Eurozone, while growth in China should remain relatively strong and likely more sustainable, given its supply-side reforms. While this would likely be tempered by tighter liquidity conditions, given the monetary-policy normalisation by key central banks around the world, we expect the growth outlook for Singapore to remain sanguine in 2018.

Amid the improved growth outlook, the budget will likely focus on further refinement of the medium-term, restructuring-related policies instead of counter-cyclical measures. Expect some attention on the rebalancing of the fiscal position (i.e. tax hikes) as well, given the recent official rhetoric on that issue, due to the increased spending in recent years and going forward, given an aging population.

The budget will skew towards longer-term structural issues, especially on executing the recommendations put forth by the Committee on the Future Economy. Note the Finance Minister is also the Chairman of the Committee.

There will be more measures to strengthen the Industry Transformation Programme (announced in Budget 2016). The aim is to promote innovation and deepen critical capabilities across industries and within individual enterprises at different stages of growth (i.e., from startups to large local enterprises). Beyond that, there could be further enhancement to the Automation Support Package, with a bigger grant quantum and higher risk-sharing by the government to help companies invest in digital technologies, additive manufacturing, and robotics. There could also be more measures or tax incentives to help companies venture overseas.

Concomitantly, more public communication on this aspect and targeted consultancy for local companies will surely help enhance the take-up rate of these schemes. Companies must also realise the potential of overseas markets and be willing to scale up their business models and take the plunge abroad. With Singapore assuming the ASEAN chairmanship this year, we need to step up our regionalisation efforts.

Besides helping established companies, resources may also be directed towards startups. Given that there are already many such assistance schemes and “incubator” facilities, a new stock exchange for startups could be an option worth exploring, as is being considered in Thailand. Beyond addressing the funding needs of startups and boosting investor interest in small local companies, such an exchange could raise the visibility of Singapore as a global centre for startups and entrepreneurship. It could also provide a steady stream of new companies which could potentially move up to the main board.

Besides refining the efforts in structural adjustment, policymakers will likely embark on some long-term fiscal planning. The primary deficit was originally projected to more than double to SG$5.6bn (1.3% of GDP) in FY17, from SG$2.7bn in FY16. Expenditure on special transfers was expected to rise about SG$110mn previously. Even though we expect the primary deficit to turn out better than projected (see later section), Singapore will still register three consecutive years (including FY17) of deficit in the primary balance.

Continuously wider deficits are not sustainable. This explains the need to rebalance the fiscal position by finding new sources of revenue and/or lower spending. The diesel tax, hikes in the water tariff, and the permanent 2% downward adjustment to budget caps of government agencies introduced in Budget 2017 were part of the aim. While the return on Singapore’s foreign reserves, in the form of the Net Investment Returns Contribution (NIRC), has helped offset the basic deficit and allowed Singapore to enjoy overall fiscal surpluses for many years, there are limitations on relying on the NIRC going forward. Hence, expect hikes in some taxes and/or cuts in subsidies in the upcoming budget.

The FY17 overall surplus is likely to be about SG$5.0bn (1.2% of GDP), significantly higher than the budgeted amount of SG$1.9bn. This comes largely on the back of a less-than-projected operating expenditure, given the self-imposed 2% downward adjustment to the budget caps of all ministries and Organs of State, as well as lower development expenditure arising from low inflation (0.6% in 2017). Total expenditure is likely to register SG$73.6bn, against a budgeted SG$75.1bn. Conversely, operating revenue in the first half of FY17 already accounts for about 55.2% of the budgeted amount. Coupled with the much-better-than-expected growth performance, the revised revenue number could surprise on the upside.

While fiscal policy will turn contractionary, it is necessary to tighten the primary balance, given the past three consecutive years of deficit. Any potential negative impact on the economy could also be easily offset by the relatively more conducive economic climate. Importantly, while Singapore’s overall fiscal position remains strong, given the robust NIRC, policymakers will continue to adopt a prudent and forward-looking approach in planning for the future. This includes possible tax adjustments, which may be unpopular but are necessary to safeguard the sustainability of Singapore’s longer-term fiscal health.

To read the full report, click here to Download the PDF.

  Irvin Seah
Economist - Singapore, Malaysia, & Vietnam

The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.

PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No.