Singapore: Singapore Budget 2019 – More room for expansion
- Fiscal strain will intensify along with demographic shift
- A better way to generate revenues to offset rising expenditure is by ensuring economic growth
- Restructuring the economy and helping local companies internationalise further is important
- The accumulated surplus over the past three years means fiscal policy can be more expansionary
- Expect a deficit of SGD2.5bn (0.5% of GDP) for FY19, from a surplus of SGD3.3bn (0.7%) in FY18
Over the past five decades, Singapore’s fiscal policy revolved around low tax rates and relatively lean public provision of services such as health and education. However, as the Singapore population continues to age, there is growing pressure on the fiscal position. These pressures are reflected in the budget balance. Although Singapore enjoyed years of overall fiscal surplus, this is largely due to support from the Net Investment Return Contributions (NIRC).
However, the government has already been tapping more on the returns from the reserves over the years. Contribution from the investment returns has risen by a factor of 6, from about SGD 2.5bn between 2000 and 2004, to an average of SGD 15bn over the past three years. The NIRC is currently the single largest revenue item on the government’s budget. Without the NIRC, Singapore could be stuck in perpetual fiscal deficit.
Yet, tapping on the NIRC has its limits. While it will be tempting to extract more from the NIRC, doing so means that less will be ploughed back to the official reserves to generate returns to meet future fiscal needs. In this regard, tapping the NIRC has its limitations.
Best way to generate revenue - growth
Higher expenditure will challenge the fiscal position unless more revenues can be generated and given the limitations in tapping the NIRC. Although raising tax rates (e.g., corporate tax, personal income tax, GST) may be the interim solution, the risk is that it could lead to outflows of talents and wealth, reduce the relative attractiveness of Singapore, and increase the overall cost burden of Singaporeans and companies.
So, the best way to generate revenues is through economic growth. It’s about growing the pie. Growth means a steady rise in revenues from which to fund expenditure. But with the population aging and productivity growth moderating, it is hoped that the next stage of growth will be driven by local companies venturing overseas .
These companies could leverage the abundant supply of resources (i.e., labour) in the region while still providing meaningful jobs (i.e., managerial or specialised skill positions) for local Singaporeans. This could also help in alleviating the predicaments faced by the PMETs. More importantly, corporate earnings generated overseas could translate into tax revenue to support a higher social expenditure.
Overall budget position for FY18 will surprise on the upside. The FY18 fiscal balance is expected to register a surplus of SGD 3.3bn (0.7% of GDP), compared to a budgeted deficit of SGD 600mn. If the overall fiscal outcome pans out as expected, this will bring total accumulated budget surplus for this term of government to about SGD 19bn. This implies that the government is in a solid position to roll out more expansionary fiscal policies in the coming two budgets.
With the accumulated surpluses, policymakers could afford to be slightly more aggressive. Budget 2019 will be expansionary without diluting fiscal prudence. A wider primary deficit of SGD 8.2bn (1.7% of GDP) is projected. Revenue is likely to rise only marginally on the back of a softer economic outlook. In contrast, expenditure is expected to surge by about 6.6%. With a slight uptick in special transfers and a conservative assumption on the NIRC (SGD 15bn), overall fiscal balance for FY19 is projected to register a deficit of SGD 2.5bn (0.5% of GDP).
Economic climate is becoming more challenging. Despite the softer growth outlook, we expect the government to stay focused on longer term restructuring of the economy. Nonetheless, the accrued surpluses over the past three years means that policymakers are in a solid position to roll out counter-cyclical measures should economic conditions warrant that. More importantly, while there is enough in the official coffer to provide more fiscal impetus in the coming two budgets, ensuring fiscal sustainability remains paramount.
To read the full report, click here to Download the PDF.
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. 09.03.1.64.96422.