Citigroup says Singapore “fairy tale” reaches end

Lee J. Miller
19 Feb 08

Singapore’s budget targets lower- and middle-income households – and disappoints on income tax – as the government grapples with rising prices and the U.S. economy slows, Citigroup Inc. said in a report.

“The fairy tale economy of high growth and low inflation of the past two years has come to an end,” Kit Wei Zheng, chief economist for Singapore and Malaysia, wrote in the report today.

The chart of the day shows Singapore’s economic growth (in red) against the cost of food (in white). Gross domestic product in the October-December period contracted for the first time in 18 quarters. The city-state of 4.6 million people imports about 90 percent of its food, according to the government.

The budget also provides “massive increases” in spending on subway and road projects, helping construction companies, the report said. A “key disappointment was the lack of a cut in personal income taxes,” with a one-time 20 percent tax rebate, the report said.

Still, the government will provide “generous handouts,” including rebates, payments to the national pension fund, and subsidies for adult education.

Singapore’s Finance Ministry unveiled the estimated S$37.5 billion ($26.6 billion) budget on Feb. 15. The day before, the growth forecast was lowered by half a percentage point, to a range of 4 percent to 6 percent for 2008. The outlook for inflation was raised by a full point, to between 4.5 percent and 5.5 percent. The government singled out higher costs as a concern.

“There was still a little of something for everyone,” the Citigroup report said. “Perhaps more could have been done to help businesses to deal with rising costs.”

Much of the increased spending for businesses was in the form of tax incentives on research and development investment in Singapore, the report said. The budget is “fairly generous and expansionary.” Singapore will boost spending 12.5 percent in the financial year starting April 1.

To contact the reporter on this story: Lee J. Miller in Bangkok at: l…