S’pore budget targets widening income gap ahead of polls

February 18, 2011
Singapore Democrats

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Kevin Lim & Charmian Kok

Reuters

Singapore unveiled a budget on Friday brimming with handouts for poorer citizens, with an eye on elections that are widely expected in the second quarter and the social impact of rapidly rising prices.

Measures for the upcoming financial year included a package of benefits for Singaporeans worth S$6.6 billion ($5.2 billion), as well as lower income taxes for middle-income wage earners, Finance Minister Tharman Shanmugaratnam told parliament in his budget speech.

Analysts said that was more than double the incentives announced in the budget before the last election in 2006.

Other handouts included increased subsidies for first-time buyers of government-built HDB apartments and grants to lower-income Singaporeans in the form of salary top-ups. Some benefits would be paid into retirement accounts.

“The incentives are mainly for lower-income and middle-income households,” said Chow Penn Nee, an economist at United Overseas Bank. “It is the last budget before elections.”

The next election must be held by February 2012.

In response to growing inflationary pressures, Tharman said the central bank would allow the currency to appreciate in order to moderate price increases, but warned that any sharp gains in the Singapore dollar posed dangers to the economy.

“Using the exchange rate to offset sudden spikes in prices, such as what we have seen in oil prices over the last six months, would require a sharp appreciation of the Singapore dollar. This would disrupt our exporters,” he said.

Inflation a growing problem

Asian countries are grappling with rising inflation and the region’s central banks are under pressure to tighten monetary policy to minimise the impact of higher prices. In Singapore’s case, this would mean a stronger local dollar as the central bank manages policy through the exchange rate.

“What he (Tharman) was alluding to was that the currency cannot do all the heavy lifting. Clearly there is scope for other government measures like administrative measures to temper inflationary expectations,” said Leong Wai Ho, an economist at Barclays.

Singapore’s budget for the financial year starting April 1, 2011 included some reliefs for companies in the budget, such as enhanced tax rebates for firms that invest to raise productivity.

But these were offset by an increase in employers’ contributions to employee pensions and higher levies on firms that employ lower skilled foreign workers.

Helped by strong economic growth of 14.5 percent last year, Tharman said Singapore will report a small overall budget deficit of S$300 million ($235 million) for the financial year ending March 2011, much smaller than the S$3 billion deficit the government had originally projected.

For the coming financial year ending March 2012, Singapore expects to post an overall budget surplus of S$100 million, helped by investment returns of about S$7.8 billion.

Singapore’s finances are healthier than official numbers suggest, as proceeds from land sales — estimated at over S$15 billion in FY2010/11 — are put directly into reserves and not reflected as revenue in its annual budgets.

Revenues have also been boosted by the opening of two multi-billion dollar casino-resorts.

Eye on elections

Prime Minister Lee Hsien Loong must hold general elections by next February and the government has indicated it will call a poll in the second quarter.

Although the economy is booming and Singapore is one of the world’s richest nations in terms of per capita GDP, Lee’s government must address a widening income gap and worries about rising inflation, which could hit 5-6 percent year-on-year in the first quarter of 2011.

“In Budget 2011, we are moving ahead with major measures for our future to build up a vibrant economy and enable an inclusive society. Our strong budget also allows us to provide an additional package of benefits to all Singaporeans this year,” Tharman said.

Lee’s People’s Action Party has ruled Singapore since independence and is widely expected to win most of the seats at the next election.

But some analysts warned the benefits of Singapore’s strong economic growth have not percolated evenly through the economy.

DBS economist Irvin Seah, for instance, points to government data showing the average monthly income of the bottom 20 percent of households had fallen in the 10 years to 2008, even as income for the top quintile soared by 53 percent over the same period.

Tharman, however, said that if data from the past two years were included, households in the bottom 20 percent also saw their real incomes increase.

There is also the perception that much of the gains from economic growth has gone to companies and foreigners. The number of foreigners working in Singapore has soared in the past decade, and citizens now account for just 3.2 million of the city-state’s total population of 5 million.

According to Leong Sze Hian, former president of Singapore’s Society of Financial Service Professionals, the median monthly income for resident households rose by 3.1 percent, or 0.3 percent after adjusting for inflation, last year, even as the economy expanded by nearly 15 percent.

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