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Singapore may boost handouts in its 2011 budget, seeking to narrow the income gap and help households cope with inflation that’s accelerated to a two-year high ahead of elections due within 12 months.
The city-state may announce as much as S$10 billion ($7.8 billion) in so-called special transfers such as cash handouts and tax rebates for the year starting April 1, according to Citigroup Inc. That compares with S$5.2 billion allocated in the 2010 plan. Finance Minister Tharman Shanmugaratnam will unveil the annual budget in parliament tomorrow.
Singapore’s economy expanded a record 14.7 percent last year, lifting government revenue as rising company earnings and the opening of two casinos boosted taxes. Asia’s rebound from the 2009 global recession has led to a surge in inflation from China to India while the gap between rich and poor widened, forcing policy makers to raise interest rates to tame price gains hurting the lowest income earners.
“Budget 2011, being the last budget before elections are slated to be held, looks likely to be a bountiful one,” said Chow Penn Nee, an economist at United Overseas Bank Ltd. in Singapore. It “will probably be focused on how Singapore can sustain its growth rates, do more to drive productivity gains. This budget will also have to address the increasing cost of living, especially for the lower-income group,” she said.
Prime Minister Lee Hsien Loong, who needs to call for an election by February 2012, has pledged to ensure lower-income families aren’t left out of the island’s growth, saying a widening income gap is affecting countries from the U.S. to China and India.
The island’s inflation rate in December rose to the highest level since 2008 as accelerating growth added about 112,500 new jobs to the economy last year, boosted earnings at companies including DBS Group Holdings Ltd., and pushed unemployment to the lowest in more than two years. The Singapore dollar has risen 10 percent in the past 12 months as the central bank allowed faster appreciation to curb price gains.
Economists including Kit Wei Zheng at Citigroup predict Shanmugaratnam will report a budget surplus for 2010, with forecasts ranging from S$3 billion to S$6.4 billion compared with an initial government estimate for a S$3 billion deficit, according to a Bloomberg compilation of the expectations of six economists. For 2011, the estimates range from a surplus of S$100 million to a deficit of S$4.6 billion.
Betting taxes may have added about S$2.5 billion to government revenue, said Chua Hak Bin, an economist at Bank of America Merrill Lynch. The country’s first casinos opened last year as part of resorts run by Genting Singapore Plc and Las Vegas Sands Corp., attracting millions to their baccarat tables and slot machines.
“The political-economic backdrop — impending general elections, rising inflation, growing concerns over the income gap and policy shift towards inclusive growth — suggests the overriding priority will be to redistribute the large accumulated surpluses of the past few years,” said Kit of Citigroup. That will “buffer real incomes of lower and middle- income citizens from rising costs of living,” he said.
The gap between Singapore’s most affluent and poorest people widened last year as higher wage earners got bigger increases in income. The Gini coefficient, a measure of income inequality, climbed to 0.48 in 2010 from 0.478 in 2009, according to the government. A reading of zero reflects a state of equality.
“We are striving to ensure that the broad majority of Singaporeans benefit from growth, including lower-income, less- skilled workers, and the middle group who feel sandwiched in between,” Lee said Dec. 31. While the government has lowered income tax rates and enhanced assistance for the poor, the most important programs are “efforts to upgrade our people and workers,” he said.
In the budget before the last election in 2006, the government spent S$2.6 billion on a “progress package” that included distributing its surplus to citizens.
Last year, the government announced S$5.5 billion of spending to spur productivity as it sought to reduce the economy’s dependence on foreign workers. In 2009, the government cut corporate taxes and tapped the country’s reserves for the first time to give employers cash grants to retain local workers.
The People’s Action Party led by Lee has been in power since the city-state’s independence in 1965 and holds 82 of the 84 elected seats in parliament. At the last election, the ruling party won about 67 percent of votes, 8 percentage points lower than the previous poll.
Economists at United Overseas and Capital Economics say the government is unlikely to cut company taxes further this year after shaving nine percentage points off the rate in the decade to 2009, to 17 percent. Singapore’s top income tax rate of 20 percent was last lowered in 2006 and will also be left unchanged this year, they predict. Hong Kong has a corporate tax rate of 16.5 percent.
The government expects economic growth to slow to 6 percent or less this year. The city of 5 million people has remained vulnerable to fluctuations in overseas demand for manufactured goods even after the government boosted services.
Gross domestic product increased an annualized 5.3 percent last quarter from the previous three months, after contracting 18.9 percent from July to September, according to the median forecast of 14 economists surveyed by Bloomberg News. That would be less than the 6.9 percent growth estimated by the government on Jan. 3. The trade ministry will release revised numbers at 8 a.m. today.