Singapore may spend surplus on inflation-hit populace

February 15, 2008
Singapore Democrats

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Shamim Adam
Bloomberg
14 Deb 08

Singapore, which may report its biggest budget surplus in eight years, will probably use part of the revenue to alleviate the effect on households of the fastest inflation in 25 years.

Finance Minister Tharman Shanmugaratnam, who will deliver the budget at 3:30 p.m. tomorrow, may also cut personal income tax as the city state competes with financial centers such as Hong Kong to retain talent. Taxes on salaries may be cut as much as 2 percentage points to 18 percent, economists predict.

International Monetary Fund Managing Director Dominique Strauss-Kahn has urged governments to combat slowing growth by easing fiscal policy. Asian governments are trying to manage rising inflation while battling to keep their economies growing amid signs the U.S. will slip into a recession. Singapore today said consumer prices may gain as much as 5.5 percent this year.

“It will be a generous budget that will focus on the less well-off to lighten the burden of price increases,” said Vishnu Varathan, an economist at Forecast Singapore Pte. “The government is also eager to maintain a competitive footing with Hong Kong, which may push it to cut personal taxes.”

The government may report a surplus of between S$4 billion ($2.8 billion) and S$5 billion for the year ending March 31, economists surveyed by Bloomberg News said. That compares with its projection last year of a S$700 million deficit.

More cash, rebates

The trade ministry today cut its 2008 growth forecast to between 4 percent and 6 percent. The economy shrank more than expected last quarter, and the government said it couldn’t rule out a second consecutive quarter of contraction.

Singapore may distribute larger amounts of cash and rebates on utility charges this year as inflation, which reached 4.4 percent in December, hovers at the highest rate since April 1982. That’s hurting a populace where 17 percent of households have incomes of S$1,000 or less a month.

The government has previously distributed cash to offset rising sales taxes or to supplement the wages of lower-income workers. In 2007, it said it would distribute S$4 billion in cash and rebates over five years.

Electricity tariffs have climbed for three consecutive quarters, while rising prices of daily food essentials prompted Prime Minister Lee Hsien Loong this month to encourage consumers to buy frozen meat and in-house brands of supermarket products that are usually cheaper.

Inflation forecast

Singapore’s central bank expects the inflation rate to increase between 4.5 percent and 5.5 percent this year, after averaging 2.1 percent in 2007.

“The government wants to rein in inflation expectations,” Varathan said. “Don’t expect them to hold off increases in the price of food or fuel like some of its neighbors have done. They will try to increase sources of supply instead.”

Other Asian nations are combating higher inflation. In Sri Lanka, consumer prices rose 20.8 percent in January, while Indonesia’s inflation rate climbed 7.4 percent last month.

Economists are divided on whether the government will lift mandatory employers’ payments to the state pension fund as it did last year. Employers now pay up to 14.5 percent of a worker’s wage, while employees pay as much as a fifth of their salary to the Central Provident Fund, or CPF.

Raising the mandatory pension payments would hurt companies that are already battling rising rentals and offering higher salaries to retain workers, some economists say.

“This would merely add to upward pressure on wages,” said Wai Ho Leong, an economist at Barclays Capital in Singapore. “We believe the government will opt for more creative measures to increase the labor-force participation rate.”

Company taxes

Tax cuts for companies such as Singapore Airlines Ltd. and DBS Group Holdings Ltd. are unlikely after the government reduced rates by 2 percentage points to 18 percent last year, most economists say. Singapore has shaved eight points off the corporate tax rate since 2000.

Not everyone is ruling out the possibility of another tax reduction for companies. Citigroup Inc. economist Kit Wei Zheng says the government may decide to cut taxes for companies to keep pace with Hong Kong, which lowered rates by 1 percentage point to 16.5 percent.

“The need to maintain competitiveness may take on greater urgency given Hong Kong’s cut, and heightened downside risks to the growth outlook,” Kit said. “This would offset some of the higher business costs from higher rentals and wages.”

To contact the reporter on this story: Shamim Adam in Singapore [email protected]

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