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Singapore will probably incur a third consecutive budget deficit this year as the government unveils another “expansionary” spending program to boost the island’s productivity in the next decade.
The city-state may have a budget shortfall of as much as S$8.1 billion ($5.8 billion), or 3 percent of gross domestic product, when Finance Minister Tharman Shanmugaratnam outlays this year’s spending plans on Feb. 22, economists predict. That compares with a predicted deficit of S$8.7 billion in fiscal 2009 when the government tapped its reserves and gave cash to companies and citizens to cushion the impact of the recession.
Singapore is considering ways to ensure its economy expands in a more sustained manner after three recessions in the past decade, with its most recent slump the deepest since independence in 1965. A government-appointed panel this month outlined seven proposals to restructure the economy including raising productivity and relying less on foreign labor, a move that may increase costs for companies such as property developer CapitaLand Ltd. and oil-rig builder SembCorp Marine Ltd.
“While many sovereigns are currently in the market spotlight for needing to unwind record fiscal stimulus and deficit spending, else risking their credit-rating health, Singapore can well afford to maintain an expansionary fiscal stance at this juncture,” said Selena Ling, head of treasury research at Oversea-Chinese Banking Corp. in Singapore.
The benchmark stock index fell 0.4 percent to 2,783.15 as of 12:55 p.m. local time. The Straits Times Index has declined 3.9 percent this year, compared with a 2.2 percent drop in the MSCI Asia Pacific Index.
The Economic Strategies Committee on Feb. 1 said the city state must double its productivity rate in the next 10 years to between 2 percent and 3 percent annually. An influx of foreign workers, currently accounting for one out of every three people in Singapore, has been blamed for the slowdown in productivity.
The government plans to reduce the nation’s dependence on foreign workers by raising levies imposed on employers hiring overseas labor in a “gradual and phased manner,” Shanmugaratnam said Feb. 1. Policy makers will seek to maintain the foreign labor force at the current level of about one-third of the total workforce, he said.
“This budget is likely to be structural in nature and longer term in focus, with the aim of sharpening the competitiveness and enhancing productivity of the economy,” said Irvin Seah, an economist at DBS Bank Ltd. in Singapore. “It will be aggressive but not in a counter-cyclical manner like” in 2009.
Last year’s Budget Day saw the government cutting corporate taxes and announcing it will tap the country’s reserves for the first time in part to fund S$20.5 billion in expenditure. Among the spending plans was a S$4.5 billion program that gave employers cash grants to retain local workers. The so-called Job Credit program was extended for another six months in October and is not expected to be renewed further when it expires in June.
“In light of Singapore’s recovery, the budget is likely to modify or reduce key fiscal measures introduced in 2009,” said Alvin Liew, an economist at Standard Chartered Plc in Singapore. “The job credit scheme has distorted the job market as the government has essentially provided subsidized Singaporean workers to companies without any improvement in efficiency or productivity of these workers.”
Economists say the government is not likely to cut corporate taxes further after shaving nine percentage points off the rate since 2000 to 17 percent. Companies may instead get financial assistance to encourage education and training for their workers and upgrade employees’ skills, they said.
Personal income taxes will also probably be left unchanged this year, most economists predict. Singapore’s top income tax rate of 20 percent was last lowered in 2006.
“Given the likelihood of a sizeable deficit by Singapore standards, we doubt that the fiscally conservative government will judge it timely to further deplete a major source of government revenue,” said Kit Wei Zheng, an economist at Citigroup Inc. in Singapore. A percentage point cut in the personal income tax rate may cost the government as much as S$400 million, he estimates.
The goods and services tax, now at 7 percent, will be maintained in 2010 and may be raised in the next two years as the economy recovers, Liew of Standard Chartered predicts.
“We forecast that the GST will be raised to 10 percent by 2012 as an expected increase in tourism broadens the domestic consumption base, making indirect taxes a more significant contributor to government revenue,” Liew said.
The country aims to lure 17 million visitors and triple annual tourism revenue to S$30 billion by 2015, helped by the two casino resorts run by Genting Singapore Plc and Las Vegas Sands Corp. Genting’s Resorts World Sentosa opened its casino last weekend, attracting more than 35,000 gamblers, newspaper reports say.
Economists are predicting 2010’s budget shortfall to be anywhere between S$4.1 billion and S$8.1 billion. The 2009 deficit was probably between S$6.5 billion and S$7.9 billion, less than the government’s estimates last year.