SINGAPORE'S FY2008 BUDGET: RECORD SURPLUS FUNDS MORSELS

UNCLAS SINGAPORE 000332 SIPDIS SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ELAB EINV PGOV SOCI KTDB SN SUBJECT: SINGAPORE'S FY2008 BUDGET: RECORD SURPLUS FUNDS MORSELS FOR HOUSEHOLDS Reftel: Singapore 311 ¶1. (U) Summary: Coming off a year of record-setting revenues and a fiscal surplus of 14.8 percent of GDP, the GOS budget disappointed analysts by providing a package of only S$1.8 billion (US$ 1.28 billion) in "giveaways" for lower and middle income groups, and leaving the personal income tax rate unchanged. The GoS designed the package to partially offset increases in inflation and the already high cost of living in Singapore (reftel). Both the record budget surplus and the accelerating inflation rate were in part driven by a two percentage point increase in the goods and services tax (GST) in July 2007. The smaller measures geared to offsetting the rising cost of doing business in Singapore focused on small businesses and the financial sector. The government also announced long- term projects focusing on education and training as well as fostering "innovation." Overall, the budget was considered only "mildly expansionary" at a time when Singapore's growth is expected to slow from the 7-8 percent rate of the past few years to closer to 4-6 percent. End Summary. ¶2. (U) Detailed information on SingaporeQs FY2008 budget can be found at: www.singaporebudget.gov.sg. [Note: Figures in this cable use the exchange rate of S$1.411 per U.S. dollar.] Record budget surplus in FY2007 -------------- ¶3. (U) Amid strong economic growth of 7.7 percent in 2007, overall government receipts collected rose strongly in FY2007, exceeding expectations by 22.5 percent. Operating revenues were up 26.7 percent to S$39.7 billion (US$28.1 billion) in FY2007 as compared to FY2006. The bulk of these gains were from the Goods and Services Tax (GST),whose rate was increased by two percentage points to seven percent in July 2007. Adding to the strong revenue growth were stamp duties (benefiting from a buoyant property market),which jumped 88.6 percent to S$3.8 billion (US$2.69 billion) as compared to a year ago. In FY2008, the government is planning for revenue to remain flat due to weaker economic growth and tax reduction measures proposed in the budget. Table: Tax Revenue for FY2007 and FY2008 -------------- (S$ billion) Budget Revised % Change over FY2008 FY2007 Revised FY2007 -------------- -------------- -------------- TOTAL REVENUE 39.84 39.65 0.5 Direct Tax 17.62 17.13 2.9 Corporate 9.19 9.0 2.1 Personal 5.94 5.56 6.9 Assets 2.49 2.57 (3.0) Indirect Tax 20.22 20.85 (3.0) Goods & Services Tax 6.19 6.0 3.2 Customs & Excise Tax 2.01 1.96 2.2 Motor Vehicle Tax 2.00 2.12 (5.6) Betting Tax 1.80 1.71 5.6 Stamp Duties 2.40 3.80 (36.8) Others 5.82 5.26 10.6 Statutory Boards' Contributions 1.99 1.67 19.0 ¶4. (U) FY2007 total expenditures did not grow as fast as revenues. Operating and development expenditures expanded by 11.4 percent to S$2.2 billion (US$1.56 billion) from the previous year. In FY2008, total expenditures will rise by 12.5 percent to S$37.5 billion (US$26.6 billion). The GOS emphasized the budget increases for transportation infrastructure (up 40.7 percent in FY2008),the provision of healthcare services (up 19 percent) and workforce development, arguing that these will help address population increases, the rising cost of living and an aging population. Table: FY2007 and FY2008 Expenditure by Sector -------------- - (S$ billion) % Change over FY2007 FY2008 Revised FY2007 -------------- -------------- -------------- TOTAL EXPENDITURE 33.3 37.5 12.5 Social Development 14.8 15.9 9.6 Education 7.5 8.0 6.6 National Development 2.1 2.2 1.8 Health 2.2 2.6 19.0 Environment & Water Resources 0.9 1.0 17.8 Community Development Youth & Sports 1.3 1.3 2.1 Information, Communications & the Arts 0.5 0.7 57.1 Security/External Relations 13.3 14.1 6.3 Defense 10.1 10.8 7.2 Home Affairs 2.8 2.9 3.6 Foreign Affairs 0.4 0.4 2.0 Economic Development 4.3 6.0 39.4 Transport 1.9 2.7 40.7 Trade & Industry 2.1 2.5 21.9 Manpower 0.3 0.7 183.2 Info-Communications & Media Development 0.1 0.1 (12.3) Government Administration 1.2 1.4 17.9 Finance 0.5 0.6 28.1 Law 0.3 0.3 13.6 Organs of State 0.3 0.3 7.1 Prime MinisterQs Office 0.2 0.2 14.0 Budget "Giveaways" Targeted Narrowly -------------- ¶5. (U) The GOS plans to return to taxpayers S$1.8 billion (US$1.28 billion) through various programs largely targeted at lower and middle income households to help them cope with the rising cost of living. Key elements of the package include one- off cash transfers dubbed "growth dividends" for all adult Singaporeans, GST credits, and increased public assistance for the needy. Other "giveaways" include additional contributions to various government-sponsored individual health and education savings programs. Some families might also benefit from education subsidies and a 30-percent increase in the number of places available at public universities. ¶6. (U) Business measures were generally focused on helping small businesses and the financial sector. For example, the government will introduce a five-percent concessionary tax rate for income from Shariah ("Islamic") compliant activities and abolish the estate duty to provide a boost to the wealth management industry. The business start-up tax exemption scheme will be liberalized to encourage the creation of more SMEs. To encourage innovation and to enhance Singapore's attractiveness as a research and development hub, start-ups will benefit from various tax incentives and the budget for government-sponsored research will be increased by S$800 million. "Deficit" Overstated: Reality is Large Fiscal Surplus -------------- -------------- ¶7. (U) According to the government's projections and accounting conventions, the budget had a surplus of S$6.5 billion (US$4.5 billion) in FY2007, equivalent to 2.7 percent of 2007 GDP. In FY2008, given the money returned to taxpayers and weaker growth expected in 2008, the government projects the overall fiscal balance will turn into a small deficit of S$0.8 billion (US$567 million) or 0.3 percent of GDP. However, analysts have pointed out that the government historically understates the budget surpluses. Singapore's conservative budgetary accounting system excludes items such as land sales, capital gains from past reserves investments, and an (undisclosed) portion of dividends and interest from its sovereign wealth funds from accounting of government revenue, for example. According to Standard and Poor's, using more conventional budgetary accounting standards, Singapore's general government fiscal surplus (including the Central Provident Fund's pension contributions and payments) was equivalent to 14.5 percent of GDP in FY2007/08, up from a surplus of 11 percent of GDP in FY2006/07. Many analysts believe the government is overly cautious in its projections and expect further budget surpluses, albeit smaller, ahead. Budget for FY2008 -------------- FY2008 FY2007 % Change over Budget Revised Revised FY2007 -------------- -------------- -------------- (S$ billion) Revenue 39.84 39.65 0.5 Expenditure 37.45 33.30 12.5 -------------- -------------- Primary Surplus 2.38 6.35 Less: Special Transfers 5.40 2.20 146.0 Add: Net Investment 2.22 2.30 (3.4) Income Surplus/(Deficit) (0.80) 6.45 Unfavorable Reactions -------------- ¶8. (U) Economists voiced their disappointment with the extent of redistribution in the budget. Moreover, some analysts do not expect the "giveaways" to have a significant effect on consumption. A Citigroup analyst cited the one-off nature of the handouts, which suggest that households may choose to save rather than spend given the uncertain economic environment. In addition, UBS analysts point out that the handouts were not significantly larger than previous handouts given in 2006, thus limiting their influence on consumption. ¶9. (U) In particular, against expectations, the government held the top personal income tax rate steady at 20 percent. Households, especially those in the middle-income groups, will instead enjoy a one-off 20 percent income tax rebate capped at S$2000 (US$1,400). Calculations by KPMG showed that an individual earning less than S$155,000 (US$110,000) a year will pay a fifth less in personal income tax as a result of the rebate. A Citigroup analyst noted that Singapore can not afford to lag behind in keeping personal income tax rate competitive given that Hong Kong's rate will fall to 15 percent in 2009. ¶10. (U) On the business side, press reports complained about the limited measures targeted at helping businesses cope with rising costs, including rents and wages. Only two measures addressed this concern. First, the government announced its intention to free up existing office space by moving government departments out of the central business district to help alleviate the office space crunch. Second, the government did not increase employer CPF contribution rate, as would usually be expected in a strong economy. Comment -------------- ¶11. (SBU) The government tried to appear responsive to the plight of lower and middle income Singaporeans, while maintaining the fiction of tight budget constraints despite a very large and growing fiscal surplus. The resulting package of one-off programs is unlikely to encourage enough growth in domestic consumption to offset poor export performance in a weak global environment. As growth slows from the 7 to 8 percent rate of the past two years down to the government's current forecast of 4 to 6 percent, such weak fiscal expansion will also do little to cheer the growing number of Singaporeans who are feeling the squeeze of rising rents, more indirect taxation, and inflation rates currently at levels not seen since the early 1980s. HERBOLD