SINGAPORE'S 2010 BUDGET TO BOOST LONG TERM GROWTH

UNCLAS SECTION 01 OF 02 SINGAPORE 000202 SIPDIS TAGS: ECON EFIN SN SUBJECT: SINGAPORE'S 2010 BUDGET TO BOOST LONG TERM GROWTH SUSTAINABILITY REF: SINGAPORE 167 ¶1. (U) Summary: Singapore's Finance Minister presented parliament a budget for FY 2010 focused on raising productivity, improving business competitiveness and making the country's economic growth more inclusive. The budget moves away from last year's expansionary budget that was designed to protect jobs and stimulate the economy out of recession, but nevertheless is predicted to result in a revenue shortfall, the country's third consecutive budget deficit. To achieve its objectives, the GOS is budgeting S$5.5 billion (US$4 billion) over the next five years to help enterprises and workers deepen skills and expertise and to foster innovation. The levy on foreign workers will rise to encourage companies to improve productivity rather than rely on cheap imported unskilled labor. The budget also provides further support for the growth of Singapore's more globally competitive companies, including incentives for more research and development. Lastly, the budget provides further support for low-wage workers to upgrade their skills, a more progressive property tax system, and help for families with children or elderly dependents. End Summary. Another Deficit Budget -------------- ¶2. (U) Singapore Finance Minister Tharman Shanmugraratnam delivered to parliament February 22 a budget for FY 2010 that shifts focus from last year's short-term stimulus to longer-term growth sustainability. The budget puts into effect many of the recent recommendations by the public/private Economic Strategies Committee (ESC),which released a report February 1 with proposals to guide Singapore's economy over the medium term (reftel). In line with the ESC report, the budget presents new programs designed to raise labor and capital productivity, improve competitiveness of Singapore business, and provide more inclusive growth for Singaporeans. Parliament will debate the budget in a March 2-12 session, with an expected approval vote on March 31. ¶3. (U) The FY2010 budget includes S$46.4 billion for operating and development expenditures, S$3.5 billion more than the previous year's budget that had included many stimulus measures designed to weather Singapore through last year's recession. In addition, the budget includes S$5.15 billion in "special transfers" to endowment and trust funds, as well as special credits and bonuses to off-budget accounts, many of which are targeted at students, the elderly, and low-income Singaporeans. The budget is expected to show an operating deficit of S$7.2 billion for FY 2010, the government's third consecutive budget deficit. However, when returns on investments are included in the budget calculation, the overall budget deficit comes in at just under S$3 billion, or one percent of GDP. Last year's budget had been expected to result in a deficit of 3.4% of GDP, but the economy's rapid recovery from the recession improved revenue and spending projections, and FY2009 fiscal spending resulted in a budget deficit of only 1.1% of GDP. If Singapore's economic growth continues to outpace forecasts, this year's projected deficit will shrink as well. Raising Productivity -------------- ¶4. (U) The centerpiece of the budget is a range of incentives to boost productivity and develop worker skills. A S$5.5 billion package in the budget includes tax benefits and subsidies for training, particularly for low-income workers. The GOS has set a goal to raise the country's productivity growth rate to 2-3 percent annually, more than double the anemic one percent growth over the previous decade. To boost skills, innovation and economic restructuring, the GOS will establish a high-level National Productivity and Continuing Education Council, which will be chaired by Deputy Prime Minister Teo Chee Hean and include members from the government, business community and labor movements. The budget package sets aside S$2.5 billion over the next five years for continuing education and training (CET) programs. ¶5. (U) To support enterprise investments in innovation and productivity, the budget introduces a Productivity and Innovation Credit which will provide tax deductions for investments in a broad range of activities, including research and development, registration of intellectual property, acquisition of intellectual property, design activities, automation through technology or software, and training of employees. The GOS will complement these broad-based tax reductions to support enterprise productivity via a National Productivity Fund. As a start, the GOS will inject S$1 billion into the fund in 2010 with a target to ultimately raise the fund to S$2 billion. The National Productivity and Continuing Education Council will establish the priorities and programs of this new fund, and tie together the efforts of stakeholders, including government agencies, industry associations, unions and enterprises. The fund will provide grants to help enterprises in all business sectors, but with an emphasis on sectors where there is potential for large gains in productivity. The construction industry is SINGAPORE 00000202 002 OF 002 expected to receive S$250 million out of the initial S$1 billion of funding. ¶6. (U) To complement the investments in productivity, the GOS is raising its levies on employment of foreign workers in an attempt to encourage businesses to restructure and upgrade their operations and rely less on cheaper but lower-skilled foreign labor. The government will gradually phase in the levy increases over the next three years, starting in July. The GOS decided to limit the inflow of foreign labor through raising levies rather than imposing quotas to allow the foreign workforce to fluctuate across the economic cycle, and enable those employers who genuinely need foreign workers to continue to hire and not be constrained by a numerical limit. Growing Globally Competitive Companies -------------- ¶7. (U) The budget's second priority is to support Singapore companies, especially those in clean energy, waste and water management, healthcare, education and transport management, to expand abroad, improve access to finance, and commercialize their research and development. The GOS will inject an additional S$1.5 billion into the country's National Research Fund, on top of the S$2.2 billion that has already been committed. The aim is to work towards the Economic Strategies Committee's (ESC) recommendation of growing Singapore's gross expenditure on R&D from 3.0 to 3.5 percent of GDP in the next five years. In addition, the GOS will commit S$450 million over a five-year period to start a Public-Private Co-Innovation Partnership for government agencies to work with private sector companies to co-develop innovations in areas such as urban mobility, environmental sustainability and energy security. Lifting All Boats -------------- ¶8. (U) The budget also makes an effort to make longer-term changes to redistribute income to those who have not benefited as much from Singapore's economic growth. Some of the new measures are outright giveaways, with S$1.8 billion in direct transfers to households budgeted for 2010, with most of the benefit going to lower- and middle-income households. In addition, however, the budget includes programs to raise worker productivity (and hopefully wages alongside) for lower income workers. Also, the GOS will restructure its current flat property tax rate system for owner-occupied residential properties to a progressive property tax rate. Nevertheless, the budget is careful to ensure that the new property tax, though being progressive, is still lower than that of most global cities to maintain Singapore's competitiveness. SHIELDS