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Business Times - 25 Jan 2007

Govt spending spree on the cards

The upcoming Budget will likely see a surge in expenditure on building infrastructure and strengthening the social safety net

By ANNA TEO

THE Singapore government can increase its spending by a billion dollars or two and it would still be among the most thrifty in Asia, perhaps the world.

Its budgeted spending of $30.62 billion for fiscal year 2006 amounts to just under 15 per cent of gross domestic product (GDP), which is the lowest in Asia. And 'possibly the world, lower than even Hong Kong', Citigroup economist Chua Hak Bin notes. Government spending elsewhere in the region ranges from about 18 per cent of GDP (Philippines and Hong Kong) to almost 26 per cent (Malaysia). Spending caps and deliberate downsizing efforts over the last few years has helped keep Singapore's operating expenditure at less than 11 per cent of GDP, he says in a report this week.

But development expenditure, at just over 4 per cent of GDP, looks suboptimal, he adds. 'There is probably scope to increase development expenditure, especially given the increasing demands from a growing and ageing population.'

Indeed, with all the plans and intentions - for Workfare, education, health care, etc - laid out well in advance in recent months, analysts expect something of a spending spree this year, and not just to strengthen the social safety net. The nascent revival of the construction sector will get a big boost from several mega-projects in the works, which will fuel a sharp spike in infrastructure investment not just this year but for a few years.

First things first. One major reason for raising the goods and services tax (GST) - a highlight of the upcoming Feb 15 Budget - is to finance a new Workfare scheme aimed at encouraging low-skilled, low-earning Singaporeans to remain gainfully employed. The proposed two-point GST hike to 7 per cent will add $1.5 billion to the government coffers. A new move to include realised capital gains as part of the state's net investment income could add another $2-3 billion.

These inflows will more than cover the Workfare bonus scheme, for which an initial $400 million was set aside in the FY2006 Budget, and which will now become a permanent part of Singapore's social safety net. Essentially an income support programme, Workfare doles out a sum - in cash and into CPF accounts - to Singaporeans above 40 years of age who earn below $1,500, and who have been working for at least six months. The first one-off payout last year went to some 330,000 low-wage older workers, who received a total $150 million, or about $450 each on average. The scheme is still being fine-tuned, with the details expected to be spelt out in the Budget next month.

There are other demands on the state's funds as well. An ageing population calls for increased spending on health care and related infrastructure, and more funds will no doubt continue to be poured into education, research and development (R&D), urban renewal, upgrading of public housing and transport in ongoing efforts to invest in the future. Spending on the poor and elderly alone could top $3 billion.

Not least, the corporate income tax rate will be cut by at least one per cent - which Minister Mentor Lee Kuan Yew has estimated to cost $400-500 million in lost tax revenue. Economists say Singapore has fiscal room to lower its 20 per cent corporate tax rate by two percentage points; the business people, of course, press for more, with some citing as much as five points off, slashing it down to 15 per cent.

Lowering the corporate tax rate is in line with global trends, and a fairly fundamental move - on top of existing tax breaks for target industries - in today's hot race for new investments. Domestically, it is also a token measure to help take a bit of the sting off employers faced with the prospect of increased CPF contribution rates for their staff - while every employer will be subject to higher CPF rates, not all of them will gain from a corporate tax cut.

Looking at where Singapore stands globally on its corporate tax and GST rates, United Overseas Bank's economists say it is conceivable that the GST might still be adjusted upwards beyond 7 per cent in the future while the corporate tax rate goes further down in the sub-20 per cent league.

And 'further surprises could come in the form of personal tax rate cuts in later years, as tax revenue improves with stronger growth', says Citigroup's Dr Chua.

In any case, crossing the lower-bound thresholds in dipping below 20 per cent income tax could mean the 'tipping point' in attracting a flood of foreign funds, he adds.

From an income standpoint, the 'grand tax rebalancing' - moving from direct to indirect taxation, in stages over the past five years - has not reduced total tax collection from income tax and GST all that significantly, Dr Chua notes.

Total revenue from income tax and GST actually rose by 3.8 per cent between 2002 and 2006, when the corporate tax rate was reduced by 4.5 percentage points over the period, the top marginal personal tax rate dropped by five points, and GST rose by 2 points to 5 per cent. The upcoming next episode in Singapore's tax restructuring will likely also see no big fall-off in tax revenue - especially if an improved economic climate (coupled with competitive corporate tax cuts) leads to better business profits, and hence fatter tax bills.

And some infrastructure pump-priming - or big investment works - is just what the doctor would order, even for a robustly healthy economy.

Goldman Sachs' economists say that, with its structural changes, Singapore will experience the biggest increase in the capital expenditure/GDP ratio in the region over the next three to five years.

Mega government projects include further expansion of the MRT network, the port and possibly the budget air terminal, as well as underground roads and rock caverns - all of which are multi-billion dollar projects that would spell a huge boost for the construction sector.

This is likely to be supplemented by a sharp increase in government investment in housing and transportation over the next three to five years as Singapore moves to bulk up, say Goldman Sachs' Adam Le Mesurier and Mark Tan in a recent report. Singapore's plans to grow its resident population - possibly by 50 per cent - as part of its 'global city push' call for the infrastructural transport and housing capacity to absorb the increase, they point out.

'This means a lot more underground roads to ease growing over-ground congestion, and a major regeneration of the public housing stock,' says Goldman Sachs.

All this public spending will spill over to the private sector - wherein lies the 'big swing factor', it adds. A surge in private investments over the next few years in the integrated resorts, the new business financial centre, huge new petrochemical plants as well as residential property projects, spell 'lots of room for upside surprise' in the construction industry, they say. And also the economy at large.

Source

loonshi

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