MOUNTING job losses, half-empty office buildings and falling tax revenues are an unusual backdrop for the Singapore government as it prepares to unveil a budget short on surprises and with a rare deficit.
The annual budget due on Friday may include further cuts in income and corporate taxes, freeze mandatory contributions to the Central Provident Fund (CPF) at current levels, and raise so-called “sin taxes” on alcohol and tobacco.
But analysts expect few surprises from a budget designed to reshape an economy that is facing unprecedented challenges from technological change in the global economy and the rise of China.
Government expenditure for the year to March 31, 2004, would probably exceed revenue, but the extent of the deficit remained largely a guessing game, they said.
“Our guess is that the government will likely incur a third straight year of budget deficits – quite an unprecedented situation,” said G.K. Goh economist Song Seng Wun.
Its Deputy Prime Minister Lee Hsien Loong, who is also finance minister, has conceded that changes made to Singapore's tax system last year, which saw a shift to indirect from direct taxation, mean a deficit is likely but emphasised such a move would be temporary.
Singapore had steadfastly banked budget surpluses since the 1970s until its economy began to slow down with the bursting of the tech sector bubble in 2000.
Analysts estimate it has squirreled away over S$140bil of savings.
The slowdown in global demand that followed the end of the stock market boom exposed a number of flaws in Singapore's economy, which has posted an average growth rate of 8.3% in its 37 years since independence.
Chief among its current problems is its cost base, principally from high wages, but also a lack of enterprise among its people and the growing competition from China and India.
“You have an economy with severe cost issues,” said Lim Say Boon, director of OCBC Investment Research.
“You also have got an economy attached to a hinterland that is not growing as quickly as it needs to,” he said.
Lim expects some spending on developing human capital and retraining but little in Western-style welfare spending, except by way of rebates in areas such as education and utility bills.
The business community wants a quick move to the government's 20% corporate tax rate target, tax exemption for foreign-earned income and rebates on property taxes and stamp duty.
Tax cuts have been factored in by many analysts but these could be left unchanged in the fiscal year starting in April.
The government has announced a target of 20% for corporate and income tax rates by 2005.
In the last budget, both rates were cut to 22%, leaving room for the final two percentage-point cuts to be made in stages.
However, after cutting both direct taxes last year, the government was forced to delay the full offsetting hike in indirect or consumption taxes at the start of this year.
The Goods and Services Tax, which was due to be raised to 5% from 3% on Jan 1, was hiked to 4% instead with the next one percentage point to be added in 2004.
G.K. Goh's Song estimates the result will be a deficit of around S$2.4bil for the year to March 31, 2003, which could reach S$4.6bil or 2.9% of gross domestic product (GDP) in the forthcoming budget. – Reuters
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