Deficit Next Year? Just Don’t Bet On It

Source : The Business Times, Feb 16, 2008

Wealth management gets a boost, but Tharman keeps his powder dry.

EVERY year at Budget time, Singapore’s Finance Minister, Tharman Shanmugaratnam, faces a task that must make him the envy of his peers in the rest of the world: he must explain why the nation’s tax revenues were so much higher than originally planned. Like those of his immediate predecessors, Lee Hsien Loong and Richard Hu, Mr Tharman’s Budgets have been inherently conservative in outcome - even if they are often (as this year and last) intended to be stimulative at the outset.

In each of the last four years, real GDP has grown much faster than anticipated at Budget time. Tax revenues have consequently far exceeded those projected at Budget time. This fiscal year (which ends on March 31, 2008) was expected to yield a fiscal deficit of $0.6 billion, but the government now estimates that the final outcome will be a surplus of $6.35 billion. In fact, over the first three quarters of the fiscal year, the actual fiscal surplus was $10.8 billion. All tax revenues were higher (as they almost always are in Singapore), but asset taxes surged most spectacularly as property values soared.

The January-March quarter tends to be the seasonally-weakest one for the fiscal balance, but the deficit for that quarter is unlikely to be $4.4 billion, so the actual surplus for this year will almost certainly be larger than the government’s current estimate.

With a larger surplus as the base, next year’s fiscal balance will also be stronger, assuming budgeted increases in revenue and expenditure. A betting man could do worse than place a large wager on actual revenues comfortably exceeding the Budget’s projections next year too!

The government’s intention is to provide a fiscal stimulus in the year ahead - evident in the projected fiscal deficit next year of $0.8 billion, which is not very different from last year’s projection.

Modest tax reductions include a 20 per cent rebate on personal income tax (capped at $2,000), revenue-neutral changes to the alcohol tax, a slight reduction in vehicle taxes (largely offset by planned increases in the coverage of ERP), and the elimination of estate duty.

Of these, the last will have a permanent positive impact on the wealth management industry (and Singapore’s attractiveness as a home for the wealthy) without hurting the exchequer much. The market will be disappointed that the top rate of income tax will not decline from 20 per cent, and the corporate tax from 18 per cent.

Mr Tharman has kept his powder dry for a rainy day - leaving ample room to lower taxes further were the global economy to weaken substantially more. He has still outlined an ambitious spending programme on further honing Singapore’s world- beating transport infrastructure, tweaking its skills-development schemes, and moving Singapore’s three (soon to be four) universities closer to the global frontiers of research and innovation.

Fiscal incentives and spending will further bolster Singapore’s R&D capabilities, by boosting both start-ups and existing companies’ research and also by attracting global talent. And for the community, there are further incentives for more voluntary saving and a deepening of funds to help the needy, vulnerable and sick.

Most exciting for the longer term, however, are the steadily-widening schemes for sharing surpluses with citizens. Singapore’s budgetary accounting system is among the most conservative in the world. The fiscal balance is obtained by subtracting both operating and development expenditure from the government’s operating revenue alone.

The government’s ample investment income (from land sales, as well as the dividends, interest and capital gains of its sovereign wealth funds) is not counted as government revenue. In recent years, the government has made a small concession by using up to 50 per cent of the dividends and interest income from its invested reserves to fund the special transfers (to MediShield for the elderly, growth dividends for citizens, GST credits, etc, which are properly skewed towards benefiting the needy more).

However, the substantial capital gains on the government’s investments continue to accumulate, and cannot yet be distributed to citizens.

By next year, a constitutional amendment will allow the government to share the fruits of the capital gains made by investing its burgeoning reserves over the past several decades. That will give Singapore the ability to turn the dream of being the pre-eminent global city into reality. Clearly, only a small proportion of capital gains will be made available for spending in this way - the prudent practices of rich university endowment funds being cited as a precedent to preserve much of the corpus for the future while spending largely the recurrent components of capital gains.

When it begins to free up some of the capital gains from past investments, Singapore will have the wherewithal to realise the vision of an innovative, research-driven global city. This Budget contains merely the hint of those vast possibilities, but the vision is already there for those who choose to look.

The author is chief economist (Asia ex-Japan) at Daiwa Institute of Research (Singapore) Pte Ltd. These are his personal views.