Singapore 2016 Budget Preview: A Re-Focus On The Economy

Transcription

1 Francis Tan Global Economics & Markets Research URL: Wednesday, 9 March 216 Singapore 216 Budget Preview: A Re-Focus On The Economy Past Budgets ( ) were very much focused on addressing key social issues and to promote an inclusive society. Steps were also made to address key economic issues, but seemingly not enough. Labour costs continue to rise and productivity stagnated during those years. With the protracted slowdown in global economic conditions affecting an export-dependent economy such as Singapore, and the failure to push productivity higher, we expect the new term of government to concentrate firepower on addressing the immediate and medium term needs of the economy. As an immediate relief for the private sector, particularly for SMEs, we think that the government could lower foreign workers levies. However, there are constraints. Being the first term of government, it has to be prudent in spending as it could not utilise any surpluses accumulated by the previous term of government. Moreover, slower economic growth in FY 215 will mean smaller incremental revenue derived from corporate and personal income taxes. For FY 215, we estimate an overall budget deficit of S$.69bn (.2% of GDP). This compares with the much larger deficit of S$6.9bn (1.7% of GDP) initially expected by the government during last year s Budget. For FY 216, we estimate an overall budget surplus of S$1.43bn (.34% of GDP). Past Budgets ( ) Were Much More Focused On Social Spending Since 212, Singapore s annual Budgets had placed heavier emphasis on alleviating social issues, while making incremental steps in addressing key economic issues surrounding the tight labour market. As a recap, we summarise the key budget measures implemented for the household and corporate sectors. In the household sector, an emphasis to improve the wages of the lower-income households as well as incentivizing the lower-income, and/or older workers into the workforce had seen schemes such as the Workfare Income Supplement (WIS) payouts, Workfare Training Support (WTS), Wage Credit Scheme (WCS), personal income tax rebates, and higher CPF contribution rates being rolled out. Other schemes such as the extra GST Vouchers, U-Save, Media-save Top Ups, and the Pioneer Generation package were also implemented to help in managing the rising cost of living as well as to recognise the contributions of Singapore s pioneers. The key goal was to build an inclusive society, with targeted help for older workers and the lower-income households. In the corporate sector, since implementing the tighter foreign workers quota in 211, the government turned to incentivizing residents to take part in the labour force, as well as improving labour productivity at the same time. Schemes such as the Productivity & Innovation Credits (PICs) assisted businesses in the upgrades of technology and capital equipment so as to help them become more capital intensive, reduce reliance on labour inputs, and cope with the labour crunch. The focus on social spending over the past few budgets was probably a stop-gap measure meant to address deteriorating social conditions (such as the widening income gap, influx of foreign workers, over-burdened public infrastructure, under-investment in public housing, etc), a wake-up call for the incumbent ruling party after suffering from its lowest public approval ratings in the 211 general elections. Wednesday, 9 March Page

2 Indeed, efforts by the previous term of government to reduce income inequality through government transfers and taxes had worked quite well as the Gini coefficient had reduced considerably from 212 onwards (EXHIBIT 1). The widening spread between before and after government transfers and taxes shows that the government had become more effective in reducing the income gap. The emphasis on social spending can be seen from the increasing share of social expenditure over total government expenditure over the last few years. During this period, economic expenditure had taken a back seat and remained relatively stable. EXHIBIT 2 shows that social spending rose four percentage points to 48.6% (estimated) of total expenditure in 215, from 44.6% in 212; while economic spending fell to 18.2% (estimated), from 2% of total expenditure during that period. 216 Budget To Re-Focus On The Economy, But Bullets Are Limited On 4 Mar 216, the new Finance Minister Heng Swee Kiat revealed that the government will be particularly prudent with Budget 216, and it will contain a strong focus on the economy, not just for the short term, but for the medium term. He had also acknowledged that the main challenge for almost all companies was in the restructuring of their businesses. As a brand new Finance Minister in the first year of the new term of government, Minister Heng and his team will be facing several tough, economic challenges. Challenge One: Slow Economic Growth First, the economy grew at the slowest pace in 215 (at 2%) since the recession in 29 when growth contracted then. Singapore s manufacturing sector, one of the key engines of growth, had contracted for five consecutive quarters. This condition was previously only seen during recessionary periods. Poorer sentiments as a result of the weak economic growth from 215 could spillover to lower consumption and investment demand this year. Challenge Two: Slow Government Revenue Growth Second, the overall taxes collected in FY215 and FY216 will be impacted as the economy continues to slow and revenue from propertyrelated segments contract. EXHIBITS 3A & 3B are two charts that display the growth trend of the various items in the annual government revenue since (and indexed to) It shows that personal income/ corporate taxes are very closely related to national income (represented by nominal GDP). Should national income growth slow, we can expect government s revenue from personal income/corporate taxes to slow down as well. Moreover, EXHIBIT 3B shows that government revenue from stamp duties had gone down sharply since 213, due to the property cooling measures suppressing property transactions volume. Gini EXHIBIT 2: Percentage Of Social And Economic Expenditure To Total Expenditure % of Total Expenditure 6% 5% 4% 3% 2% 1% EXHIBIT 1: Singapore Gini Coefficient Spread % 48.6% +4.% -2.2% 2.% 18.2% % % Social Expdt % Economic Expdt Before Accounting for Govt Transfers & Taxes After Accounting for Govt Transfers & Taxes Spread Average Note: The spread is derived from subtracting After Accounting for Govt Transfers & Taxes with Before Accounting for Govt Transfers & Taxes. The slower growth in tax collections will place a tighter budget constraint on the upcoming government expenditure plans (compared to past Budgets) if the new term of government intends to maintain a balanced budget. Being the first year of a new term of government, we think that it will run a balanced budget, possibly with a small surplus, unless any unforeseen economic development warrant additional expenditure. Wednesday, 9 March Page

3 EXHIBIT 3A: Trend of Selected Items In Government Revenue Basket Index (1994=1) Income/Corporate Taxes Betting Taxes GST Nominal GDP Index (1994=1) EXHIBIT 3B: Trend Of Selected Items In Government Revenue Basket Asset Taxes Motor Vehicles Taxes Custom/Excise Duties Stamp Duties Other Taxes Fees/Charges Nominal GDP Challenge Three: Sudden Decline In Net Employment Gains Third, the labour market remains tight and limits the upside potential of the economy. Since placing a growth constraint on the inflow of foreign workers in 211, the government had a few years of success in encouraging residents (mainly females and older workers) to join the labour force. That was to allow companies to tide over the labour shortage situation in the medium term as they restructure their business operations via capital-labour substitution. The flip-side of this was that labour productivity growth suffered as the labour force grew faster than economic value added could. This resulted in the strong employment growth annually, where net employment (both foreigners and residents) averaged 13, persons during the period. However, the situation changed quite dramatically in 215, as net employment growth was only 31,7 persons, of which only 1 persons were Singapore residents. As resident labour force participation rates near its asymptotic limit, it will be marginally harder to attract more into the labour force. This will probably mean that the labour market may get even tighter in 216. However, the outcome in the labour market may be uncertain because slow economic growth from last year may result in a reduction in labour demand by firms. Challenge Four: Labour Productivity Lagging Behind Wage Growth Fourth, since the time when the government tightened the inflow of foreign workers in 211, the key challenge for Singapore-based companies over the past few years had been centered on rising labour costs. Real wages had been rising at 1.1% pa in the period. However, real productivity growth was only gaining at.4% pa. If this continues, Singapore will lose out in terms of cost competitiveness in the medium term. Looking at the slow productivity growth, policymakers may be tempted to apply a blanket policy framework for the entire economy to boost labour productivity. However, this will be too simplistic, because not all sectors face the same issues when it comes to the productivity problem. A recently published feature article in the Economic Survey of Singapore 215 report by the Ministry of Trade and Industry discussed this phenomenon and found that different sectors in the economy were indeed facing very different issues. For example, it found that domestically-oriented sectors (such as retail trade and F&B services) had been suffering from both low/negative productivity growth and worsening labours terms of trade 1 at the same time. On the other hand, export-oriented sectors generally did not experienced low productivity growth. However, some sectors within (eg: transport engineering, finance & insurance, biomedical manufacturing, wholesale trade) have been experiencing a decline in labour s terms of trade, thus reducing the potential for stronger real wage growth. A part of the reason was due to very stiff global competition in these sectors and this had limited the potential for higher selling price on the output. For such sectors, the policy direction will have to be different and should be centered towards assisting these sectors to offer innovative products/services that can command 1 The difference between the increase in output prices and the increase in consumer prices. Workers in a sector will be better off if the labour terms of trade is positive, meaning that the prices of goods/services produced by them gain faster than the prices of goods/services consumed by them. Wednesday, 9 March P a g e

4 premium prices in the international marketplace. Labour productivity may not be the immediate concern in these sectors as they are more capital, skills, and knowledge-intensive already. Tackle Short Term Or Medium Term Issues First? Although Singapore is not experiencing a recession, economic growth has been very slow and protracted. There are both structural and cyclical reasons behind the growth slowdown and Budget 216 will need to balance both short and medium policy implementation very intricately. If Budget 216 is overly prescriptive on short term problems, then it may miss the longer term picture and steer the economy in the wrong direction. If it is overly prescriptive on longer term problems, then perhaps many companies may not even survive the current downturn to be present for the longer term. On the shorter term concerns, the on-going global economic weakness had impacted externally-oriented sectors much more than domesticallyoriented sectors due to the international competition for its products/ services. For instance, growth in externally-oriented sectors had lagged that of domestic sectors for the past 16 consecutive quarters (except 1Q 214) (EXHIBIT 4). We think that these sectors should be targeted with more short term help from the government. Budget 216 should take this into consideration and help to reduce some costs of doing business for these sectors and thus freeing up some cash flow for companies during this difficult times. An example that the Ministry of Finance can consider is the reduction of foreign workers levies 2. On longer term concerns, the government should continue to push for productivity growth, particularly amongst domestically-oriented sectors first. As for export-oriented industries, the government should continue to push for innovation, internationalization and the effective identification of the future of industries as a blueprint for the export sectors to base their business restructuring on. EXHIBIT 4: Externally-Oriented Sectors Need More Short Term Help % y/y SG Recessions Externally-oriented Sectors Domestically-driven Sectors Challenge Five: Grow Stronger Earning Power Before Population Ages Further Singapore does not have much time left for the business sector to restructure. We have to do it before the labour market starts contracting due the lower labour force participation rate as there may not be enough young people to replace older workers who leave the workforce. The Population White paper of 213 suggested that there would only be.7 persons entering the workforce for every 1 person leaving the workforce in 23, should there be no net new immigration to supplement the local workforce at the current fertility rate. To illustrate this point, let s look at the young and old age ratios amongst Singapore residents. EXHIBIT 5: Convergence Of The Percentage Of Older And Younger Residents Pool In 198, just 5% of residents were above the age of 65 years old. Fast forward to 215, it was nearly 12%. During the same period, the ratio of younger residents (below the age of 15 years old) fell from around 28% in 198 to 15% in 215 (EXHIBIT 5). % of total residents 3% 25% UOB's forecast A simple extrapolation of the trend shows that the percentages of the older group of residents will equal the younger group of residents in just two years time (218), at around 14%. 2% 15% 218 A further extrapolation reveals that the older group of residents could reach 29% of total residents in 23, while the younger group of residents drops to 1.3% of total residents. 2 Box article 3.1 in the Economic Survey of Singapore 215 by the Ministry of Trade and Industry showed that labour costs, work given out, and royalties payments account for 64% and 71% of business costs for large enterprises and SMEs in the manufacturing sector respectively. 1% 5% % %>65yo %<15yo Wednesday, 9 March P a g e

5 To put this in perspective, this will be worse than the current situation experienced in Japan today (where 25.8% of total Japanese residents were above 65 years old, while 13.2% were below 15 years old in 215) (EXHIBIT 6). Once Singapore reaches that stage, there will simply not be enough younger residents to replace those who have retired from the workforce. FY 215 Budget Estimation: A Smaller Deficit Expected Singapore s overall budget for FY 215 was estimated by the government to come in at a deficit (S$6.7bn) due to the S$6bn that was set aside for future investments, particularly the S$3bn into the Changi Airport Development Fund, and significant top-ups for the % <15yo EXHIBIT 6: Singapore s Demographics Path Until 23 The Price of Economic Development? y = ln(x) R² = Europe JP % >65yo Note: This chart shows the demographics path that Singapore had taken since 198. At the current rate of population aging and birthing, Singapore s demographics will be in the league of European countries by 22. And by 23, we will have surpassed that of Japan today. The other scatters on the chart represents a selected group of countries Special Employment Credit Fund, National Productivity Fund, and the National Research Fund. If these were excluded, FY 215 Budget will be close to balance. With three quarters of actual FY 215 numbers at hand, our projection shows that the initial estimates by the government of a S$6.7bn deficit (1.7% of GDP) could be too large. Our projection shows that FY 215 may see only a slight S$.69bn deficit (.2% of GDP). One of the reason was that we project total expenditure to come in at a smaller S$63bn, whereas the government had initially budgeted S$68bn. FY 216 Budget Projection: A Surplus of S$1.4bn Expected For FY 216, we estimate that the government should see a primary budget surplus of S$3.2bn (.76% of GDP), where operating revenue may grow 5.5% to S$68.2bn, while total expenditure is expected to expand 3.8% to S$65bn. It has always been tricky to estimate what the special transfers and NII contribution may amount to, and we have used a simple average of past data. For FY 216, we project an overall budget surplus of $1.43bn (.34% of GDP). In terms of government revenue breakdown, we expect personal and corporate income tax revenue to grow 3.5% in FY 216, compared to our estimates of 4.7% y/y in FY 215, and 8.6% y/y in FY 214. The slowdown in tax collection is likely due to the slower GDP growth in 215. That said, we project revenue from GST to gain 5.% in FY 216, compared to our estimates of a.3% growth in FY 215, and the stronger 7.4% growth in FY 214. Wednesday, 9 March Page

6 S$ bn Singapore Budget Statistics FY214 FY215 FY215 FY216 Actual Govt Estimated UOB Estimated UOB Forecast Operating Revenue Taxes & Fees Total Expenditure Operating Expenditure Development Expenditure Primary Budget Balance** 4.15 (3.95) % of GDP 1.1 (1.2) Less: Special Transfers Add: NII Contribution Overall Budget Balance (.13) (6.68) (.69) 1.43 % of GDP (.3) (1.72) (.17).34 Source: Ministry of Finance * Figures may not add up due to rounding; ** Surplus (Deficit) before Special Transfers and Net Investment Income (NII) Contribution Disclaimer: This analysis is based on information available to the public. Although the information contained herein is believed to be reliable, UOB Group makes no representation as to the accuracy or completeness. Also, opinions and predictions contained herein reflect our opinion as of date of the analysis and are subject to change without notice. UOB Group may have positions in, and may effect transactions in, currencies and financial products mentioned herein. Prior to entering into any proposed transaction, without reliance upon UOB Group or its affiliates, the reader should determine, the economic risks and merits, as well as the legal, tax and accounting characterizations and consequences, of the transaction and that the reader is able to assume these risks. This document and its contents are proprietary information and products of UOB Group and may not be reproduced or otherwise. Singapore Company Reg No Z