DBS Focus Singapore Budget 2018: Enhancing Sustainability

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1 Economics DBS Focus Singapore Budget 2018: Enhancing Sustainability Group Research 20 February 2018 Irvin Seah Senior Economist Budget 2018 Amid an improved growth outlook, the emphasis of this year s well-telegraphed budget was on medium-term economic transformation, building a liveable and sustainable city, fostering a caring society, and fiscal rebalancing. This is a give and take budget, with some goodies for most, coupled with a few near-and longer-term costs. Near-term measures to defray costs Please direct distribution queries to Violet Lee violetleeyh@dbs.com Key Themes: Budget 2018 focuses on economic transformation, innovation incentives, the social safety net, and fiscal sustainability. Much emphasis was placed on additional revenues needed to deal with aging and infrastructure, notably with the announcement of a 2%-pts GST hike between 2021 and Among short-term measures, the increase in stamp duty for property purchases, the extension of the wage credit scheme, and the enhancement of corporate income tax rebates reveal the government s prudent approach to managing prevailing macroeconomic dynamics. The fiscal stance has turned marginally expansionary, with a budgeted deficit of S$0.6bn (-0.1% of nominal GDP) for FY18, although we believe the outcome would surprise on the upside, given the sanguine economic climate. Among short-term measures, the Wage Credit Scheme (WCS) has been extended, which should help lower business costs and sustain income growth for some vulnerable segments of the economy. Extension and enhancement to the Corporate Income Tax (CIT) rebates will provide some short-term relief for companies, although the restriction in tax exemption (Start-up Tax Exemption and the Partial Tax Exemption) will affect smaller companies and startups more than bigger corporates. However, other forms of tax deductibles and innovation-related grants should help offset the negative impact. CIT rebate YA18 YA19 % of tax payable 40% 20% Rebate cap SGD 15,000 SGD 10,000 Transforming the economy Policymakers have also continued to embark on the medium-term transformation of the economy. While 21 of the 23 Industry Transformation Roadmaps (ITMs) have been announced, these are merely plans on the table at this juncture. Implementation will be crucial. Facilitation and coordination between the authorities with trade associations to ensure that companies can utilise the ITMs to deepen their own capabilities will Refer to important disclosures at the end of this report.

2 certainly help ensure success of the programme. Although details of the implementation process were lacking in the budget, we reckon that this is best examined at the micro / industry level rather than in the context of a macro-budget setting. Beyond that, the introduction of the Aviation and Marine Transformation programmes, the Enterprise Development Grant (EDG), and further refinements to existing measures such as the Double Tax Deduction for Internationalisation (DTDi), Tech Skill Accelerator, the National Robotics programme, and the SkillsFuture programme will buttress efforts to transform Singapore into an innovation-driven economy. Notably, the Productivity Solutions Grant (PSG) and various tax deductibles should encourage companies to invest in capabilities and technologies, as well as to anchor IP in the medium term. In this regard, there is a visible shift away from broad-based programmes (e.g., Productivity and Innovation Credit scheme) towards more specific and innovation-focused measures. This is in line with our long-held belief that a more targeted approach to restructuring would yield better outcomes in the longer term. Concomitantly, more public communication on this aspect and targeted consultancy for local companies will surely help enhance the take-up rate of these schemes. The announcement of the ASEAN Innovation Network and the setting up of the Infrastructure Office is exactly in line with our belief that Singapore can benefit from ASEAN growth by participating actively in the economic development of the region. With Singapore assuming the ASEAN chairmanship this year, we need to step up our regionalisation efforts. Not only will this create more opportunities for local companies, Singapore could also share best practices and new technologies with her neighbours and contribute to their economic advancement. This will be a win-win arrangement. While helping to promote regional economic development, it would also allow Singapore s institutions, companies, and public to generate good returns from the growth prospects in the region. Moreover, this is also very much in line with Singapore s macro priority to regionalise local companies. Contributing to the growth of the region will surely benefit local companies and the Singapore economy at large. Building a sustainable city and fostering a caring society Measures on enhancing the living environment and fostering inclusivity have also been announced. There are new schemes to support the Smart Nation initiative, as well as to develop the Energy Grid 2.0. The new Carbon Tax to be imposed from 2019 could affect the bottom-line of some sectors in the longer term, although this is certainly a sustainable and responsible way forward. The announcement of the SG Bonus (up to S$300 per adult) is about sharing the fruits of growth while measures such as the topping-up to Edusave, more financial assistance for the low-income, the S&CC rebate, and enhancement to the housing grant will certainly be welcomed by some households. Fiscal rebalancing The need for long-term fiscal planning is the key focus of the budget announcement. Budget 2018 is not about the present but rather, about planning for the future. Although Singapore has enjoyed years of overall fiscal surplus, mainly attributed to the robust Net Investment Return Contributions (NIRC), her primary balance has been in deficit for the past few years and projected to deepen further in FY2018 (see later section). Besides, an aging population will entail higher healthcare spending in the years ahead. Spending on education, security, and infrastructure is also expected to rise. Hence, it should come as no surprise to see announcement on tax hikes, particularly the GST. Page 2

3 Population is aging yrs old Rising social expenditure SGD mn 2.0 Social expenditure Median age will continue to rise per. Mov. Avg. (Social expenditure) Latest: 3Q Singapore s GST rate is low compared with some regional peers. Unlike the CIT, there is no competitive pressure. Notwithstanding the regressive nature of the GST, it is perhaps the most direct and effective tool in raising tax revenue. It has a relatively broader tax base and is also the secondlargest source of revenue, just behind the CIT. Hence a 2%-pt hike in GST rate goes some way in ensuring longer-term fiscal sustainability. However, a robust offset package, coupled with a staggered implementation process, will be necessary to sooth the pain for households, particularly lower-income families. In this regard, a GST offset package of at least S$4bn could be announced at a later stage, which will more than cover the projected tax revenue that could be GST, VAT rates for some regional countries UK 20% France 20% Germany 19% China 17% New Zealand 15% Philippines 12% Korea 10% Indonesia 10% Australia 10% Japan 8% Singapore 7% Thailand 7% Malaysia 6% derived from the 2%-pt tax hike. Expect the GST voucher pay-out to be increased, with the amount inversely proportional to household income. A oneoff income tax rebate could also be introduced to soften the effect on the middle-income group. More rebates on conservancy charges and utilities could also be considered. For more details, kindly refer to DBS report Biting the GST bullet dated 28 November Apart from the GST, the government has also announced a hike in the Buyer Stamp Duty (from 3% to 4%) for property above S$ 1mn. This is likely to impact developers relatively more than individual home-buyers. On the implementation of the GST on imported services from January 2020 onwards, this would be the first step towards plugging the gap in internet transactions for tax collection as well as levelling the playing field between local and foreign service providers and retailers. The Finance Minister also alluded to the possibility of financing infrastructure via borrowing to spread the cost of investment over more years, as well as setting up separate development funds to finance big-ticket infrastructure projects (Changi Airport and the rail system). This makes sense as the financial strain can then be smoothened out over a longer period rather than incurred in any particular fiscal term. Page 3

4 Beyond tax hikes Beside hiking taxes and/or cutting subsidies, there are three less spoken-about factors in ensuring fiscal sustainability: It is important to grow the pie. Ensuring a reasonable pace of growth will help generate a sustainable stream of tax revenue to support the fiscal position. While this may prove to be challenging given an aging population, Singapore can overcome the demographic limitation by encouraging internationalizsation of her local companies (refer to DBS report, National vs domestic growth dated 28 Apr16). This outward investment strategy should yield positive returns in the longer term, judging from the experiences of Japan and Taiwan. Essentially, investing in more rapidly-growing economies in the region will help Singapore sustain income growth in coming years. Cost management is just as crucial to curbing the strain of subsidies. For example, healthcare inflation averaged 2.6% in 2017, significantly higher than the overall inflation rate of 0.6%. There is a need to review the current cost structure and streamline the administrative processes of Singapore s healthcare system. Ultimately, subsidies will never keep pace with increases if costs are not kept in check, particularly given the aging demographic profile. And this applies to all forms of social assistance schemes. For healthcare assistance in particular, some form of personal responsibility (i.e. co-payment) to stem potential abuse is also necessary to ensure sustainability. Singapore's overall fiscal position Revised Estimated Chg over FY2017 FY2018 FY 2017 SGD bn SGD bn % change Operating revenue Less: Total expenditure Operating expenditure Developmental expenditure Primary surplus/deficit Primary balance as % of GDP Less: Special transfers Add: NIRC Overall surplus/deficit Overall balance as % of GDP An expansionary budget The economy registered an overall surplus of S$9.61bn (2.1% of GDP), significantly higher than the budgeted amount of SGD1.9bn. This comes largely on the back of a one-off spike in Statutory Board contributions of S$4.6bn, and increased stamp-duty collections of S$2.0bn due to the pickup in the property market. For FY18, fiscal policy has turned expansionary, with a budgeted deficit of S$0.6bn (-0.1% of nominal GDP). This stems partly from a projected 3.3% decline in tax revenue, an 8.3% spike in spending, as well as a whopping 46.2% surge in special transfers. The increase in special transfers reflects largely the top-ups to endowment and trust funds in addition to the announcement of the SG Bonus. Primary and basic deficits deepening SGD bn Special transfers ex top-up to endownment & trust funds Primary surplus/deficit 10 Basic surplus/deficit Ensuring high returns from the investment of Singapore s reserves will be crucial. But in this regard, it is important to note the risk-return trade-off. Aiming for higher returns typically entails taking on higher risks. This explains the prudent and, at times conservative, approach with a longer time horizon taken by the relevant agencies when investing Singapore s reserves FY06 FY08 FY10 FY12 FY14 FY16 FY18 Page 4

5 More importantly, it should be noted that the primary and basic deficits have deepened. The primary deficit is expected to dip to S$7.3bn while the basic deficit will register S$9.2bn. These would be the deepest shortfall since While we reckon that the outcome would surprise on the upside, persistent deficit in the longer term is certainly not sustainable. This explains the need to bite the fiscal bullet and to rebalance the fiscal position in the longer term. While Singapore s overall fiscal position remains strong, given the robust NIRC, policymakers will continue to adopt a prudent and forward-looking approach to planning for the future. While tax adjustments are unpopular, they are essential to safeguarding the sustainability of Singapore s longer-term fiscal health. Indeed, Budget 2018 is another crucial building block in the longer-term development of Singapore. Besides maintaining a prudent approach to reallocating resources amongst the various segments of the economy, Budget 2018 has also struck the right note in balancing the present and future needs of the society. This is a budget with an eye on the future. Page 5

6 Group Research Economics & Strategy Team Taimur Baig, Ph.D. Chief Economist - G3 & Asia taimurbaig@dbs.com Radhika Rao Economist - Eurozone & India radhikarao@dbs.com Gundy Cahyadi Economist - Indonesia, Thailand, & Philippines gundycahyadi@dbs.com Irvin Seah Economist - Singapore, Malaysia, & Vietnam irvinseah@dbs.com Nathan Chow Strategist - China & Hong Kong nathanchow@dbs.com Samuel Tse Economist - China & Hong Kong samueltse@dbs.com Eugene Leow Rates Strategist - G3 & Asia eugeneleow@dbs.com Duncan Tan FX and Rates Strategist duncantan@dbs.com Chris Leung Economist - China & Hong Kong chrisleung@dbs.com Philip Wee FX Strategist - G3 & Asia philipwee@dbs.com Ma Tieying Economist - Japan, South Korea, & Taiwan matieying@dbs.com Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations). Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified. DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore Tel: Company Registration No E. Page 6