SINGAPORE, Feb. 24 (UPI) -- Singapore's 2003-2004 budget, to be announced Friday, is likely to emphasis medium-term competitiveness, rather than short-term stimulus, taking on board some of the recent recommendations by the Economic Review Committee.
Cost control will be high on the budget's agenda and the government is likely to adopt all the proposals relating to the Central Provident Fund, analysts say. A further small cut in income taxes this year is also a possibility.
"The budget will be about creating the right environment to help the restructuring of the economy which is needed in the face of the China challenge," predicts Cliff Tan, an analyst at Citigoup.
"The budget focus will be on longer-term issues that the ERC has identified in the last 6 months, with some near-term cost cutting measures," adds Kaan Quan Hon, analyst at DBS Bank.
Singapore has just about skirted another technical recession in 2002, but the local economic outlook is still fairly uncertain and very dependent on the international environment. Earlier this month, the government-appointed ERC unveiled its blueprint to help the economy remain competitive over the long-term future, calling for changes in the tax regimes and the Central Provident Fund system. It recommended the government promote growth in the service sector, while encouraging entrepreneurship.
JP Morgan Chase Bank analyst Rajeev Malik believes the budget will be "a tough balancing act between declining revenues (owing largely to substantial tax cuts announced last year) and managing expectations of further relief for taxpayers."
In the previous budget, corporate and top personal tax levels were cut to 22 percent for that fiscal year, from 24.5 percent and 26 percent respectively, while the government promised to cut them further to 20 percent by 2004. To counterbalance the lost in revenues, the Goods and Services Tax was to be raised from 3 percent to 5 percent in January. However, due to the worsening of the economic outlook, the government decided to raise the GST to 4 percent, delaying the 5-percent level for 2004. Deputy Prime Minister and Minister of Finance Lee Hsien Loong has already warned that the phasing in of the GST rise would result in a budget deficit, though he has stressed the government intends to maintain a balanced budget in the long run.
For these reasons, the government is likely to restrain spending this fiscal year, says Steve Brice, chief economist at Standard Chartered.
"On our calculations, the budget balance (2002-2003) will be in the red for the second straight year. We estimate a deficit of S$800 million (US$460 million) or -0.5 percent of GDP, slightly higher than our previous forecast of a balanced budget," Malik says, adding that for 2003-2004, the budget balance will post "a meager surplus of 0.3 percent of GDP."
"Overall, the budget will be painfully short of unexpected goodies," he adds.
Analysts expect the government to endorse the ERC recommendations on CPF contributions, which included a 2-year delay in the increase in the employers' contribution rate (currently at 10 percent) to its former rate of 16 percent. The ERC also suggested proceeding immediately with the phasing in of reducing the salary ceiling for both employers' and employees' contributions and lowering the employees' contribution rate for workers aged 50 to 55 from the present level of 20 percent to 16 percent.
Analysts also believe both corporate and personal income tax rates could be cut by 1 percentage point to 21 percent this year, broadly in line with the government's announced schedule.
"However, given the pressure on revenues, there is a good chance that the government does not change tax rates this year but cuts them by 2 percent in 2004," Malik says.
Taxes on tobacco and liquor will likely be raised, partly to cushion the hit on revenues by the cuts in income tax rates. Excise duties on both items were raised last year.
From a business perspectives many believe priority should be given to lower the cost of business. According to a survey by the Singapore Chinese Chamber of Commerce & Industry conducted in December, 70 percent of respondent hoped government charges, taxes and rentals could be lowered to reduce their financial burden. Respondents were looking for immediate reductions in operating costs, including road taxes, ERP charges, petrol tax, utilities charges, license fees, rentals, and other government levies and charges.
The SCCCI also urges the government to review and cut down any "excessive or extravagant manpower and operating expenditure," critically with a view to reducing the various government taxes and charges on a more substantial and sustainable basis.