Singapore Analytical Brief: Singapore Budget 2017

Singapore Analytical Brief | February 28, 2017
Authors: Kim Yaeger, Sunita Kapoor, and Riley Smith
 

Singapore Budget 2017

Analysis

On February 20, Minister for Finance Heng Swee Keat presented the Government of Singapore’s (GoS) Budget statement (Budget 2017) for fiscal year 2017 (FY2017).  Budget 2017 is a direct follow up to the Committee on the Future Economy’s (CFE) deliberations last year and its recently released recommendations.  It focuses on the three main themes of economy, environment, and society, and broadly lays out plans to encourage increased innovation in the domestic economy and implement the CFE’s recommendations, released earlier this month.  The CFE was a consultative body formed in late 2015.  It was tasked with devising economic policy recommendations to strengthen Singapore’s business environment amid global and domestic headwinds, such as slowing global trade, disruptive technological advancements, and an aging workforce.  After the presentation of Budget 2017 to Parliament, the next step of the budget process is the Committee of Supply debates on Budget 2017.  An overview of the budget process can be found here.

In general, Budget 2017 is an expansionary budget that aims to address the effects of the economic headwinds that Singapore has faced, particularly over the last year.  It aims to do this by promoting digitalization, domestic innovation, and internationalization, most especially for small- and medium-sized enterprises based in Singapore.  However, it also emphasizes future fiscal prudence, with Minister Heng stating that GoS would have to raise taxes or implement new taxes in the future to meet the fiscal needs of future generations.  Positioning the budget as an “investment in [Singapore’s] economic transformation and social resilience,” Minister Heng also said that as expenditures rise more rapidly in the coming years, especially in healthcare and infrastructure, Singapore will have to “do better – and more – with less.”  This is why Budget 2017 implements a permanent 2% decrease in the budget caps of all ministries and organs of the state, starting in FY2017.  For the Ministries of Defense, Health, Home Affairs, and Transport, this 2% reduction will be done in phases over two years, as these ministries either deal with security issues or will have to expand their services in the coming years to keep up with demand. 

Budget 2017 also marks a step in a shift in focus from broad-based tax relief schemes to more specific stimulus measures for certain industries or economic sectors.  Such an approach allows GoS to more directly target sectors of the economy that may be suffering from cyclical and structural weaknesses, or a combination of the two.  The clearest example of this is the reduction of the corporate tax rebate cap for FY2018 and the extension of foreign worker levy deferral for the Marine and Process sectors for another year.  The corporate tax rebate cap, which will be increased to S$25,000 (US$17,760) at 50% of tax payable for FY2017, will be lowered to S$10,000 (US$7,100) at 20% of tax payable for FY2018.  In terms of sector-specific relief, Budget 2017 defers for another year the previously announced increases in the foreign worker levy for the Marine and Process sectors due to continued weakness in these sectors. 

Unlike with the introduction of more targeted tax relief measures, Budget 2017 expands the use of indirect taxes to help raise government revenue.  The clearest example of this is the proposed introduction of a carbon tax for large-scale emitters and the 30% increase in the price of water, both of which are discussed in greater detail below.  The expanded use of indirect taxes such as these, coupled with measures in Budget 2017 to help Singapore-based firms grow and globalize, means there is an increased likelihood that the Goods and Services Tax (GST) base could be expanded in future budgets to bolster GST-registered local firms relative to non-GST-registered foreign firms.

Key Themes and Aspects of Budget 2017

In his introduction to Budget 2017, Minister Heng touched on the global and domestic headwinds that are buffeting Singapore’s trade-dependent economy.  He noted an “inward looking mood” in several of the most advanced economies in the world, a mood that risks slipping into protectionism, further dragging down the already marked slowdown in global trade.  He also mentioned how advances in technology are disrupting traditional business models and jobs at an accelerating rate.  Both of these trends, Minister Heng noted, are occurring concurrently and feeding into a broader transition in Singapore’s economy.  Singapore’s economy is maturing and its workforce is aging rapidly—both of which put downward pressure on economic growth.  To reinvigorate the domestic economy, Minister Heng said that Singapore must refocus its efforts on encouraging increased innovation and adaptability among its workforce while remaining open and connected to world markets.  “We will take a learning and adaptive approach,” Minister Heng said, “try new methods, continue with them when they work well, cut losses when they do not, and draw on feedback and experience to adjust and refine our plans.  That is the Singapore way.”

Under the economy theme, Budget 2017 lays out means to support and strengthen the business sector, boost competitiveness within and between industries, and build up a skilled but adaptable workforce.  One example is the increase in the corporate tax rebate cap from S$20,000 (US$14,200) to S$25,000 (US$17,760), at 50% of tax payable.  Budget 2017 also extends the corporate tax rebate to FY2018, though its cap will be lowered to S$10,000 (US$7,100) at 20% of tax payable for that year.  Budget 2017 also provides support for employers that hire and keep on older workers through various means such as the Wage Credit Scheme and the Special Employment Credit (SEC).  Overall, these allocations in Budget 2017 amount to support for employers of up to 11% for the wages of their eligible older workers. 

To help boost industry-wide competitiveness and encourage innovation, Budget 2017 provides various types of support, including the increase or creation of government funds and recommendations on how to implement the CFE’s advice.  Budget 2017  calls for the start dates of S$700 million (US$500 million) worth of public sector infrastructure projects to be brought forward to FY2017 and FY2018.  The Budget also establishes a Public Sector Construction Productivity Fund that will be capped at S$150 million (US$107 million).  That fund will be put towards ensuring that public sector projects are using innovative and productive construction solutions.  To support industry transformation efforts, Budget 2017 increases the National Productivity Fund by S$1 billion (US$712 million) and the National Research Fund by S$500 million (US$356 million).  It also calls for the formulation of Industry Transformation Maps (ITMs) for 23 sectors, as well as the expansion of regulatory sandboxes to industries other than the financial services sector and self-driving vehicles.  Overall, Budget 2017 allocates S$2.4 billion (US$1.7 billion) over the next four years to carry out the CFE’s recommendations.

On the theme of environment, Budget 2017 introduces measures to help Singapore reduce its greenhouse gas emissions and “sustain a quality environment for the future.”  The two most prominent measures are the introduction of a new carbon tax and a 30% increase in the price of water.  The tax will be between S$10 (US$7.13) and S$20 (US$14.25) per ton of greenhouse gas emissions, and will be applied to large-scale emitters like power stations and refineries.  Consultations on pricing and scheduling will commence this March for an eventual implementation in 2019.  GoS says that the 30% increase the price of water more accurately reflects its scarcity in 2017.  The increase will take effect on July 1 and will take place in two phases over the course of the year.  Budget 2017 also imposes a 10% water conservation tax on NEWater tariffs.  

A copy of the full budget statement can be found here.  The following are highlights of Budget 2017:

Budget

  • Budget 2017 estimates Total Expenditure for Fiscal Year 2017 (FY2017) to be S$75.1 billion (US$53.4 billion) 
    • This is an increase from Fiscal Year 2016’s (FY2016) downwardly-revised Total Expenditure of S$71.4 billion (US$50.7 billion)
  • Total Expenditure for FY2017 is equal to 17.7% of gross domestic product (GDP)
  • Operating Revenue is estimated to be S$69.5 billion (US$49.4 billion) for FY2017
    • This is a slight increase FY2016 Operating Revenue, which was revised upwards to S$68.7 billion (US$48.8 billion)
  • A budget surplus of S$1.9 billion (US$1.4 billion) is projected after Top-ups to Endowment and Trust Funds (S$4.0 billion (US$2.8 billion)) and the Net Investment Returns Contribution (S$14.1 billion (US$10.0 billion)) are added
  • Starting in FY2017, the Government will implement a permanent 2% decrease in the budget caps of all ministries and organs of the state
    • For the Ministries of Defense, Health, Home Affairs, and Transport, this 2% reduction will be done in phases over two years
  • Total Expenditure by sector for FY2017:

Sector

Total Expenditure FY2017 (billions)

% Difference from FY2016

Defense

S$14.2

+2.9%

Education

S$12.9

+1.6%

Transport

S$9.2

-11.5%

Health

S$10.7

+9.2%

Home Affairs

S$5.8

+13.7%

Trade and Industry

S$3.7

-2.6%

National Development

S$4.8

+37%

Social and Family Development

S$2.5

0%

Culture, Community and Youth

S$2.2

+10%

Manpower

S$1.7

+10.5%

Environment and Water Resources

S$2.8

+55.6%

Communications and Information

S$1.3

+18.2%

Finance

S$1.1

+22.2%

Law

S$0.5

-16.7%

Organs of State

S$0.6

+20%

Foreign Affairs

S$0.5

0%

Prime Minister’s Office

S$0.5

0%

Support for Business Sector

  • Budget 2017 raises the corporate income tax rebate cap from S$20,000 (US$14,200) to S$25,000 (US$17,760), at 50% of tax payable
  • The rebate will be extended to FY2018 and be capped at S$10,000 (US$7,100), at 20% of tax payable, for that year
  • GoS aims to refine tax schemes and implement relevant standards to conform with the Base Erosion and Profit Shifting (BEPS) project
  • Budget 2017 allocates S$80 million (US$57 million) to programs meant to strengthen corporate capabilities
    • Programs include those promoting digitalization for SMEs and those supporting pilot projects for new information and communications technology solutions
  • In March 2017, the Wage Credit Scheme will pay out over S$600 million (US$426 million) to help firms deal with rising wages
  • Budget 2017 allocates more than S$300 million (US$214 million) over FY2017 to those covered by the Special Employment Credit (SEC), and the Ministry of Manpower will extend the employment age to 67 from 65
  • Additional SEC totaling approximately S$160 million (US$114 million) will be put towards helping older workers stay employed by providing wage offsets of up to 3%
    • This SEC will be extended until December 31, 2019
    • It is estimated it will benefit approximately 120,000 workers and around 55,000 employers
  • Overall, these allocations in Budget 2017 amount to support for employers of up to 11% for the wages of their eligible older workers

Encouraging Innovation

  • Budget 2017 calls for the formulation of Industry Transformation Maps (ITMs) for 23 sectors
    • Collectively, the 23 sectors that the ITMs will cover comprise 80% of Singapore’s economy
  • Budget 2017 increases the National Productivity Fund by S$1 billion (US$712 million) to support industry transformation efforts
  • Budget 2017 increases the National Research Fund by S$500 million (US$356 million)
  • The budget calls for the expansion of regulatory sandboxes to industries other than the financial services sector and self-driving vehicles
  • Overall, Budget 2017 allocates S$2.4 billion (US$1.7 billion) over the next four years to carry out the CFE’s recommendations

Cybersecurity

  • The Budget allocates S$80 million (US$57 million) to programs meant to strengthen Singapore’s data and cybersecurity capabilities

Infrastructure

  • Budget 2017 calls for the start dates of S$700 million (US$500 million) worth of public sector infrastructure projects to be brought forward to FY2017 and FY2018
  • Budget 2017 establishes a Public Sector Construction Productivity Fund
    • The fund is capped at S$150 million (US$107 million)
    • It will be put towards ensuring that public sector projects are using innovative and productive construction solutions

Healthcare

  • Budget 2017 allocates S$400 million (US$285 million), inclusive of existing initiatives, to support persons with disabilities and their caregivers
    • Support will focus on early intervention and education, employment, care services, assistive technologies, and making healthcare more accessible
  • The Budget allocates S$160 million (US$114 million) over the next five years to support those with mental health conditions

Environment

  • Budget 2017 calls for the implementation of a new carbon tax by 2019 to help reduce greenhouse gas emissions
    • The tax will be between S$10 (US$7.13) and S$20 (US$14.25) per ton of greenhouse gas emissions
    • It will be applied to large-scale emitters like power stations and refineries
  • Budget 2017 increases the price of water by 30%
    • GoS says the increase more accurately reflects scarcity
    • The increase will take effect on July 1 and will take place in two phases over the course of the year
  • Budget 2017 imposes a 10% water conservation tax on NEWater tariffs

Macroeconomy

  • GDP growth in last quarter (Q4) of 2016 was a faster-than-expected 1.8% on a year-on-year basis, bringing GDP growth for 2016 to 1.8%
    • On a quarter-by-quarter seasonally-adjusted basis, GDP grew 9.1%; on an annualized basis, it grew 12.3%—the fasted in six years 
    • The strong growth in Q4 of 2016 helped Singapore avoid a technical recession (two consecutive quarters of GDP contraction) after GDP contracted 1.9% in the third quarter of 2016
  • However, with anemic economic growth and a continued slowdown in global trade, it is unlikely the strong GDP growth figures from Q4 2016 will be sustainable
  • In Q4 2016, the unemployment rate rose to 2.2%, bringing the whole year average unemployment rate to 2.1%
    • This is the highest unemployment rate since 2010
  • In January 2017, inflation, as measured by the All-Items Consumer Price Index (CPI), increased to 0.6% year-on-year
    • This was the second consecutive month of increasing inflation; CPI rose to 0.2% in December 2016
    • Prior to December 2016, CPI had not increased since October 2014
    • Planned water price hikes and implementation of a carbon tax over 2017 are likely to spur continued inflation  

Reactions to Budget 2017