Singapore Set for Modest Fiscal Push as Growth Risks Abound

(Bloomberg) -- Singapore’s 2017 budget is set to deliver a modest fiscal push to an economy that’s facing a gloomy trade outlook just as it starts to rebound.

With China’s economy showing consistent signs of recovery, spurring exports across the region, the immediate pressure is off Finance Minister Heng Swee Keat to provide a large stimulus package when he gives his budget speech in Parliament on Monday. Consumer demand remains weak though, and with global uncertainties mounting, the fiscal policy focus is set to stay on targeted measures and plans to spur productivity in a country grappling with an aging population.

“The urgency for a sizable counter-cyclical fiscal stimulus has probably eased compared to just three months ago,” said Kit Wei Zheng, an economist at Citigroup Inc. in Singapore.

Here’s what to watch for in the budget:

CFE Recommendations

The budget comes less than two weeks after a government-appointed panel, led by Heng, outlined initiatives to propel the economy into its next phase of growth. The Committee on the Future Economy recommended a range of measures -- such as skills development, helping small businesses adopt digital capabilities and easing regulations for businesses -- to help spur growth to 2 percent to 3 percent a year over the next decade.

The budget will probably give effect to some of these proposals, including possible moves to shore up the manufacturing industry, which the CFE recommended should be maintained at its current share of about 20 percent of gross domestic product, said Citigroup’s Kit.

Social Spending

The government’s strong focus on social spending -- such as cash transfers -- will probably take a backseat and measures to support job-creation will get more attention, said Vaninder Singh, an economist at Natwest Markets in Singapore. To help consumers spend more, the government may assist in reducing the cost of living rather than cutting taxes, he said.

“Singapore will have to continue fiscal support to the economy,” he said. “We expect the budget to focus its attention on helping corporates create jobs and helping households spend.”

Investment Sweeteners

Singapore posted its lowest level of fixed-asset investments last year since at least 2007, as a booming cycle in the petrochemical industry turned to bust after oil prices fell. U.S. President Donald Trump’s decision to ditch the Trans-Pacific Partnership -- a free-trade deal that would’ve benefited open economies like Singapore -- may add urgency to government efforts to boost investment.

Singapore is “increasingly facing an uphill climb as far as multilateral trade agreements, for example TPP, attracting foreign direct investments (as more economies turn more protectionist), and generating more value-added, well-paying jobs,” Selena Ling, an economist at Oversea-Chinese Banking Corp. in Singapore, said in a report.

Property Curbs

The government imposed property curbs in recent years, including capping debt repayments at 60 percent of a borrower’s income and higher stamp duties, to rein in an overheating market, causing residential home prices to contract for a third consecutive year in 2016. Lim Ming Yan, the president and CEO of CapitaLand Ltd., said there’s no “compelling” reason for the government to make any major changes to the rules since the housing market seems to be stabilizing.

Fiscal Surplus

Heng forecast a budget surplus of S$3.5 billion in the fiscal year ending March 2017, or just under 1 percent of GDP. The outcome may turn out to be better at S$5.05 billion after an improvement in tax receipts in the first six months of the year, said OCBC’s Ling. That may give authorities scope to “be more generous and target a modest fiscal deficit” of S$0.99 billion, or 0.2 percent of GDP, in the year beginning April 1, she said.

The government also gets contributions from state investment companies and institutions like Temasek Holdings Pte, GIC Pte and the Monetary Authority of Singapore. It’s mandated to run a balanced budget over its term of office.

Tax Measures

The CFE recommended a review of Singapore’s taxes, saying the nation may need to move toward a progressive system -- where the tax rate rises as income increases -- while staying fiscally attractive in a world of declining corporate tax rates.

It’s not clear whether the government will be ready to announce such a move so soon after the proposal was made as it needs careful consideration, said Brian Tan, an economist with Nomura Holdings Inc in Singapore.

Singapore’s corporate tax rate has been steadily reduced to 17 percent from more than 30 percent in the early 1990s, according to estimates by accounting and auditing firm Ernst & Young. The nation’s top marginal income tax rate, at 22 percent, is among the lowest in the world and compares favorably with other regional countries, including Australia at 45 percent and Indonesia at 30 percent.

--With assistance from Myungshin Cho

To contact the reporter on this story: David Roman in Singapore at droman16@bloomberg.net.

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Sebastian Tong

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