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Extracts from Finance Minister Tharman Shanmugaratnam’s Budget Speech

Economic Performance 2007

We had real growth of 7.7 per cent in 2007, much higher than we had expected at the start of 2007. The strong economy also brought unemployment down to 1.6 per cent at the end of last year. Resident unemployment also fell sharply to 2.3 per cent, the lowest level in a decade.

We have been aided by a favourable global environment. But Singapore’s strong growth in recent years has mainly been the result of our broad-ranging efforts to restructure our economy, labour market and fiscal system.

This is not a story of an old economy growing quickly, but of a new economy emerging out of the old. It is about how we are attracting new and cutting edge investments, capitalising on opportunities in new growth industries and markets abroad, upgrading our workers’ skills and competing at an advantage.

Fiscal Position in 2007

With stronger than expected economic growth in 2007, we expect the overall Budget balance to be a surplus of $6.4 billion for Financial Year (FY) 2007, compared to the deficit of $0.7 billion that was originally projected.

We started the year expecting a growth rate of 4.5 per cent to 6.5 per cent, which was also in line with market forecasts.

With actual growth at 7.7 per cent, corporate and personal income taxes came in some $1 billion higher than projected. GST revenues also exceeded our projection by about $1.2 billion, mostly from higher consumption.

GST collection arising from the 2 percentage point hike in July is estimated at about $1.4 billion in total, which now just matches the size of the GST Offset Package and Workfare Income Supplement tranches that were distributed in FY2007.

However, the largest boost to revenues came from the exceptionally buoyant property market last year.

Prices of private residential units rose by over 30 per cent, much higher than industry forecasts of around 10 per cent to 15 per cent at the beginning of the year.

The volume of property transactions went up by over 60 per cent. Stamp duties consequently rose to an unprecedented $3.8 billion, $2.3 billion higher than expected.

Other property -related revenues were around $1.1 billion above projections.

The overall budget surplus of $6.4 billion was therefore the result of a strong economy and property market.

Economic Outlook for 2008

The key factor that will shape the growth of the Singapore economy in 2008 is the global economy, especially the state of the US economy.

Many private forecasters now expect the US economy to enter a recession in the first half of the year, although it may be mild. If this happens, Asian exports will be affected.

However, the IMF and other global forecasters still expect growth in Asia on the whole to remain healthy.

China and India are expected to slow down, but still grow at 10 per cent and 8 per cent respectively on the back of strong domestic demand.

Overall, on all current indications of global conditions, we expect growth of 4 per cent to 6 per cent in the Singapore economy this year. This is lower than last year, but well in line with the economy’s potential over the medium term.

However, there are major downside risks to this year’s forecast of growth.

A sharper than expected decline in US growth could add to the turmoil in the financial markets, and deepen the credit crunch that is still unfolding.

This will inevitably spill over to the Asian economies and markets, and our own growth will be impacted. The outcomes cannot be predicted, but we must be watchful of the risks and be ready to respond to them.

Dealing with inflation

Global Outlook Inflation is the other major uncertainty in the global economy, and a concern for us.

After a period of very low inflation over the last 10 years, it has re-emerged and is now an economic problem everywhere in the world.

The basic factors which have led to these price increases are not expected to go away soon. The demand for food especially has continued to rise globally, especially with the rapid growth of the middle classes in China and India.

We therefore have to brace ourselves for a period of relatively higher inflation globally, which will affect the prices of the goods we import.

We cannot say how long it will last, but we have to expect that it will remain high, in the first half of this year especially.

Inflation was about 2 per cent for 2007 as a whole, but it was much higher towards the end of the year.

Consumer price inflation reached 4.4 per cent for December 2007.

Overall, we currently expect inflation at 4.5 per cent to 5.5 per cent in 2008, but with inflation being higher in the first half of the year than the second.

The GST change has caused only a one-off increase in prices, and not continuing price increases. Singaporeans have also not been materially affected by the GST increase, because the Government has provided the majority of citizens with substantial offsets.

There is also a technical reason, due to the rising values of homes.

The increase in the assessed Annual Values of homes will contribute significantly to inflation this year. However, here too, most Singaporeans are not materially affected, as 95 per cent of citizens own their own homes and do not pay rentals.

Nevertheless, even if we exclude this technical factor due to home values, and the one-off effect of the GST increase, inflation today is higher than what we have been used to in Singapore for many years.

Our Strategies

Our strategies will ensure that Singapore continues to have lower inflation than the rest of the world over the medium term.

Our strategies to help Singaporeans cope with inflation essentially comprise five planks.

First, we seek to moderate imported inflation through our Singapore dollar exchange rate policy. This has been the Monetary Authority of Singapore’s consistent policy objective.

However, there is a limit to how fast the Singapore dollar can appreciate without hurting our economic performance and growth, and eventually causing wages to fall.

An overly strong Singapore dollar can bring inflation down, but at the cost of lower growth and higher unemployment.

This is why, while we can mitigate imported inflation through MAS’s exchange rate policy, we cannot insulate ourselves completely from the effects of global inflation passing through to the Singapore economy.

Second, we are stepping up diversification of food sources.

These policies of mitigating imported inflation, through exchange rate policy and source diversification, have helped to lower food inflation in Singapore.

The third way in which Government policies help Singaporeans cope with inflation has been our support of home ownership as a key pillar of society.

Even lower-income Singaporeans therefore have substantial equity in their homes which rises over time and is generally protected against inflation.

We have become used to this in Singapore. But it in fact insulates Singaporeans, especially our retirees, from increases in rental costs which are a significant long-term concern in other countries.

Fourth, the Government provides assistance directly to Singaporeans who face problems coping with the cost of living. This approach…is better, and more sustainable than taking reflex actions such as imposing price controls on essential goods.

Our fundamental approach to helping Singaporeans in need is to help them to get a good income for themselves. The best way to do so has been and remains to help needy Singaporeans get a job, and to encourage them to stay at it, upgrade themselves, and support their family members.

Last year we introduced the Workfare Income Supplement (WIS) scheme, to add to the income and savings of Singaporeans at the lower end of the wage ladder.

For those who are truly unable to work, for example because of disability, we have the Public Assistance (PA) Scheme.

We will continue to complement these institutionalised schemes, by providing discretionary assistance to those in need. This is why we have boosted the ComCare Fund, which now stands at $600 million, and Medifund which has reached $1.4 billion.

Further, where we make good surpluses on the budget, we have redistributed benefits back to Singaporeans, with more going towards the elderly and the needy.

The fifth plank of the Government’s strategy is the most fundamental to how we cope with rising global inflation.

Our strategy is to keep our economy competitive and build up our capabilities so that we can enjoy good economic growth.

This is the best offset to global inflation, which will be with us not just for a few months but possibly a few years.

If global inflation stays high, all countries will be affected by it and we will not be able to totally insulate ourselves. But there is no reason why we cannot keep growing, and keep outperforming.

And because our economy has done well and we have healthy surpluses, we now stand from a position of strength.

Top quality economy, resilient community

This Budget is about how we are looking ahead to create new advantages and fresh opportunities for Singapore in a competitive world.

The way we will do it is to be a top-quality economy. This means top-quality people, and top-quality enterprises.

The Budget is also about keeping all our people together as we grow and ensuring that no one is left behind.

Budget 2008 Key Thrusts The Budget this year is centred on four key thrusts:

a. We will provide a full range of education and training opportunities for people to find and stretch their potential, in school and in their post-secondary education, as well as throughout their working years.

We will enhance assistance for needy students to ensure that a top-rate tertiary education is affordable to all.

b. We will spur the growth of innovative enterprises. We will significantly enhance the incentives for enterprises big and small to create new ideas and products.

c. We will also adjust our tax policies so that we stay competitive, support the growth of our SMEs, encourage risk-taking as well as strengthen our role as a financial and business hub.

d. We will continue to build a resilient community. We will strengthen financial security for retirement, and help the less well-off members in our society.

We will also share surpluses with Singaporeans, with particular focus on the lower and middle-income groups who are more affected by rising prices.

Creating a top-quality economy

We are competing in a league of both established leaders and newly-emerging cities with an edge in knowledge-based industries.

They are not standing still, even in the developed world.

We have what it takes to compete in the top league.

We already have a first-class infrastructure and one of the most attractive living environments in Asia.

But we will invest in a total upgrade of our business, transport and IT infrastructure to enable new growth in the decades to come.

Together with the ongoing upgrading programmes in all our estates, and the green corridors and waterways that we are now developing all over the island, we will provide a vibrant and distinctive living environment for our people.

These large investments will position Singapore for its next phase of development as a global city, open up many new opportunities for growth, and help transform the quality of life for all Singaporeans.

However, our infrastructure is only the enabler.

The key to our success will be our people and our enterprises.

Whether we make the most of our opportunities, whether we grow, and whether we hold our place in the top league will ultimately depend on whether our people and enterprises are top quality, in every job and business they do.

Nurturing Every Skill and Talent

We will commit more resources to achieve higher standards in the pre-school sector, which will especially benefit children from lower-income backgrounds.

We will also enhance our financial assistance schemes to help more families with their children’s fees in kindergartens and childcare centres. More details of these initiatives will be announced by MOE (ministry of Education) and MCYS (Ministry of Community Developemnt, Youth and Sports) later.

We are also putting more resources into overseas immersion for a broad base of students and new boarding school programmes that will enhance opportunities for bonding and a rigorous all-round education.

Tertiary Education Our university sector is entering a new phase.

NUS, NTU and SMU are stepping up to a new level of excellence that will put them decisively ahead. We will grow the number of subsidised university places from 25 per cent to 30 per cent of each cohort by 2015, with four publicly-funded universities.

Besides the four universities, we will have a range of other programmes that will enable students to earn degrees in specialised fields, like early childhood education and naval architecture.

We will also provide enhanced assistance to needy students to make sure that financial status remains no obstacle to pursuing studies at our publicly-funded universities.

However, taking into account the higher costs of university education today, with the improvements in quality that we are making, we have decided to significantly enhance the bursaries given to students from the lower-income group.

We will also provide more assistance for those in the middle-income brackets.

Further, through a combination of bursaries and loans, students within the bottom two-thirds of the population will not need to expend cash for either their fees or living expenses during their university years.

University Bursaries First, for students in the lowest 20 per cent of households who enter our universities, we will increase the CDC/CCC-University Bursary Scheme for students, from $1,000 to $1,600 per annum. The universities will themselves also provide further bursaries to low-income students in need. Second, for the middle-income group, the MOE Bursary Scheme for students up to the 50th percentile of households will be increased from $800 to $1,200 per annum.

Further, we will extend the bursaries to students above the 50th percentile but within the lower two-thirds of households by income, who will receive a lower amount of $800.

To provide greater access to credit for students in middle-income households, the Study Loan Scheme will be extended to students up to the 80th percentile of households.

Polytechnic Bursaries We will similarly increase the bursary quantums for polytechnic students. For the CDC/CCC-Polytechnic Bursary Scheme, we will increase it from $1,000 to $1,200 per annum.

We will also be introducing a new MOE Bursary Scheme for polytechnic students from the bottom 50 per cent of households, as we have done at the universities.

The new bursary will be set at $800 per annum.

We will also extend the MOE and CDC bursaries to students enrolled in MOE-funded diploma programmes in the arts institutions - LaSalle and Nanyang Academy of Fine Arts.

Similar to the study loans for university students, the Study Loan Scheme for diploma students will be extended to students up to the 80th percentile of households.

All new and existing students can take advantage of these schemes starting from this coming academic year.

Last year we introduced Post-Secondary Education Accounts (PSEAs) for all students.

I announced a top up of $100 to $400 for each of 2008 and 2009.

I will now make a further top-up later this year.

We will provide the majority of students, which includes those from all HDB homes, $300 for those still in primary school and $600 for those in secondary schools.

Including what was announced previously, this means that secondary school students would have up to $1,400 in their accounts by March next year to use for their post-secondary education.

The additional top-up this year will cost us $300 million.

Continuing Education and Training

A key focus going forward will now be continuous education for adults.

This is going to be absolutely essential for us to retain the competitiveness of our workforce.

We expect to spend, on recurrent expenditure alone, $400 million per year on CET by 2010. To support this long term engagement, I will top-up the Lifelong Learning Endowment Fund (LLEF) by $800 million this year, bringing it to $3.0 billion.

As the Government ramps up its spending on CET, employers will remain key players in the training of workers.

Currently, they contribute a Skills Development Levy (SDL) on workers earning $2,000 and below.

As we move to provide CET to workers across all levels, we should broaden the base for the SDL.

Employers will now contribute the SDL on all workers they employ, up to the first $4,500 of gross remuneration. The wider base will allow us to reduce the levy rate from 1 per cent to 0.25 per cent.

This will be broadly neutral in terms of levy collections, but will reduce the overall burden on smaller companies and employers of lower-wage workers. The change will take effect from 1st October 2008.

We will also help Singaporeans who take the initiative to upgrade themselves, by extending subsidies beyond vocational CET.

Currently we do not subsidise part-time degree programmes.

We will now provide subsidies for part-time degree programmes at the three publicly-funded universities and UniSIM for those who have not previously benefited from a government-subsidised undergraduate education.

Singapore citizens will be able to pay subsidised fees, with the government meeting 40 per cent of the cost of these programmes.

Making Innovation Pervasive

We must make innovation pervasive in our economy.

Our strategy is to spread innovation across the corporate sector, enhance incentives for enterprises small and big to do R&D and push for greater commercialisation of research generated in our institutes of higher learning.

Investing in World-class R&D Capabilities

We will increase our overall research spending to $7.5 billion per annum by 2010, or 3 per cent of the GDP, with one-third of this being publicly funded research.

This year, I will top up the National Research Fund by $800 million, bringing it to a total of $1.8 billion.

Commercialisation of Research Having the facilities and talent for top-class research is not enough, however.

We will facilitate incubation of early-stage ideas that are developed in our universities and research institutions, and partner with venture capital funds to help the institutions spin off companies.

Polytechnics and ITEs too will be encouraged to commercialise their innovations.

MOE has established an Innovation Fund of $10 million to help seed their ideas and products, and to bring their innovations to the point that could attract industry funding.

Incentivising Enterprise and Innovation We will help all our companies move up the innovation ladder.

In this year’s Budget, we will make Singapore one of the most competitive places for companies, big and small, to do R&D.

Firstly, I will increase the tax deductions allowed for R&D done in Singapore from 100 per cent to 150 per cent.

This enhanced deduction means that for every $100,000 of local R&D spending, a company will be able to deduct $150,000 from its taxable income.

I will also lift the requirement that the R&D done in Singapore must be related to a company’s existing business, so as to allow it to qualify for the deduction even if it is doing research in new areas unrelated to its current activity.

Secondly, I will introduce a new broad-based tax allowance which will provide a further push for innovation amongst companies in Singapore, and especially the SMEs.

Companies will be granted R&D tax allowances each year, up to an amount of 50 per cent of the first $300,000 of their chargeable income.

This allowance can be used to defray incremental expenditure on R&D done in Singapore in subsequent years. This will provide additional resources for SMEs to invest in innovation, whatever their field of business.

It is extra funds that they will lose if they do not use them for R&D.

Thirdly, I will also introduce an incentive to help our high-tech start-ups. Turning R&D into marketable products usually takes time, during which they may have no taxable income.

Currently, they carry forward their losses for tax purpose.

The new incentive, called R&D Incentive for Start-Up Enterprises (or RISE), will allow them to convert immediately these losses into a cash grant of up to about $20,000.

They will get this as long as they incur at least $150,000 during the year for doing R&D in Singapore. This scheme will be available for enterprises in their first three years of assessment.

As with the other incentives I have mentioned, we will review the scheme after five years.

The three schemes together will cost about $250 million a year.

Catalysing Innovation in Public Services

A new Public Service Innovation Framework will serve to promote public-private collaborations that will bring about breakthrough public services.

The Government will set aside $90 million over three years as a seed fund for experimentation, test-bedding and building capabilities.

Each Ministry will have a Chief Innovation Officer to drive and coordinate this process.

The Public Service is always looking for solutions to problems, big and small, that innovative enterprises could participate in.

Private companies with new ideas for technologies and services can offer them for joint development prior to the procurement stage.

We cannot expect quick results from the investments we make today and the incentives we are providing. We may have to do more in future years.

But what we do now… will eventually pay off.

Enhancing Business Competitiveness

We have to keep our business costs competitive, and not let them run ahead of the cities we are competing with.

Office Space Constraints

In the short term, we face tightness in office space capacity, caused by the surge in business growth.

The tightness in office space should ease over the medium term.

By 2012, we will have an additional 1.4 million sqm of office space. But we are addressing the short term problem.

The Government has released 15 transitional office sites and vacant state properties , which will yield 150,000 sqm of additional office space.

Further, the Government has decided to relocate several agencies out of the Central Area. We will now free up 20,000 sqm or more by first quarter 2009 for use by the private sector. Construction costs are another short term problem.

To ease the pressure, the Government has earlier announced the deferment of some $2 billion worth of Government projects. We have now decided to defer another close to $1 billion of projects.

This deferment will only affect projects which are less urgent. Key investments such as the expressways, the Downtown Line and the NUS University Town will not be affected.

Tax Competitiveness With our 18 per cent Corporate Tax rate and the enhancements we have made to our Partial Tax Exemption scheme last year, our corporate tax regime is competitive.

The R&D incentives I have announced will provide further reductions in effective tax rates for companies over time.

I will make additional refinements this year to give a further boost to entrepreneurial companies and SMEs.

Start-Up Tax Exemption Scheme Currently, all shareholders must be individuals before the company is eligible for the scheme. This is too restrictive.

I will therefore allow the tax exemption for start-ups as long as there is at least one individual shareholder with at least a 10 per cent shareholding.

Source : Straits Times - 16 Feb 2008