Mr Toh's comments on Budget 2017

As an Economics tutor, the Budget speech each year is something we actively discuss and debate in class each year. The economic challenges that the Singapore economy are facing is usually outlined in the Budget speech and the solutions that the government has in place to tackle these challenges.

Here are my brief comments on Budget 2017. I’ll go through more in detail during class next week :)

Challenge #1: Growth, but uneven

· Contrary to expectations, the Singapore economy did better than expected with 2% economic growth. Most expected around 1.5%.

· This was largely due to strong performance in the 4th quarter.

· However, the growth was uneven, with sectors such as education doing well (of course!) but sectors such as Marine, Oil/Gas & Construction doing badly.

· The solution was to target specific industries through specific measures such as

  1. Accelerating infrastructure projects (to help construction)

  2. Deferring Foreign Worker Levy increases for affected industries

· The solutions are in the right direction, which is to target ‘badly-hit’ industries instead of carrying out a ‘broad-based’ approach but here are my thoughts

  1. If infrastructure projects are awarded mostly to MNCs, SMEs may not benefit significantly

  2. Deferring Foreign Worker Levy increases hardly helps improves the situation, it only prevents the problem from worsening.

· Considering that the above solutions are of ‘no extra cost’ if you think about it, I think more can be done. (bringing forward projects is just simply spending the $ you intended to spend earlier, and deferring FWL increases are just simply not collecting more revenues)

Challenge #2: Rising government expenditures, demographic changes

· We recorded a Budget surplus for FY2016. However, that was because of the Net Investment Returns (NIR) from investing our reserves. If we take the primary balance, we would actually yield a primary deficit (i.e. government expenditure actually exceeds tax revenues)

· Minister Heng pointed out that due to expected changes in the demographics (an ageing population, obviously), we would expect progressively expect increases in government expenditure (actually, it is also because of the increasingly populist policies)

· With the expected increase in expenditures, the Budget also comprised of, many measures to actually increase government revenues (which is a surprising timing to announce considering the lackluster economic climate)

· However, the proposed increase in expenditure are all in areas where strong economic reasoning would support (think market failure & negative externalities), for example

  1. Increased water pricing

  2. Carbon taxes

  3. Tiered ARF for Motorcycles (this is more of an alignment to what we are already doing with cars rather than a completely new policy)

· I would agree in general with the approaches for there is definitely a need to account for the rising expenditures and maintain a prudent position, but I do have the following questions

  1. If the cost of water prices have been rising over the years, then it could have been possible to adjust water prices at a more frequent basis, say once every 2-3 years, so that the effect is ‘diluted’ in phases rather than the huge “30%” increase currently proposed. My gripe is with more of the timing of implementation rather than the principle. Also, measures to help defray such cost increases are generally for the lower income, but the middle income will still be affected.

  2. Singapore has been refraining from introducing a carbon tax for ages, presumably due to concerns about reducing the business competitiveness of Singapore. The signing of the Paris agreement wouldn’t really remove this concern, would it? If so, how are we ensuring that businesses are able to remain competitive and attracted to investing in SG?

· We should also note that the government has imposed on its Ministries a downward revision of its budget cap by 2%

  1. This is in my opinion sending a right message that the government itself is taking steps to think about whether its processes are ‘efficient’ and whether more can be done for less.

  2. However, I’m interested to know how would the Ministries go about doing this. (If they do it haphazardly, quality of services could be compromised!)

Challenge #3: Building an inclusive society

· We have high income inequality in Singapore with the latest GINI Coefficient being reported at 0.458. There is a marginal fall in this value since few years ago where it was around 0.48.

· After accounting for government transfers, the GINI coefficient drops to 0.40 which is a pretty reasonable value.

· This shows that there is significant effort in trying to build an inclusive society and reduce income inequality. (In economics, we tend to link the two together)

· This year, more measures are being introduced to promote an inclusive society further

  1. Third Enabling Masterplan - $400m deployed to help those with disabilities

  2. Community Mental Health - $160m

· Towards this end, I think the government has moved many steps towards a more compassionate & inclusive society. At this point I think the efforts are in the right direction. However, let us be mindful that there will always be tradeoffs (in terms of higher expenditures which means the need to think of ways to raise revenues)