Weekly Market Focus

Singapore Budget FY2017 Moving Forward Together

Selena Ling
Head, Treasury Research & Strategy
OCBC Bank
Member of OCBC Wealth Panel

Highlights
  • A fiscally prudent Budget to move forward to a future economy, even as the Government believes in doing more with less.
  • FY2017 targets a budget surplus of $1.9 billion (0.4% of GDP), following a larger than expected FY2016 budget surplus of $5.2 billion (1.3% of GDP).
  • Adopts many of the Committee of the Future Economy (CFE) recommendations and key thrusts, focusing on business support and innovation.
  • Surprises include the carbon tax and tiered ARF for motorcycles, as well as water price hikes which could be inflationary in nature.
  • Sweeteners include the Corporate and Personal Income Tax Rebates, Foreign Worker Levy deferral for Marine & Process sectors for 1 more year.
  • Social issues not sidelined and encompass pro-family measures, help for lower-income households and community/environment measures.

The importance of moving forward, together
With the current global uncertainties plaguing investor confidence and overall global economic growth, the marching call of “Moving Forward Together” cannot come at a more appropriate time. As the Singapore Budget FY2017 is aptly titled, there is a crucial need for policy-makers and businesses alike to recognise the advances in technologies and evolving circumstances that could create new challenges while opening up new opportunities for those who can adapt quickly. In a nut-shell, the budget is an outline of the measures for the Singapore economy and its society, to take a learning and adaptive approach to the new technological methods in the global arena, as well as supporting local business and households during this transition.

Singaporebudgetposition
Source: Singapore Budget, CEIC, OCBC Bank.

The emphasis to stay competitive and grow
Indeed, the need to develop Singapore’s enterprises to stay competitive and grow is crucial in the current transition. To that end, the government has recognised three capabilities for firms: (1) to be able to use digital technology, (2) embrace innovation and (3) scale up. To aid this process, the government will make available $80 million to promote the building of digital capabilities through the SMEs Go Digital Programme, support firms in tapping on innovation and technology through partnership with A*STAR and Intellectual Property Intermediary (IPI), as well as setting up an International Partnership Fund of $600 million to co-invest with Singapore firms to aid in their efforts to internationalise, and enhancements to IE Singapore’s Internationalisation Finance Scheme to co-share default risk of loans especially in higher-risk developing markets.

Elsewhere, there are also measures to support businesses during this transition will span over the next two to three years. These measures include the Wage Credit Scheme (over $600 million till March ’17) in which 70% of the pay outs will be to Small and Medium Enterprises (SMEs), the Special Employment Credit to provide employers with support for wages of older workers till 2019 (over $300 million in FY2017), the SME Working Capital Loan which co-shares 50% of the default risks ($300,000 per SME). First, there will be an enhancement of the Corporate Income Tax (CIT) Rebate, in which the cap of $20,000 is raised to $25,000 for YA2017, while extending it to YA2018 at a reduced 20% tax payable, capped at $10,000. Second, there will be an extension of the Additional Special Employment Credit till end-2019, where the re-employment age will be raised to 67 years (previous 65) with effect from 1st July 2017 while a wage offset of up to 3.0% is given for workers who earn under $4,000/month.

To aid industries facing cyclical weaknesses, namely in the Marine & Process sectors, and the Construction sectors, the government will defer the foreign worker levy increases in these two sectors by one more year. Moreover, to support the construction sector, a total of $700 million worth of public sector infrastructure projects will start in FY2017 and FY2018.

Deepening people’s capabilities and innovation
Aside from aiding Singapore enterprises to grow and stay competitive, the budget also seeks to aid workers to (1) develop new skills to operate overseas and (2) deepen skillsets to remain relevant in jobs. To that end, the Singapore government seeks to set up a Global Innovation Alliance for Singaporeans to collaborate among educational institutions, economic agencies and businesses. Elsewhere, there will also be the SkillsFuture Leadership Development Initiative that will aid in grooming leaders for specialized courses and overseas postings. Moreover, there will also be funding support for Singaporeans to take approved courses through the SkillsFuture program. All in all, the government seeks to set aside over $100 million under the Global Innovation Alliance and Leadership Development Initiative, and another $150 million to match donations to the NTUC-Education and Training Fund for SkillsFuture selected courses.

Moreover, the urge to further innovate stems from the additional funding to the National Research Fund by $1.5 billion to support innovation efforts and industry transformation. All in, the government seeks to set aside $2.4 billion over the next four years to implement the CFE strategies, above the $4.5 billion set aside for the Industry Transformation Programme. Also, the government aims to develop Industry Transformation Maps (ITMs) for 17 sectors (6 has already been launched) which covers 80% of the economy within FY2017.

Supporting Families
The effort to support families can also be seen in the recent budget, specifically from the increase in grants made in the CPF housing grant, increase in the capacity of centre-based infant care, and the increase in annual bursary amounts for Post-Secondary Education Institutes. More importantly however, is the increase in GST vouchers, as well as the extension of the Service and Conservancy Charges (S&CC) rebate to offset some of the increase in water prices. Specifically, families living in 1 and 2 room HDB flats will receive $380 of U-save rebates, while families in 3 – 4 rooms will get $340 and $300 per year, respectively. Also, a one-off GST voucher – Cash Special Payment will also be given to eligible Singaporeans, on top of a personal income tax rebate of 20% payable capped at $500. All-in-all, these policies will provide additional support of over $850 million to aid in household expenses.

We note however that there are additional tax expenses that are introduced, although the above mentioned support should aid in fraying away some of the burden. These include increased water price charges by 30%, and a Water Conservation Tax on NEWater. Aside from this, companies will also face with higher carbon tax of between $10 - $20 per tonne of greenhouse gas emission. Moreover, a restructure of diesel tax to a volume-based duty of $0.10 per litre of automotive diesel, industrial diesel and diesel component in biodiesel will also be implemented. To aid in business adjustment, a 100% road tax rebate will be given for year for commercial diesel vehicles.

Conclusion – Thriving in an uncertain and rapidly changing world
In a nut-shell, the budget serves as a call for the government, firms, and individuals to come together and develop resilience and improve the ability to adapt to an uncertain and rapidly changing world. On one end, there are numerous supports geared in aiding businesses to thrive. Individuals themselves can also find comfort in the support given to train and retrain in the evolving labour market. Importantly as well, although there are introductions of increased carbon, water, and diesel taxes, measures are also in place to aid household and businesses to fray away some of the burden.

Given that Budget FY2017 is but only the second year in the current 5-year framework, an estimated budget surplus of $1.9 billion (above our expectations of $0.99 deficit) in FY2017, on top of a generous $5.2 billion surplus seen in FY2016, does give the Singapore economy ammunition for subsequent budget years ahead should the need arise.