VZCZCXYZ0000
RR RUEHWEB

DE RUEHGP #0332/01 0770510
ZNR UUUUU ZZH
R 170510Z MAR 08
FM AMEMBASSY SINGAPORE
TO RUEHC/SECSTATE WASHDC 5037
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SINGAPORE 000332 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB EINV PGOV SOCI KTDB SN
SUBJECT: SINGAPORE'S FY2008 BUDGET: RECORD SURPLUS FUNDS MORSELS 
FOR HOUSEHOLDS 
 
Reftel: Singapore 311 
 
¶1.  (U) Summary:  Coming off a year of record-setting revenues 
and a fiscal surplus of 14.8 percent of GDP, the GOS budget 
disappointed analysts by providing a package of only S$1.8 
billion (US$ 1.28 billion) in "giveaways" for lower and middle 
income groups, and leaving the personal income tax rate 
unchanged.  The GoS designed the package to partially offset 
increases in inflation and the already high cost of living in 
Singapore (reftel).  Both the record budget surplus and the 
accelerating inflation rate were in part driven by a two 
percentage point increase in the goods and services tax (GST) in 
July 2007.  The smaller measures geared to offsetting the rising 
cost of doing business in Singapore focused on small businesses 
and the financial sector.  The government also announced long- 
term projects focusing on education and training as well as 
fostering "innovation."  Overall, the budget was considered only 
"mildly expansionary" at a time when Singapore's growth is 
expected to slow from the 7-8 percent rate of the past few years 
to closer to 4-6 percent.  End Summary. 
 
¶2. (U) Detailed information on SingaporeQs FY2008 budget can be 
found at: www.singaporebudget.gov.sg. [Note:  Figures in this 
cable use the exchange rate of S$1.411 per U.S. dollar.] 
 
Record budget surplus in FY2007 
------------------------------- 
 
¶3.  (U) Amid strong economic growth of 7.7 percent in 2007, 
overall government receipts collected rose strongly in FY2007, 
exceeding expectations by 22.5 percent.  Operating revenues were 
up 26.7 percent to S$39.7 billion (US$28.1 billion) in FY2007 as 
compared to FY2006.  The bulk of these gains were from the Goods 
and Services Tax (GST), whose rate was increased by two 
percentage points to seven percent in July 2007.  Adding to the 
strong revenue growth were stamp duties (benefiting from a 
buoyant property market), which jumped 88.6 percent to S$3.8 
billion (US$2.69 billion) as compared to a year ago.  In FY2008, 
the government is planning for revenue to remain flat due to 
weaker economic growth and tax reduction measures proposed in 
the budget. 
 
Table: Tax Revenue for FY2007 and FY2008 
---------------------------------------- 
(S$ billion) 
 
                        Budget    Revised  % Change over 
                        FY2008    FY2007   Revised FY2007 
                        -------   -------  -------------- 
 
TOTAL REVENUE            39.84     39.65         0.5 
 
Direct Tax               17.62     17.13         2.9 
  Corporate               9.19      9.0          2.1 
  Personal                5.94      5.56         6.9 
  Assets                  2.49      2.57        (3.0) 
 
Indirect Tax             20.22     20.85        (3.0) 
  Goods & Services Tax    6.19      6.0          3.2 
  Customs & Excise Tax    2.01      1.96         2.2 
  Motor Vehicle Tax       2.00      2.12        (5.6) 
  Betting Tax             1.80      1.71         5.6 
  Stamp Duties            2.40      3.80       (36.8) 
  Others                  5.82      5.26        10.6 
 
Statutory Boards' 
 Contributions            1.99      1.67        19.0 
 
 
¶4.  (U) FY2007 total expenditures did not grow as fast as 
revenues.  Operating and development expenditures expanded by 
11.4 percent to S$2.2 billion (US$1.56 billion) from the 
previous year.  In FY2008, total expenditures will rise by 12.5 
percent to S$37.5 billion (US$26.6 billion).  The GOS emphasized 
the budget increases for transportation infrastructure (up 40.7 
percent in FY2008), the provision of healthcare services (up 19 
percent) and workforce development, arguing that these will help 
address population increases, the rising cost of living and an 
aging population. 
 
Table: FY2007 and FY2008 Expenditure by Sector 
--------------------------------------------- - 
(S$ billion) 
                                                  % Change over 
                                FY2007    FY2008  Revised FY2007 
                                -------   ------  -------------- 
TOTAL EXPENDITURE               33.3      37.5     12.5 
 
Social Development              14.8      15.9      9.6 
  Education                      7.5       8.0      6.6 
  National Development           2.1       2.2      1.8 
 
  Health                         2.2       2.6     19.0 
  Environment & Water 
    Resources                    0.9       1.0     17.8 
  Community Development 
    Youth & Sports               1.3       1.3      2.1 
  Information, Communications 
    & the Arts                   0.5       0.7     57.1 
 
Security/External Relations     13.3      14.1      6.3 
  Defense                       10.1      10.8      7.2 
  Home Affairs                   2.8       2.9      3.6 
  Foreign Affairs                0.4       0.4      2.0 
 
Economic Development             4.3       6.0     39.4 
  Transport                      1.9       2.7     40.7 
  Trade & Industry               2.1       2.5     21.9 
  Manpower                       0.3       0.7    183.2 
  Info-Communications 
    & Media Development          0.1       0.1    (12.3) 
 
Government Administration        1.2       1.4     17.9 
  Finance                        0.5       0.6     28.1 
  Law                            0.3       0.3     13.6 
  Organs of State                0.3       0.3      7.1 
  Prime MinisterQs Office        0.2       0.2     14.0 
 
Budget "Giveaways" Targeted Narrowly 
------------------------------------ 
 
¶5.  (U) The GOS plans to return to taxpayers S$1.8 billion 
(US$1.28 billion) through various programs largely targeted at 
lower and middle income households to help them cope with the 
rising cost of living.  Key elements of the package include one- 
off cash transfers dubbed "growth dividends" for all adult 
Singaporeans, GST credits, and increased public assistance for 
the needy.  Other "giveaways" include additional contributions 
to various government-sponsored individual health and education 
savings programs.  Some families might also benefit from 
education subsidies and a 30-percent increase in the number of 
places available at public universities. 
 
¶6.  (U) Business measures were generally focused on helping 
small businesses and the financial sector. For example, the 
government will introduce a five-percent concessionary tax rate 
for income from Shariah ("Islamic") compliant activities and 
abolish the estate duty to provide a boost to the wealth 
management industry.  The business start-up tax exemption scheme 
will be liberalized to encourage the creation of more SMEs.  To 
encourage innovation and to enhance Singapore's attractiveness 
as a research and development hub, start-ups will benefit from 
various tax incentives and the budget for government-sponsored 
research will be increased by S$800 million. 
 
"Deficit" Overstated: Reality is Large Fiscal Surplus 
--------------------------------------------- -------- 
 
¶7.  (U) According to the government's projections and accounting 
conventions, the budget had a surplus of S$6.5 billion (US$4.5 
billion) in FY2007, equivalent to 2.7 percent of 2007 GDP.  In 
FY2008, given the money returned to taxpayers and weaker growth 
expected in 2008, the government projects the overall fiscal 
balance will turn into a small deficit of S$0.8 billion (US$567 
million) or 0.3 percent of GDP.  However, analysts have pointed 
out that the government historically understates the budget 
surpluses.  Singapore's conservative budgetary accounting system 
excludes items such as land sales, capital gains from past 
reserves investments, and an (undisclosed) portion of dividends 
and interest from its sovereign wealth funds from accounting of 
government revenue, for example.  According to Standard and 
Poor's, using more conventional budgetary accounting standards, 
Singapore's general government fiscal surplus (including the 
Central Provident Fund's pension contributions and payments) was 
equivalent to 14.5 percent of GDP in FY2007/08, up from a 
surplus of 11 percent of GDP in FY2006/07.  Many analysts 
believe the government is overly cautious in its projections and 
expect further budget surpluses, albeit smaller, ahead. 
 
Budget for FY2008 
----------------- 
 
                        FY2008      FY2007     % Change over 
                        Budget      Revised    Revised FY2007 
                        -------     ------     -------------- 
(S$ billion) 
 
Revenue                 39.84       39.65        0.5 
Expenditure             37.45       33.30       12.5 
                        -----       ----- 
Primary Surplus          2.38        6.35 
 
Less: Special Transfers  5.40        2.20      146.0 
 
 
Add:  Net Investment     2.22        2.30       (3.4) 
      Income 
 
Surplus/(Deficit)       (0.80)       6.45 
 
 
Unfavorable Reactions 
--------------------- 
 
¶8.  (U) Economists voiced their disappointment with the extent 
of redistribution in the budget.  Moreover, some analysts do not 
expect the "giveaways" to have a significant effect on 
consumption.  A Citigroup analyst cited the one-off nature of 
the handouts, which suggest that households may choose to save 
rather than spend given the uncertain economic environment.  In 
addition, UBS analysts point out that the handouts were not 
significantly larger than previous handouts given in 2006, thus 
limiting their influence on consumption. 
 
¶9.  (U) In particular, against expectations, the government held 
the top personal income tax rate steady at 20 percent. 
Households, especially those in the middle-income groups, will 
instead enjoy a one-off 20 percent income tax rebate capped at 
S$2000 (US$1,400).  Calculations by KPMG showed that an 
individual earning less than S$155,000 (US$110,000) a year will 
pay a fifth less in personal income tax as a result of the 
rebate.  A Citigroup analyst noted that Singapore can not afford 
to lag behind in keeping personal income tax rate competitive 
given that Hong Kong's rate will fall to 15 percent in 2009. 
 
¶10.  (U) On the business side, press reports complained about 
the limited measures targeted at helping businesses cope with 
rising costs, including rents and wages.  Only two measures 
addressed this concern.  First, the government announced its 
intention to free up existing office space by moving government 
departments out of the central business district to help 
alleviate the office space crunch.  Second, the government did 
not increase employer CPF contribution rate, as would usually be 
expected in a strong economy. 
 
Comment 
------- 
 
¶11.  (SBU) The government tried to appear responsive to the 
plight of lower and middle income Singaporeans, while 
maintaining the fiction of tight budget constraints despite a 
very large and growing fiscal surplus.  The resulting package of 
one-off programs is unlikely to encourage enough growth in 
domestic consumption to offset poor export performance in a weak 
global environment.  As growth slows from the 7 to 8 percent 
rate of the past two years down to the government's current 
forecast of 4 to 6 percent, such weak fiscal expansion will also 
do little to cheer the growing number of Singaporeans who are 
feeling the squeeze of rising rents, more indirect taxation, and 
inflation rates currently at levels not seen since the early 
1980s. 
 
HERBOLD