Singapore plans expansionary fiscal budget, eases central bank pressure

A woman walks out for lunch past a sculpture at the Raffles Place financial district in Singapore on March 24, 2016. Singapore's finance minister Heng Swee Keat will deliver his first Budget statement in Parliament on March 24. / AFP / ROSLAN RAHMAN

Singapore / Bloomberg

Singapore said it will adopt an expansionary fiscal budget to boost growth, reducing pressure on the central bank to provide more support for the economy weeks before its next policy decision.
Finance Minister Heng Swee Keat, presenting his first budget to Parliament, pledged support for companies that are facing labour constraints and a faltering global outlook, promised higher wages for low-income Singaporeans and more assistance for elderly and needy households. The government will raise expenditure by S$5 billion ($3.7 billion), or 7.3 percent, from a year earlier, and still expects a surplus equivalent to 0.8 percent of gross domestic product, he said.
“Singapore leans in on fiscal levers with an expansionary fiscal stance,” said Weiwen Ng, an economist at Australia & New Zealand Banking Group Ltd. in Singapore. “This effectively removes the near-term catalyst for easing by the central bank” in April, he said.
Governments around the world are under pressure to ramp up fiscal support as some central banks resort to negative interest rates, and Singapore is among the most vulnerable in Asia to swings in global demand. Ructions in the world economy are coming at a time when cracks are showing in the island’s traditional pillars of growth such as manufacturing and electronics, and as it faces an aging population.

‘More Challenging’
“The longer term picture will grow more challenging as we expect expenditure needs to grow faster than revenues,” Heng said. “Even as we plan for rising expenditures, we must spend only when it is needed and where it best achieves our social and economic objectives. We will review the major expenditure items we expect ahead, to ensure efficiency and effectiveness.”
Higher expenditure and measures in the budget will result in a “positive fiscal impulse” of about 1 percent of GDP, Heng said. The economy is forecast to grow 1 percent to 3 percent this year, after expanding at the slowest pace in six years in 2015.
The Monetary Authority of Singapore or MAS releases scheduled monetary policy statements twice a year, usually in April and October. The central bank, which uses the currency rather than interest rates to guide the economy, eased monetary policy on October 14 for the second time in 2015.
“A contractionary fiscal policy stance, while not our base case, would have raised the probability of an exchange rate policy easing move by the MAS in April,” said Michael Wan, an economist at Credit Suisse Group AG in Singapore. “These risks did not materialize.”

‘Strike a Balance’
The plan to maintain a budget surplus “seeks to strike a balance between being prudent given the continued rise in expenditures we expect in the years ahead, and being accommodating to support enterprises in the current economic climate even as we continue our restructuring efforts,” Heng said. “Should economic conditions turn, we stand ready to adjust and respond.”
The year’s budget was supported by higher operating revenue, and as it takes into account more contributions from the returns of Temasek Holdings Pte, Singapore’s state-owned investment company.
The budget is “unequivocally counter-cyclical,” said Vishnu Varathan, an economist at Mizuho Bank Ltd.

Tax Rebates
The government will give bigger tax rebates and provide small and medium-sized companies with access to more than S$2 billion of loans, set aside S$4.5 billion for a so-called Industry Transformation Plan, and S$770 million a year to boost workers’ wages, Heng said.
“The economy isn’t doing all that badly,” said Daniel Martin, an economist with Capital Economics Asia in Singapore. “It wasn’t obvious that the economy needed the boost.”
The government will defer levy increases for foreign workers in the marine sector, where rig builders are warning of more difficulties ahead amid low oil prices. It will also monitor property market developments closely, Heng said, adding that it’s “premature” to relax measures implemented since 2009 to cool the sector.
Even as Heng outlined short-term challenges for companies and Singaporeans, he said the nation needed to prepare for longer term structural changes.
“The need to restructure is both urgent and critical,” Heng said. “Productivity has not been as strong as we would like” and “we must keep working on this,” he said.

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