Cablegate: Singapore's Fy2008 Budget: Record Surplus Funds Morsels


DE RUEHGP #0332/01 0770510
R 170510Z MAR 08




E.O. 12958: N/A

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: [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
& 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)

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.


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


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