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Cablegate: Singapore's 2010 Budget to Boost Long Term Growth

VZCZCXRO1400
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHGP #0202/01 0542347
ZNR UUUUU ZZH
R 232347Z FEB 10
FM AMEMBASSY SINGAPORE
TO RUEHC/SECSTATE WASHDC 7848
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 SINGAPORE 000202

SIPDIS

TAGS: ECON EFIN SN

SUBJECT: SINGAPORE'S 2010 BUDGET TO BOOST LONG TERM GROWTH
SUSTAINABILITY

REF: SINGAPORE 167

1. (U) Summary: Singapore's Finance Minister presented parliament a
budget for FY 2010 focused on raising productivity, improving
business competitiveness and making the country's economic growth
more inclusive. The budget moves away from last year's expansionary
budget that was designed to protect jobs and stimulate the economy
out of recession, but nevertheless is predicted to result in a
revenue shortfall, the country's third consecutive budget deficit.
To achieve its objectives, the GOS is budgeting S$5.5 billion (US$4
billion) over the next five years to help enterprises and workers
deepen skills and expertise and to foster innovation. The levy on
foreign workers will rise to encourage companies to improve
productivity rather than rely on cheap imported unskilled labor.
The budget also provides further support for the growth of
Singapore's more globally competitive companies, including
incentives for more research and development. Lastly, the budget
provides further support for low-wage workers to upgrade their
skills, a more progressive property tax system, and help for
families with children or elderly dependents. End Summary.

Another Deficit Budget
----------------------

2. (U) Singapore Finance Minister Tharman Shanmugraratnam delivered
to parliament February 22 a budget for FY 2010 that shifts focus
from last year's short-term stimulus to longer-term growth
sustainability. The budget puts into effect many of the recent
recommendations by the public/private Economic Strategies Committee
(ESC), which released a report February 1 with proposals to guide
Singapore's economy over the medium term (reftel). In line with the
ESC report, the budget presents new programs designed to raise labor
and capital productivity, improve competitiveness of Singapore
business, and provide more inclusive growth for Singaporeans.
Parliament will debate the budget in a March 2-12 session, with an
expected approval vote on March 31.

3. (U) The FY2010 budget includes S$46.4 billion for operating and
development expenditures, S$3.5 billion more than the previous
year's budget that had included many stimulus measures designed to
weather Singapore through last year's recession. In addition, the
budget includes S$5.15 billion in "special transfers" to endowment
and trust funds, as well as special credits and bonuses to
off-budget accounts, many of which are targeted at students, the
elderly, and low-income Singaporeans. The budget is expected to
show an operating deficit of S$7.2 billion for FY 2010, the
government's third consecutive budget deficit. However, when
returns on investments are included in the budget calculation, the
overall budget deficit comes in at just under S$3 billion, or one
percent of GDP. Last year's budget had been expected to result in a
deficit of 3.4% of GDP, but the economy's rapid recovery from the
recession improved revenue and spending projections, and FY2009
fiscal spending resulted in a budget deficit of only 1.1% of GDP.
If Singapore's economic growth continues to outpace forecasts, this
year's projected deficit will shrink as well.

Raising Productivity
--------------------

4. (U) The centerpiece of the budget is a range of incentives to
boost productivity and develop worker skills. A S$5.5 billion
package in the budget includes tax benefits and subsidies for
training, particularly for low-income workers. The GOS has set a
goal to raise the country's productivity growth rate to 2-3 percent
annually, more than double the anemic one percent growth over the
previous decade. To boost skills, innovation and economic
restructuring, the GOS will establish a high-level National
Productivity and Continuing Education Council, which will be chaired
by Deputy Prime Minister Teo Chee Hean and include members from the
government, business community and labor movements. The budget
package sets aside S$2.5 billion over the next five years for
continuing education and training (CET) programs.

5. (U) To support enterprise investments in innovation and
productivity, the budget introduces a Productivity and Innovation
Credit which will provide tax deductions for investments in a broad
range of activities, including research and development,
registration of intellectual property, acquisition of intellectual
property, design activities, automation through technology or
software, and training of employees. The GOS will complement these
broad-based tax reductions to support enterprise productivity via a
National Productivity Fund. As a start, the GOS will inject S$1
billion into the fund in 2010 with a target to ultimately raise the
fund to S$2 billion. The National Productivity and Continuing
Education Council will establish the priorities and programs of this
new fund, and tie together the efforts of stakeholders, including
government agencies, industry associations, unions and enterprises.
The fund will provide grants to help enterprises in all business
sectors, but with an emphasis on sectors where there is potential
for large gains in productivity. The construction industry is

SINGAPORE 00000202 002 OF 002


expected to receive S$250 million out of the initial S$1 billion of
funding.

6. (U) To complement the investments in productivity, the GOS is
raising its levies on employment of foreign workers in an attempt to
encourage businesses to restructure and upgrade their operations and
rely less on cheaper but lower-skilled foreign labor. The
government will gradually phase in the levy increases over the next
three years, starting in July. The GOS decided to limit the inflow
of foreign labor through raising levies rather than imposing quotas
to allow the foreign workforce to fluctuate across the economic
cycle, and enable those employers who genuinely need foreign workers
to continue to hire and not be constrained by a numerical limit.

Growing Globally Competitive Companies
--------------------------------------

7. (U) The budget's second priority is to support Singapore
companies, especially those in clean energy, waste and water
management, healthcare, education and transport management, to
expand abroad, improve access to finance, and commercialize their
research and development. The GOS will inject an additional S$1.5
billion into the country's National Research Fund, on top of the
S$2.2 billion that has already been committed. The aim is to work
towards the Economic Strategies Committee's (ESC) recommendation of
growing Singapore's gross expenditure on R&D from 3.0 to 3.5 percent
of GDP in the next five years. In addition, the GOS will commit
S$450 million over a five-year period to start a Public-Private
Co-Innovation Partnership for government agencies to work with
private sector companies to co-develop innovations in areas such as
urban mobility, environmental sustainability and energy security.

Lifting All Boats
-----------------

8. (U) The budget also makes an effort to make longer-term changes
to redistribute income to those who have not benefited as much from
Singapore's economic growth. Some of the new measures are outright
giveaways, with S$1.8 billion in direct transfers to households
budgeted for 2010, with most of the benefit going to lower- and
middle-income households. In addition, however, the budget includes
programs to raise worker productivity (and hopefully wages
alongside) for lower income workers. Also, the GOS will restructure
its current flat property tax rate system for owner-occupied
residential properties to a progressive property tax rate.
Nevertheless, the budget is careful to ensure that the new property
tax, though being progressive, is still lower than that of most
global cities to maintain Singapore's competitiveness.

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