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Economic Performance 2007
1.1 Our economy has done well over the past year. We had real growth of 7.7% in 2007, much higher than we had expected at the start of 2007. This was exceptional growth, and more so because it came after three previous years of strong growth.
1.2 The strong economy also brought unemployment down to 1.6% at the end of last year. Resident unemployment also fell sharply to 2.3%, the lowest level in a decade.
1.3 We have been aided by a favourable global environment. But Singapore?s strong growth in recent years has mainly been the result of our broad-ranging efforts to restructure our economy, labour market and fiscal system. This is not a story of an old economy growing quickly, but of a new economy emerging out of the old. It is about how we are attracting new and cutting edge investments, capitalising on opportunities in new growth industries and markets abroad, upgrading our workers' skills and competing at an advantage. Indeed this is why we have been growing much faster than other developed countries - faster than any other country with the same standard of living as us. Our policies are working well, the economy is restructuring, and we are delivering superior performance.
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Fiscal Position in 2007
1.4 With stronger than expected economic growth in 2007, the projected Budget outturn improved significantly. We expect the Overall Budget Balance to be a surplus of $6.4 billion for Financial Year (FY) 2007, compared to the deficit of $0.7 billion that was originally projected.
1.5 We started the year expecting a growth rate of 4.5% to 6.5%, which was also in line with market forecasts. With actual growth at 7.7%, Corporate and Personal Income Taxes came in some $1.0 billion higher than projected. GST revenues also exceeded our projection by about $1.2 billion, mostly from higher consumption.
1.6 GST collection arising from the 2 percentage point hike in July is estimated at about $1.4 billion in total, which now just matches the size of the GST Offset Package and Workfare Income Supplement tranches that were distributed in FY2007.
1.7 However, the largest boost to revenues came from the exceptionally buoyant property market last year. Prices of private residential units rose by over 30%, much higher than industry forecasts of around 10% to 15% at the beginning of the year. The volume of property transactions went up by over 60%. Stamp duties consequently rose to an unprecedented $3.8 billion, $2.3 billion higher than expected. Other property related revenues were around $1.1 billion above projections. These were large gains, out of the ordinary, and which we cannot expect to see very often.
1.8 The overall budget surplus of $6.4 billion was therefore the result of a strong economy and property market. The surplus was also an appropriate fiscal stance to adopt, as it avoided adding further liquidity and stimulus to an already rapidly growing economy.
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Economic Outlook for 2008
1.9 The key factor that will shape the growth of the Singapore economy in 2008 is the global economy, especially the state of the US economy. Many private forecasters now expect the US economy to enter a recession in the first half of the year, although it may be mild. If this happens, Asian exports will be affected. However, the IMF and other global forecasters still expect growth in Asia on the whole to remain healthy. China and India are expected to slow down, but still grow at 10% and 8% respectively on the back of strong domestic demand.
1.10 Overall, on all current indications of global conditions, we expect growth of 4.0% to 6.0% in the Singapore economy this year. This is lower than last year, but well in line with the economy's potential over the medium term. Our economic fundamentals remain strong. Our pipeline of manufacturing investments remains robust with EDB expecting $16 billion worth of investment commitments this year, on top of the same volume last year. Our services sector too is well-positioned for growth. While demand for services will depend on the growth of the region and the rest of Asia, we have gained significant mindshare as a global financial and business centre.
1.11 However, there are major downside risks to this year's forecast of growth. A sharper than expected decline in US growth could add to the turmoil in the financial markets, and deepen the credit crunch that is still unfolding. This will inevitably spill over to the Asian economies and markets, and our own growth will be impacted. The outcomes cannot be predicted, but we must be watchful of the risks and be ready to respond to them.
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Global Outlook
2.1 Inflation is the other major uncertainty in the global economy, and a concern for us. After a period of very low inflation over the last 10 years, it has re-emerged and is now an economic problem everywhere in the world.1
2.2 Oil prices have risen by 50% over the last year. Raw food prices at the end of January 2008 had risen by 55% globally, compared to a year ago. Commodity prices in general have risen by 31%.2 All these increases in raw material prices have cascaded down into higher transport costs, more expensive manufactured goods, and costlier consumer foods.
2.3 The basic factors which have led to these price increases are not expected to go away soon. The demand for food especially has continued to rise globally, especially with the rapid growth of the middle classes in China and India. This is part and parcel of expanding global prosperity, but it is happening at a time when food supply is constrained because of bad weather, and more agricultural land is converted from producing food crops to producing bio-fuels.
2.4 We therefore have to brace ourselves for a period of relatively higher inflation globally, which will affect the prices of the goods we import. We cannot say how long it will last, but we have to expect that it will remain high, in the first half of this year especially. For example, China's worst winter in 50 years will likely add pressure to prices of certain foods in the next six months.
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Inflation in Singapore
2.5 Singapore has already been affected by this recent rise in global inflation. Inflation was about 2% for 2007 as a whole, but it was much higher towards the end of the year than it was at the start. Consumer price inflation reached 4.4% for December 2007. Overall, we currently expect inflation at 4.5% to 5.5% in 2008, but with inflation being higher in the first half of the year than the second.
2.6 The relatively high "headline" Consumer Price Index (CPI) numbers that we are now seeing, like in December, are partly due to the GST increase in July last year. The CPI inflation figure continues to show the impact of the GST change, because it is comparing prices this month with prices twelve months ago, i.e. before the GST increase in July 2007. But if we compare prices today with prices say in September last year, there has been little further increase due to the GST change. The GST change has caused only a one-off increase in prices, and not continuing price increases.
2.7 Singaporeans have also not been materially affected by the GST increase, because the Government has provided the majority of citizens with substantial offsets, which more than make up for the increased spending on GST by most families. Lower-income families are in fact receiving offsets which are several times larger than their higher GST payments. (Excluding the impact of the GST increase, which has been fully compensated for, December 2007 CPI inflation is estimated at slightly less than 3.0%.)
2.8 There is also a technical reason, due to the rising values of homes, that is leading to high headline CPI numbers. The increase in the assessed Annual Values of homes will contribute significantly to inflation this year [more than 1.0% of the expected 4.5% to 5.5% inflation]. However, here too, most Singaporeans are not materially affected, as 95% of citizens own their own homes and do not pay rentals.
2.9 Nevertheless, even if we exclude this technical factor due to home values, and the one-off effect of the GST increase, inflation today is higher than what we have been used to in Singapore for many years.
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Our Strategies
2.10 The rising cost of living that Singaporeans face is a major concern for the Government. Prices of certain essential items like cooking oil, bread, milk and other dairy products have gone up significantly over the past year.
2.11 We must start by recognising that the key problem we face going forward is that of imported inflation caused by high global prices, especially of food and oil. Some of our inflation does reflect domestic factors. I have just mentioned the GST increase, which has been compensated for, and the Annual Values of homes, which have no material impact on Singaporeans. The rapid growth of our economy has also pushed up wages and rental costs. However, our CPI inflation is not due to domestic inflationary expectations, causing wages to go up to compensate not only for inflation experienced, but even for future inflation expected, resulting in higher costs for businesses, higher prices for consumers, and an upward spiral of wages and prices. We must not let domestic inflationary expectations set in, because it will entrench inflation in Singapore even after external inflationary pressures have subsided.
2.12 Our strategies will ensure that Singapore continues to have lower inflation than the rest of the world over the medium term. We have achieved that for many years now, and will keep it that way in future. The Government is also helping lower-income Singaporeans and those in need directly with the immediate problems they face.
2.13 Our strategies to help Singaporeans cope with inflation essentially comprise five planks.
2.14 First, we seek to moderate imported inflation through our Singapore dollar exchange rate policy. This has been MAS's consistent policy objective. For several years, MAS's policy has been a modest and gradual appreciation of the Singapore dollar. In October last year, MAS increased slightly the slope of the currency band, meaning that it allowed a slightly faster appreciation of the currency. Our exchange rate policy has helped to keep inflation down. Had the MAS not allowed the Singapore dollar to appreciate over the last two years, our CPI inflation in the last quarter would have averaged 6.5%, instead of the 4.1% that was actually recorded (MAS estimates).
2.15 However, there is a limit to how fast the Singapore dollar can appreciate without hurting our economic performance and growth, and eventually causing wages to fall. An overly strong Singapore dollar can bring inflation down, but at the cost of lower growth and higher unemployment. This is why, while we can mitigate imported inflation through MAS's exchange rate policy, we cannot insulate ourselves completely from the effects of global inflation passing through to the Singapore economy.
2.16 Second, we are stepping up diversification of food sources so as to minimise spikes in the prices of foods we import which would otherwise happen when there is a disruption in supply from any one country. The Agri-Food and Veterinary Authority of Singapore (AVA) is facilitating private importers buying from new sources overseas, where the foodstuffs meet our standards. For food products that are already imported from well-diversified sources, the Government will continue to work with retailers to increase public awareness of cheaper food choices and substitutes.
2.17 These policies of mitigating imported inflation, through exchange rate policy and source diversification, have helped to lower food inflation in Singapore.
2.18 The third way in which Government policies help Singaporeans cope with inflation has been our support of home ownership as a key pillar of society, and especially the heavy subsidies that we provide for lower-income Singaporeans to own a home. Even lower-income Singaporeans therefore have substantial equity in their homes which rises over time and is generally protected against inflation. We have become used to this in Singapore. But it in fact insulates Singaporeans, especially our retirees, from increases in rental costs which are a significant long-term concern in other countries. In the US for example, about a fifth of older Americans rent their homes. The rental costs make up close to one-third of their expenditures each month.
2.19 Fourth, the Government provides assistance directly to Singaporeans who face problems coping with the cost of living. This approach of helping those in need directly is better, and more sustainable than taking reflex actions such as imposing price controls on essential goods. Everything we see in the countries that have tried price controls, even today, tells us that these are not real solutions, and will only lead to hoarding, black markets, and even more problems for ordinary people over time.
2.20 Our fundamental approach to helping Singaporeans in need is to help them to get a good income for themselves. The best way to do so has been and remains to help needy Singaporeans get a job, and to encourage them to stay at it, upgrade themselves, and support their family members.
2.21 Last year we introduced the Workfare Income Supplement (WIS) scheme, to add to the income and savings of Singaporeans at the lower end of the wage ladder. It is a significant incentive to work. For a worker above 45 and earning a wage of $1,000 or below, the scheme will supplement his wages by 10% to 20% each year. 287,000 workers have received their first payouts in January this year, receiving a total of $150 million from the Government. For those who are truly unable to work, for example because of disability, we have the Public Assistance (PA) Scheme.
2.22 We will continue to complement these institutionalised schemes, by providing discretionary assistance to those in need. This is why we have boosted the ComCare Fund, which now stands at $600 million, and Medifund which has reached $1.4 billion.
2.23 Further, where we make good surpluses on the budget, we have redistributed benefits back to Singaporeans, with more going towards the elderly and the needy. For example, the GST Offset Package last year provides benefits spread out over four years. For a lower-income household, what they will receive this year alone from the GST Offset Package, together with the WIS, will be substantial.
2.24 HDB two-room households will this year receive, on average, continuing benefits from the GST Offset Package and the WIS that will in fact be equal to 12% of their annual incomes. Even if we exclude the benefits that they cannot use to meet their immediate expenses ? in other words exclude the Post-Secondary Education Account top-ups for their children who are still in school, and the CPF component of WIS - the benefits add up to an average of 8% of their incomes. 8% exceeds any increase in their overall cost of living that might be expected this year3, and this is before counting any additional benefits that this year's Budget will provide them, and any growth in wages that they may get in 2008.
2.25 Even four-room and five-room households will receive significant benefits this year as a result of what was announced last year, which will offset at least a good part of the increase in costs of living they experience this year.
2.26 Later in the speech, I will lay out additional benefits to Singaporeans that this year's Budget will provide as part of our sharing of last year's Budget.
2.27 The fifth plank of the Government's strategy is the most fundamental to how we cope with rising global inflation. Our strategy is to keep our economy competitive and build up our capabilities so that we can enjoy good economic growth. This is the best offset to global inflation, which will be with us not just for a few months but possibly a few years - to educate and train up our people, attract new investments, create jobs, and sustain good growth of incomes for our whole population.
2.28 This is indeed why most Singaporeans experienced good growth in real incomes last year, even as inflation went up. Even lower-income (non-retiree) households, those in the bottom 20%, saw significant real growth of 5% in their total incomes (7.1% in nominal terms), as more members of their households obtained jobs.
2.29 If global inflation stays high, all countries will be affected by it and we will not be able to totally insulate ourselves. But there is no reason why we cannot keep growing, and keep outperforming. And because our economy has done well and we have healthy surpluses, we now stand from a position of strength. We have the resources and the capacity not just to deal with our immediate problems, but to look ahead and position ourselves to deliver more years of good growth and quality jobs for our people.
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3.1 This Budget is about how we are looking ahead to create new advantages and fresh opportunities for Singapore in a competitive world. The way we will do it is to be a top quality economy. This means top quality people, and top quality enterprises. The Budget is also about keeping all our people together as we grow and ensuring that no one is left behind.
Budget 2008 Key Thrusts
3.2 The Budget this year is centred on four key thrusts:
a) We will provide a full range of education and training opportunities for people to find and stretch their potential, in school and in their post-secondary education, as well as throughout their working years. We will enhance assistance for needy students to ensure that a top-rate tertiary education is affordable to all.
b) We will spur the growth of innovative enterprises. We will significantly enhance the incentives for enterprises big and small to create new ideas and products.
c) We will also adjust our tax policies so that we stay competitive, support the growth of our SMEs, encourage risk-taking as well as strengthen our role as a financial and business hub.
d) We will continue to build a resilient community. We will strengthen financial security for retirement, and help the less well-off members in our society. We will also share surpluses with Singaporeans, with particular focus on the lower and middle-income groups who are more affected by rising prices.
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(4) CREATING A TOP QUALITY ECONOMY
4.1 We are competing in a league of both established leaders and newly-emerging cities with an edge in knowledge-based industries. They are not standing still, even in the developed world.
4.2 Munich in Germany, previously dependent on the automobile industry, is now a high-tech, knowledge-based city. Today, Munich is home to not only leading biotechnology research centres like the Max Planck Institute of Biochemistry and corporate giants such as BMW and Siemens, but also vibrant SMEs with world-beating technologies. Last year, Munich was also cited in the International Herald Tribune as the most liveable city in the world.
4.3 In the US, the city of Austin in Texas is fast establishing itself as a centre of innovation for clean technology. It was recently named by Moody's as the best place for business in the US. Austin has the third-highest number of patents among US cities in 2005, and over 44% of the population hold a college degree.
4.4 Asian cities, including even lower-cost cities, are joining in the high-value game. Hyderabad, now dubbed the second Silicon Valley in India after Bangalore, has invested heavily in education, research and digital infrastructure. It is home to Satyam, a leading IT company, and has attracted large global investors such as Microsoft, IBM and Novartis. In China, besides Beijing and Shanghai, second- and third-tier cities like Hangzhou, Qingdao and Yantai are developing highly competitive industry clusters.
4.5 Kyoto in Japan has also emerged over the last decade as a major hub for innovation, home not only to leading global companies that started out there like Murata, Kyocera, and Nintendo but also a large number of small, dynamic firms often with world-leading technologies. Kyoto has one of the highest concentrations of high-tech start-ups in Japan. It also hosts top-notch academic institutions like Kyoto University, which has produced five of Japan's nine Nobel prizes in science; and an assortment of incubator facilities. And all this happening in a city endowed with centuries-old traditions, beautiful temples and gardens.
4.6 We have what it takes to compete in the top league.
4.7 We already have a first-class infrastructure and one of the most attractive living environments in Asia. But we will invest in a total upgrade of our business, transport and IT infrastructure to enable new growth in the decades to come. The development of Marina Bay will eventually double the size of our financial district. Minister Raymond Lim has set out our plans to ensure that our roads are free-flowing, and to make a quantum leap in our public transport infrastructure. We will double our rail network by 2020. Our expenditure on Land Transport alone from now till 2020 will add up to $50 billion or about $4 billion a year - about two and a half times what we have spent on all transport infrastructure - land, air and sea, over the last 20 years.
4.8 We have also embarked on a transformation of our HDB heartlands that will take place over the next 20 to 30 years, beginning with the rejuvenation of our older estates and the building of new generation public housing in estates like Punggol and Dawson. Together with the ongoing upgrading programmes in all our estates, and the green corridors and waterways that we are now developing all over the island, we will provide a vibrant and distinctive living environment for our people.
4.9 These large investments will position Singapore for its next phase of development as a global city, open up many new opportunities for growth, and help transform the quality of life for all Singaporeans.
4.10 However, our infrastructure is only the enabler. The key to our success will be our people and our enterprises. Whether we make the most of our opportunities, whether we grow, and whether we hold our place in the top league will ultimately depend on whether our people and enterprises are top quality, in every job and business they do.
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Nurturing Every Skill and Talent
4.11 At all levels of our education system, we are investing more and moving up in quality.
4.12 We will commit more resources to achieve higher standards in the pre-school sector, which will especially benefit children from lower-income backgrounds. We will also enhance our financial assistance schemes (KiFAS and CFAC) to help more families with their children's fees in kindergartens and childcare centres. More details of these initiatives will be announced by MOE and MCYS later.
4.13 We will continue to invest in higher quality education in every school. We are paying our teachers competitively to ensure that we keep good and dedicated people, and have improved the pupil-teacher ratio in every school to enhance the learning experience for all our pupils. Indoor sports halls will be coming to all our schools. We are also putting more resources into overseas immersion for a broad base of students and new boarding school programmes that will enhance opportunities for bonding and a rigorous all-round education.
Tertiary Education
4.14 Our university sector is entering a new phase.
4.15 NUS, NTU and SMU are stepping up to a new level of excellence that will put them decisively ahead. We will grow the number of subsidised university places from 25% to 30% of each cohort by 2015, with four publicly-funded universities. Government spending on the universities will increase by one quarter, or by $500 million annually. Besides the four universities, we will have a range of other programmes that will enable students to earn degrees in specialised fields, like early childhood education and naval architecture. We will stand out, even among developed countries, in the way we provide a top quality range of publicly-subsidised university options to a sizeable proportion of Singaporeans to aspire toward and take advantage of.
4.16 Our young Singaporeans are taking advantage of this and they keep surprising the world with what they are capable of. Last year, a team of first-year students from the NUS won an award given to the top ten teams in the Mondialogo Engineering Competition - the largest competition for young engineers with ideas that can change the world, organised by Daimler-Chrysler and UNESCO. They were up against 800 teams, including many with PhD students. Their project focused on how solar processing can be used to help farmers preserve fruit so as to raise their incomes. These were first-year students from NUS - three Singaporeans and two Malaysians who had done JC education in Singapore. They made up for the fact that they were only in their first year, by doing their own research, and teamed up with two senior undergraduate students from the Mumbai University Institute of Chemical Technology - using the connections between faculty of the two universities.
4.17 We will also provide enhanced assistance to needy students to make sure that financial status remains no obstacle to pursuing studies at our publicly-funded universities.
4.18 Our universities must be able to charge realistic and sustainable fees, so that they can recruit good faculty, improve their faculty-student ratios over time and provide a top quality education. This is the only way we can build a world-class university system for Singaporeans.
4.19 The Government provides very significant subsidies for university education, at 75% of costs. Students also have easy access to loans to fund a large part of their fees. This system is fair, since university graduates can expect to earn a significant premium in the employment market and to afford to pay back their loans gradually after they start work.
4.20 However, taking into account the higher costs of university education today, with the improvements in quality that we are making, we have decided to significantly enhance the bursaries given to students from the lower-income group. We will also provide more assistance for those in the middle-income brackets. This will ensure that no student needs to face an excessive burden of loans at the start of his working life. Further, through a combination of bursaries and loans, students within the bottom two-thirds of the population will not need to expend cash for either their fees or living expenses during their university years.
University Bursaries
4.21 First, for students in the lowest 20% of households who enter our universities, we will increase the CDC/CCC-University Bursary Scheme for students, from $1,000 to $1,600 per annum. The universities will themselves also provide further bursaries to low-income students in need.
4.22 Second, for the middle-income group, the MOE Bursary Scheme for students up to the 50th percentile of households will be increased from $800 to $1,200 per annum. Further, we will extend the bursaries to students above the 50th percentile but within the lower two-thirds of households by income, who will receive a lower amount of $800. To provide greater access to credit for students in middle-income households, the Study Loan Scheme will be extended to students up to the 80th percentile of households.
Polytechnic Bursaries
4.23 We will similarly increase the bursary quantums for polytechnic students. For the CDC/CCC-Polytechnic Bursary Scheme, we will increase it from $1,000 to $1,200 per annum. We will also be introducing a new MOE Bursary Scheme for polytechnic students from the bottom 50% of households, as we have done at the universities. The new bursary will be set at $800 per annum. We will also extend the MOE and CDC bursaries to students enrolled in MOE-funded diploma programmes in the arts institutions - LaSalle and Nanyang Academy of Fine Arts. Similar to the study loans for university students, the Study Loan Scheme for diploma students will be extended to students up to the 80th percentile of households.
4.24 All new and existing students can take advantage of these schemes starting from this coming academic year.
4.25 Last year we introduced Post-Secondary Education Accounts (PSEAs) for all students. I announced a top up of $100 to $400 for each of 2008 and 2009. I had also said that we would top up students' accounts from time to time when our surpluses allow. Given the good surplus that we had last year, I will now make a further top-up later this year. We will provide the majority of students, which includes those from all HDB homes, $300 for those still in primary school and $600 for those in secondary schools. Including what was announced previously, this means that secondary school students would have up to $1,400 in their accounts by March next year to use for their post-secondary education. The additional top-up this year will cost us $300 million
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Continuing Education and Training (CET)
4.27 From kindergarten up to universities, we are investing more and enhancing financial support for students. However, a key focus going forward will now be continuous education for adults. This is going to be absolutely essential for us to retain the competitiveness of our workforce, in a world where we are competing on skills, quality and productivity, and not on costs alone.
4.28 Two weeks ago, PM launched the National CET Masterplan, which sets out our strategy to invest in our people over the next 10 years. We expect to spend, on recurrent expenditure alone, $400 million per year on CET by 2010. To support this long term engagement, I will top-up the Lifelong Learning Endowment Fund (LLEF) by $800 million this year, bringing it to $3.0 billion.
4.29 As the Government ramps up its spending on CET, employers will remain key players in the training of workers. Currently, they contribute a Skills Development Levy (SDL) on workers earning $2,000 and below. As we move to provide CET to workers across all levels, we should broaden the base for the SDL. Employers will now contribute the SDL on all workers they employ, up to the first $4,500 of gross remuneration. The wider base will allow us to reduce the levy rate from 1% to 0.25%. This will be broadly neutral in terms of levy collections, but will reduce the overall burden on smaller companies and employers of lower-wage workers. The change will take effect from 1st October 2008.
4.30 We will also help Singaporeans who take the initiative to upgrade themselves, by extending subsidies beyond vocational CET. Currently we do not subsidise part time degree programmes. We will now provide subsidies for part-time degree programs at the three publicly-funded universities and UniSIM for those who have not previously benefited from a government-subsidised undergraduate education. Singapore citizens will be able to pay subsidised fees, with the government meeting 40% of the cost of these programmes.
4.31 We will also make further refinements to the existing tax relief for course fees to help individuals claim the relief more easily when they take up academic, professional or vocational courses. Details on this are at Annex B-1
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