Budget 2015: Time to turn to growth

Budget 2015 will be announced next Monday amid global uncertainties and high domestic expectations


THE financial numbers coming out today will likely underpin what is shaping up as the country's new normal - annual growth well below the stellar heights we have become used to.

Fourth-quarter gross domestic product (GDP) is tipped to be just above the 1.5 per cent announced earlier in flash estimates while the full-year tally is expected to be about 2.8 per cent.

While these are creditable numbers, this pace of growth looks tepid compared with the 5 to 6 per cent expansions racked up in earlier years. In 2013, growth came in at 3.9 per cent.

Prime Minister Lee Hsien Loong recently highlighted the trend, noting that Singapore will have done well if, over the next five years, growth comes in at around 2-3 per cent.

Look outside Singapore and it's a similar story - some good news mixed in with the not so good.

The positives are that lower oil prices will help to relieve cost pressures and that the world's largest economy, the United States, is recovering fairly strongly. But China is not stepping as hard on the growth pedal as before, and Europe's economy is struggling while the euro zone's woes darken the horizon.

The bottom line is that Singapore cannot count on external growth in any substantial way to fuel the economy. Yet Singaporeans have grown used to Budget goodies. Expectations are high for this year as Singapore turns 50, with many predicting tax rebates or some kind of growth dividends or shares.

Also on the cards is the launch of the Silver Support Scheme, expected to be a helping hand for the low-income elderly to meet their retirement needs. This was flagged by Mr Lee in his National Day Rally speech last year.

The Budget will also unveil a wide-ranging SkillsFuture initiative to improve skills in light of technological changes that spur global competition.

These plans to increase social spending with the aims of reducing inequality and giving Singaporeans more reassurance on coping with uncertainty will cost money.

Bank of America Merrill Lynch's Chua Hak Bin noted: "The Government's focus has shifted away from growth to income distribution over the last several years. Some shift is justified given concerns over the plight of lower income households and social imbalances from high growth."

Still, Singapore has long enjoyed healthy finances. Although the official prediction is for a deficit of $1.16 billion for last year's Budget, most economists expect a modest deficit or surplus when the revised numbers are out.

Last year's Pioneer Generation package was financed entirely from that year's Budget, a ringing endorsement of how fiscally sound Singapore is.

The country remains unique in being one that can afford to have such a long-term planning horizon. But the uncertain global economy may reduce in the future the net investment returns contribution - the portion of the returns from the reserves managed by GIC and the Monetary Authority of Singapore and the dividends from Temasek Holdings. The contribution to the last Budget was set at $8.1 billion.

At the same time, the economy is in a transitional phase with an increasingly younger workforce of graduates with more aspirations and older workers whose skills may become redundant.

This all requires long-term structural measures to keep Singapore competitive - but upgrading an entire workforce will take years before bearing fruit.

In the meantime, there is a risk that Singapore, which still ranks highly in various competitiveness and economic surveys, could slip in the standings if growth is in the low single digits.

Dr Chua said: "Lower growth is already slowing fiscal revenue, which will limit the scope for future social spending and support. High manpower costs are raising the cost of living."

Tourist arrivals fell 3.1 per cent last year compared with 2013, although total tourism receipts held firm. Separately, the amount of investments into Singapore took a hit in 2014 and this year's number is likely to be even lower, according to the Economic Development Board.

Yet growth is vital as a vibrant economy is needed to achieve and support many of the Government's plans.

That may be why some economists and analysts expect Monday's Budget to focus strongly on internationalisation, to further encourage companies to expand overseas and grow their revenue. In other words, to grow beyond our small domestic market instead of just being focused on keeping costs low.

SkillsFuture too can help in this, by giving workers relevant skills.

DBS economist Irvin Seah noted recently that "rather than taking the carrot-and-stick approach of starving companies of foreign workers and subsidising the costs of investment in technology, the focus going forward could be on helping local companies improve their revenues."

Dr Chua pointed out: "Lost growth and revenue forgone over the years must be recognised as a huge opportunity cost."

Although the Government has made it clear that the labour force can expand, albeit at a slower pace, companies would welcome short-term help to deal with the worker shortage, even as they knuckle down to tackle the longer-term issues of having less manpower.

Social building blocks such as CPF Life, Medishield Life, Pioneer Generation, the Silver Support Scheme and Workfare are in place or will be soon. It is time to turn to growth.