Comments on Singapore Budget 2021
We discuss the Budget during classes every year and these are my comments on Singapore Budget 2021.
A copy of the Budget Statement is available here.
Here’s a summary of the important / interesting points
Singapore faced the worst recession in 2020, with a contraction of GDP by 5.4%
An overall budget deficit (also largest in history) of SGD$63.9 billion (13.9% of GDP) was incurred
(According to DPM) Without the monetary and fiscal response, Singapore’s GDP would have shrunk by at least 12.4% instead of 5.4%. and unemployment rate would have been 2% higher.
Jobs Support Scheme will be extended for 3 months to 6 months at substantially reduced levels (and only for Tier 1 and Tier 2 sectors)
Sectors that are important and are badly affected will receive targeted support e.g. Aviation, land transport, arts/culture/sports sector will receive additional financial support
The government wants to further help co-fund innovative ventures and help Singapore firms create Intellectual Property.
Extension of the Jobs Growth Incentive (costing an additional $5.4 billion) to help with job creation
Salaries of healthcare workers will increase
Further steps are being implemented to reduce reliance on foreign workers - especially in manufacturing
Additional short-term relief will be provided to households in the form of cash ($200), utilities rebate, S&CC rebate & topup of Edusave, $100 CDC vouchers for usage at heartland shops and Hawker centres. This will cost $900 million.
Progressive wages in every sector (“an aspiration”)
Extra help for vulnerable (ComLink & Inclusive Support Programme) but no details provided at Budget Statement yet.
$60 million to adopt technology in agri-food sector, presumably to up Singapore’s internal food production
Speeding up in adoption of Electric Vehicles - 60000 charging points targeted by 2030, $30 million for EV-related initiatives, reduction of cost differential between ICE & electric cars. The ARF for Electric cars will be reduced to 0 in time to come.
Petrol taxes will be raised
Issuing green bonds (borrowing) to finance select public infrastructure projects + new bonds - SINGA to finance long term infrastructure projects such as new MRT lines (subject to $90 billion limit)
Carbon taxes will be held constant at $5 per tonne from now till 2023 until a review is complete in 2022 - from this tone, it is likely carbon taxes will go up
Total past draw on reserves in 2020 & 2021 is expected to total $53.7 billion.
Government spending on healthcare has actually tripled on healthcare from SGD$3.7 billion to SGD $11.3 billion between FY2010 to FY2019.
GST will be extended to imported low-value goods
Did we overspend? Should we start tapering off now?
Borders world-wide have been closed for a year now - Singapore’s too. Tourism, aviation - those are all non-existent. There’s even a story about an accomplished conductor who is delivering food now - showing how many of us have been affected significantly by the pandemic.
The policies that the government has put in place has scale & breadth like we have never seen before
The Jobs Support Scheme provided wage support of up to 75% of monthly wages while the lesser twin, Jobs Credit Scheme used in the 2009 Budget provided only 12% wage support.
The COVID-19 Relief Scheme & the Self Employed Relief Scheme is really quite similar to providing unemployment benefits.
Without these policies, the economy would have definitely been in a far deeper recession than what we saw.
There are two questions recently being raised in some form, especially in parliamentary discussions.
Some ask “did we overspend?” and while some ask “should we taper off now when many parts of the economy are still in trouble?” These are two questions that can be seen to be at odds with each other.
Let’s start with “Did we overspend?”
This is a fair question, after all - the size of the COVID-19 policy response was $93 billion. That’s SGD$23250 spent per resident (resident population is 4 million).
Some will wonder, is the money well-spent? Could we have put some of the money to better use?
But in terms of outcomes - the policies put in place has helped to prevent unemployment from being higher.
Did we likely overspend? Could we have been more efficient with our spending? There is a possible yes to these questions but for a Ministry putting out 4 Budgets within months - I think this was an emergency surgery in the hands of experienced surgeons and while it wouldn’t likely have been as perfect executed with a plan like you do with an elective surgery, we likely did good.
When you go for speed, there must be some compromise in terms of efficiency. And in this specific case - I think we can argue that reasonable speed must be taken to ensure that the unemployment rate does not rise too sharply.
The next question - “Should we taper off the spending now?”
There are those who are concerned that if we cut spending too much too soon, the economy could be in trouble. After all, there are certain sectors which are not seeing any form of recovery anytime soon. This includes the tourism & aviation sector, considering that borders around the world are pretty much still closed.
Mainstream leisure travel does not even exist for Singaporeans at this time - there is nowhere you can fly to without being subject to some form of quarantine control measures either at the destination or upon reaching back to Singapore. Even the much talked about Singapore-Hong Kong Travel Bubble ‘died’ and we are not seeing that in action yet.
Nightlife (clubs, pubs), performing arts (concerts, musicals, plays) & events are still subjected to numerous restrictions.
Yet, the government cannot continue spending to help every single firm out there. This is for fear of keeping “zombie firms” alive. “Zombie firms” are firms that would have been phased out by the market without any government help even without the COVID-19 pandemic BUT has been artificially sustained and kept alive due to government support.
Again, I think the government has taken the correct approach in this case - which is to taper off the support for all firms save for those in the sectors facing a temporary decline due to the pandemic. There is an Arts and Culture Resilience Fund, Sports Resilience Fund. There is also help provided to taxi drivers / private hire transport drivers as well as towards the Aviation sector.
The policy direction is in my opinion, correct, the only thing that probably hard to ensure, is that the funding actually ends up reaching all those rightfully in need of help, like help should be directed to those affected so they can continue doing what they do best after the pandemic has ended - like this guy.
Why has spending on healthcare tripled?
I was shocked to see that healthcare spending by the government has gone up from $3.7 billion in FY2010 to 11.3 billion in FY2020. That’s healthcare spending going up 3 times in 10 years.
I’m hazy on the cause and the effect and this brings some questions to mind - specifically relating to medical inflation.
So I’m thinking, why healthcare spending has tripled should likely be due to the following factors
Ageing population (of course) - I know Singapore population was ageing, but the problem seems to be far worse than I expected it to be. Did you know that Singapore will be a ‘super-aged’ population by 2026?
Medical inflation contributing to the increase in government expenditure
Introduction of Medishield Life
Government efforts within the last decade to ensure that growth is inclusive, one of which is affordable access to healthcare (schemes like CHAS)
But 3x spending in 10 years is quite significant. The government is a large player when it comes to healthcare, and its increase in spending could be one factor itself contributing to medical inflation.
Are we to expect that in the next 10 years, healthcare costs rises by another 3 times?
Hopefully some MP asks this question in parliament so we get an understanding of the underlying factors of why healthcare spending increased this much.
Reducing our reliance on Foreign Workers
DPM Heng has signalled that we will continue to reduce our reliance on foreign workers, and this is done through further tweaking of the Dependency Ratio Ceiling.
The population is ageing rapidly and this is not helped by the historically low Total Fertility Rate of 1.10 that we recorded in 2020.
Our unemployment rate has always been low - we have been at 1.9% to 2.3% before the COVID-19 pandemic. You can somewhat argue that low-wage workers have wages depressed by low-wage foreign workers but you cannot quite argue that foreign workers are causing Singaporeans to be out of jobs, because at 1.9% to 2.3% that’s what we consider to be at full employment level.
Foreign workers actually become somewhat of a buffer for the local residents when it comes to unemployment during a recession. Partially due to government grants and subsidies only available for Singapore residents, given a local resident vs a foreign worker of the same calibre - the foreign worker will be first to let go.
In Dec 2019, total foreign workforce (excluding foreign domestic workers) stands at 1.165m while in June 2020, the number has dropped to 1.099 million. This would mean that we sent approximately 65,000 foreign workers back - not quite a small number.
Also, if we want to reduce our reliance on foreign workers, we need to start pushing the TFR back up. Reliance on foreign workers is partly a strategy to counter problems relating to an ageing population. Replacement rate TFR is 2.1 but our latest TFR is 1.1. We really need more babies.
Borrowing to finance infrastructure
”If we are in good fiscal health - why need to borrow?” - this will be on the minds of some students.
The idea of borrowing to finance infrastructure is due to two reasons
The first, is to promote better equity between current taxpayers vs future taxpayers. Let me provide an example. Say you want to build an MRT line - and the benefit of the MRT line will perhaps last 30 or 40 years and for the next 30 or 40 years, everyone benefits.
Lets say the MRT line cost 20 billion dollars and will be built over 5 years - this will then mean that current taxpayers incur a cost of 4 billions per year. So someone who turns 25 and starts working will have to through, various taxes paid (GST, personal income taxes, vehicle taxes) - pay for this MRT line. A future taxpayer who is currently 18 years old and a JC student who will enjoy this for the next 30 years or so enjoys it without incurring cost for it.
By taking say a 30 year loan, and paying instalments + interest on the loan, the cost is better split between current taxpayers and future taxpayers who will both enjoy the benefits from such a project.
The second reason why the government has suggested borrowing is due to something quite simple - interest rates are low. Say the government takes a loan at 0.5% interest rate to finance a $20 billion project. It simply pays the interest and then does not have to dip into its coffers to pay for this project (even if we can afford to) - they can then use the same funds to invest.
This however rests on two assumptions
The government is able to generate returns higher than the current interest rates (there is a good track record for that)
Interest rates will remain low for some time to come.
Raising tax revenues to maintain a prudent fiscal position
Btw this question has been coming up again and again and again, I don’t know why - the question is, how much reserves does Singapore have.
As of 31 Mar 2020
MAS manages $397 billion of foreign exchange reserves
Temasek’s portfolio is $306 billion
GIC’s funds under management is not revealed
But if you ask me, give or take - $1 trillion should be the figure. If you really want to figure out the rough sum, you can look at GIC’s contributions to the NIRC, and compute using the annualised return, you should be able to get a give-or-take figure.
But that’s besides the point.
If we are drawing 53.7 billion from our reserves, that’s a good 5% to 7% of our total reserves. Which again is substantial.
But I think, fantastic use. If anything, ‘we are keeping our reserves for buffer against external shock on a rainy day’ is no longer a fairy-tale. We used it, and kept economic numbers decent, and prevented massive unemployment on a rainy day. If not now, then when?
Raising taxes to maintain a prudent fiscal position is the right thing to do, after the economy has been successfully navigated out from the storm, which is not now.
If there is a need to raise taxes, one thing that the government usually always does is to raise taxes on ‘demerit goods’ that generate externalities.
Like motor vehicles because congestion. Like casino entry because gambling. Like cigarettes because smoking is harmful for you.
So I feel the increased petrol taxes is more of a long-term measure to raise tax revenue from one source. We are trying to go for a car-lite & greener society after all. Yet, there are always unintended consequences from any policy, and there will always be groups that certain policies will affect.
Like what Malminderjit Singh from ChannelNewsAsia said in his commentary - that electric cars are not yet mainstream or convenient, and for large families, there are really quite few options when it comes to electric cars, specifically a lack of 7-seater options.
Looking at our rising social and healthcare expenditure, as well as the ageing population, the GST hike really does feel like it needs to be a sooner than later thing (to maintain a healthy fiscal position) but instead of saying that ‘it would come sooner than later’, maybe we say that this will be implemented once the economy is on strong footing and has recovered.
Conclusion
Overall, I think that most of what can be done has already been done. Frankly on just both the healthcare and economic front, Singapore is really one of the best places to be in right now.