Feb. 19 (Bloomberg) -- Singapore will spend S$6.6 billion ($5.2 billion) on benefits including tax cuts and rebates as the government prepares to face elections within the next year.
The government will hand cash to all adult citizens as a “dividend” from record growth, upgrade homes and invest in improving productivity, Finance Minister Tharman Shanmugaratnam said in the city state’s budget speech yesterday. Companies will be required to increase contributions into employees’ pension funds and pay more to hire foreign workers, he said.
Prime Minister Lee Hsien Loong has pledged to ensure lower-income families aren’t left out of the island’s expansion, as quickening inflation threatens to erode purchasing power in Asia. Economists at Citigroup Inc. and Standard Chartered Plc say the budget may signal higher costs for businesses at a time when consumer-price growth is already at a two-year high.
“It’s a redistributive pre-election budget,” said Kit Wei Zheng, an economist at Citigroup in Singapore. “There will be some wage inflation pressures,” though the government is trying to offset the higher costs with one-time measures, he said. Those steps announced yesterday include tax breaks and rebates.
The administration expects inflation to average 3 percent to 4 percent this year, up from a previous forecast of 2 percent to 3 percent. Consumer prices may rise 5 percent to 6 percent in the first few months of 2011, it projects.
“The rising cost of living is a concern,” Shanmugaratnam said. “We are providing lower- and middle-income Singaporeans with benefits in this budget that for many households will more than offset their increase in household expenses -- even before taking into account any wage increases.”
Singapore’s expansion is forecast to slow this year to less than half of 2010’s pace, when a rebound from the global recession spurred wages and boosted home prices to a record. The economy expanded 14.5 percent last year, the fastest rate since independence in 1965. The government has said this year’s growth will be 4 percent to 6 percent with “some upside potential.”
Rising commodity prices may hurt Asia’s growth should they force governments to tighten domestic policies to control inflation, Shanmugaratnam said.
“Food and other commodity prices have climbed sharply, because supply has been affected by harsh weather conditions while demand continues to grow in China and elsewhere,” Shanmugaratnam said. “The political uncertainties in the Middle East have also driven oil prices up. There will not be early relief from these inflationary pressures.”
Singapore’s first approach is to seek to moderate medium-term inflationary pressures through the currency, Shanmugaratnam said. The island’s dollar rose as much as 0.6 percent yesterday and has climbed more than 10 percent in the past year to be the second-best performing currency in Asia excluding Japan.
The central bank “has permitted the Singapore dollar to appreciate against a basket of foreign currencies over the last 18 months, which has helped counter inflation in imported goods,” the minister said. “However, using the exchange rate to offset sudden spikes in prices, such as what we have seen in oil prices over the last six months, would require a sharp appreciation of the Singapore dollar. This would disrupt our exporters.”
Of the S$6.6 billion in benefits that the government announced yesterday, S$3.2 billion will be distributed this year while the rest will be for “longer-term social investments,” Shanmugaratnam said. The government will also spend S$10 billion to upgrade its public housing estates to preserve their value, he said.
The measures announced yesterday include a 20 percent income-tax rebate capped at S$2,000 for earnings in 2010 and the scrapping of radio and television license fees. The government will also supplement the salaries of low-income Singaporeans, and reduce marginal tax rates on personal incomes from 2011 to result in lower payments for most taxpayers.
While the top personal tax rate is higher than in Hong Kong, “there is no pressing competitive need for us to reduce it at this point,” the minister said. Hong Kong taxes individuals at a maximum 17 percent, while Singapore levies a 20 percent rate.
The gap between Singapore’s most affluent and poorest people widened last year as higher wage earners received bigger increases in income, according to the statistics department.
The People’s Action Party led by Lee has been in power since independence and holds 82 of the 84 elected seats in parliament. At the last election in 2006, the ruling party won about 67 percent of votes, 8 percentage points lower than the previous poll. The next election must be held by February 2012.
Companies will have to pay more into employees’ pension funds, the government said yesterday. An employer currently pays up to 15 percent of a worker’s wage into employee pension funds, and this will increase by half a percentage point next month. From September, the rate will be lifted a further half point to 16 percent, subject to a raised cap, the finance minister said.
Singapore has cut taxes in recent years to encourage businesses to set up operations or expand in the city state.
Exxon Mobil Corp. is among the companies that are adding capacity and the nation’s two casinos, which opened last year, have hired tens of thousands of workers at their hotels, malls and gaming centers.
Last year, Singapore announced S$5.5 billion of spending to spur productivity as it sought to reduce the economy’s dependence on overseas labor. Singapore will raise the levies on foreign workers to prevent them exceeding the long-term target of one-third of the workforce, Shanmugaratnam said.
The government will provide a 20 percent corporate tax rebate and a cash grant to small and medium enterprises to help companies cope with rising costs, he said, adding that the initiative will cost it S$560 million.
In 2009, the government tapped the country’s reserves for the first time to give employers cash grants to retain local workers. Singapore will return S$4 billion into its reserves that it had earlier drawn, Shanmugaratnam said yesterday.
The fiscal surplus will be about S$100 million in the year starting April 1, from a projected shortfall of approximately S$300 million for the current period, he said.
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