Singapore budget 2019: Hopes for increased spending are too high, BofA-ML says

A Singapore 10-dollar note Photo by Leslie Shaffer

Hopes for a spending spree in the upcoming Singapore budget are too high, although an expansionary budget with increases for social and defense spending and transfers to households is likely, Bank of America-Merrill Lynch said in a late January note.

The budget will be released on 18 February.

Given the large accumulated surplus, expectations are high for a spending spree ahead of a reported early-election later this year. Growing downside economic risks also make a fiscal injection timely and appropriate,” the investment bank said. 

But it added, “despite all ingredients for an expansionary budget seemingly in place, we think expectations for a big spending spree need to be reined in as the economy is not in a crisis.” 

Exceptionally large fiscal injections are rare outside of a significant economic slowdown, such as during the late 1990s Asian Financial Crisis, the 2001 downturn and the 2008-09 Global Financial Crisis, the bank said.

Should a downturn/crisis hit the economy, the authorities will stand ready to roll out off-budget measures to provide crucial support,” BofA-ML said. 

Better-than-expected tax collection will likely spur a smaller primary deficit of around S$3 billion, or 0.6 percent of gross domestic product (GDP), likely boosting the city-state’s overall balance to a S$4 billion surplus position, or around 0.8 percent of GDP, around 1 percentage point higher than planned, the investment bank estimated.

It added that the government will have a S$20 billion surplus — equivalent to around 4.4 percent of GDP — accumulated over the 2016-18 political term, one of its highest in more than two decades.

Primary focus of spending

BofA-ML said it expected “social development” to be a primary spending focus in the budget, with more generous education allocations, especially for early childhood educations and care, and for healthcare.

The government has also been relying on “special transfers” for more populist spending, and direct transfers tend to increase in election years, the note said.

After recent naval skirmishes with Malaysia and amid plans to modernize the armed forces, defense spending also appeared set to rise “substantially,” the bank said.

But businesses may only see significant budget support if there’s an economic slowdown, with the government likely looking to pare back transfers given over 2014-18, the note said.

Too prudent?

BofA-ML said it expected the budget speech to reiterate the need to increase the goods and services tax (GST) ahead to fund rising healthcare costs — an increase of 2 percentage points to 9 percent which was announced in the last budget, but which won’t take effect until the next government term.

The government estimated the GST would provide additional revenue of 0.7 percent of GDP a year, enough to cover the expected 0.8 percentage point increase in healthcare expenditure to 3 percent of GDP over the next 10 years, the note said.

But the investment bank added it wasn’t clear the increase was needed.

“The long history of surpluses has seen critics accusing the government of targeting excessive fiscal prudence. There is some merit to this criticism,” it said, noting the bank’s estimates showed surpluses averaged around 0.8 percent of GDP over 1997-2018, enough to cover the expected healthcare spending increase and still balance the budget.

Investment returns should also increase faster than the domestic economy over the longer term, while efficiency gains can also be achieved from corporate taxes,” BofA-ML said. 


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