Big-spending budget to prop recovery next year

Tharman indicates another deficit in 2010 but more targeted govt spending

(SINGAPORE) Finance Minister Tharman Shanmugaratnam yesterday said that even more money will be pumped into the economy through the 2010 government budget - in what some see as a suggestion that the current rebound will not hold up without support.

'We are spending a lot more next year and the coming years compared to the past. If we take infrastructure alone, we are spending more,' he told Parliament, adding that spending will also rise in education and healthcare.

Mr Tharman's remarks came barely a week after Prime Minister Lee Hsien Loong said the government would extend the $4.5 billion Jobs Credit scheme - introduced in January to help companies save costs and jobs - for another six months, after it expires in December.

Private-sector economists yesterday said the move to step up budget spending next year - even after putting in place an extraordinary $20.5 billion stimulus package this year - reflects the cautionary stance of the government despite signs of the economy recovering.

'The government remains very cautious, very unconvinced about the stability of the recovery,' said Robert Prior-Wandersforde, senior Asian economist at HSBC Holdings.

Added CIMB-GK economist Song Seng Wun: 'The government is projecting a conservative macroeconomic environment. Its premise is that there is still a question mark over the shape of the recovery even though we've seen strong growth in the past two quarters.'

Singapore's economy has bounced back, returning to year-on-year growth in the third quarter after three quarters of annual contractions, but Mr Tharman said the global financial system is still fragile.

'The underlying problems haven't been resolved,' he told Parliament, pointing to fears about the extent of any economic recovery and of banks' ability to start lending again.

'So confidence hasn't returned to normal,' Mr Tharman said. 'We and seasoned observers all over the world do not expect the next year or two to be a very pretty one.'

The finance minister did not say how much the bigger budget spending will amount to next year, or how big the fiscal deficit will be.

But the spending is expected to exceed the $20.5 billion stimulus in this year's budget, which was partly funded by past reserves and aimed at helping companies and saving jobs in the country's worst recession.

That amount was expected to leave the government with a record $8.9 billion deficit, or about 6 per cent of gross domestic product.

In his Addenda to the President's Address in May, Mr Tharman said his ministry would strive for a balanced budget in the medium term, even as spending will jump in the face of a more competitive global environment and an ageing population at home.

'Government expenditures are likely to increase from 15% of GDP to about 17% of GDP over the next 5-10 years,' he said.

Yesterday, Mr Tharman told Parliament that government revenues would not cover the spendings anticipated in the coming budget, because corporate tax collections are expected to be reduced in a recessionary year.

But he added: 'The key issue is not merely going to be the size of the fiscal year deficit that we are going to run in the next fiscal year, but the type of measures that we are going to put in place. We would be more discriminating.'

Unlike the 2009 budget, in which the help measures for companies were broad-based, Mr Tharman said the ones in the 2010 budget will be more targeted and zero in on helping with restructuring and productivity growth.

'(Still) , overall I don't expect that you will see a major shift from an expansionary fiscal stance that we have this year,' he said.

'It is too early to say what our fiscal position will be . . . we have some savings as I indicated in the budget this year and we'll make sure we'll live within our means.'

Private-sector economists also play down concerns over a ballooning budget deficit that may result from the combination of huge government spendings and low tax revenues, saying next year's deficit is unlikely to be bigger than this year's.

'The extension of the Jobs Credit scheme will be paid out from the FY2010 budget and I don't see the need for further extraordinary spending,' CIMB-GK's Mr Song said.

Added Joseph Tan of Credit Suisse: 'Being expansionary on the fiscal front next year is a good thing because demand from Singapore's major trade partners like the US is not likely to recover next year. I won't worry too much over the deficit because it can be balanced out over the course of the cycle.'

Source: Business Times, 20 Oct 2009