A closer look at Budget 2007

By Edmund

The budget statement debate concluded last Thursday. This article ponders over some issues raised as well as those which were not.

How is the government financing the budget deficit?

In my previous article I mentioned that given the constitutional bar against the current government dipping into the surpluses built up by previous government, the new government would be motivated to run a budget surplus at the start of its term to build up a fiscal buffer for the remaining years of its term.

I was wrong, going by the projection for the overall budget position for FY2007. The PAP government is running an estimated budget deficit of $0.69 billion for the coming fiscal year.

It is true that the “deficit” is in “accounting only” – as the government do not include in its overall budget position capital receipts, mainly from land sales, and at least 50% of the net investment income. In fact only $2.02 billion of the estimated $7.75 billion investment income was budgeted. The expected capital receipts of $3.19 billion and the remaining $5.73 billion of the investment income will go directly to the reserves.

Budget 2007 – Changes necessary in our fiscal policy

By Edmund

PM Lee announced in November 2006 two significant fiscal policy changes in the first parliament session after the election in May. First, the Goods and Services Tax (GST) will be increased to 7%, up from the present 5%. The GST hike by two percentage points will raise at least $1.5 billion of tax revenue per year.

Second, the definition of net investment income (NII) will be broadened to include realised capital gains. Currently, the NII recognises only interest income and dividends. The Constitution allows the government to spend, during its term, all the NII from current reserves and up to half of the NII from past reserves. The inclusion of realised capital gains could increase annual revenue by about $2 billion.

Since the announcement, the buzz has initially been focused on financing an enhanced social safety net to help the lower-income group and meet the rising social expenditure needs of an ageing population. The argument has since widen to improving Singapore’s competitiveness to foreign investors by reducing income tax for companies and the rich, and to fund infrastructural developments. In particular, SM Lee announced in January a corporate tax cut of at least 1 percentage point in the budget to be presented on Feb 15.

Foreign labour policy & income disparity in Singapore

By Edmund

There has been a disconnect between the profits of businesses and the wages of ordinary Singaporeans in recent years. While corporate profits have increased, the wages of Singaporean workers, except for those at the higher end, have barely budged in real terms.

In addition, income disparity in Singapore has increased. The lowest 20% of income earners or 300,000 Singaporean workers are earning $1,200 per month or less. They have not benefited from the growth in the economy, and their incomes have not increased as much proportionally as the other income groups. In fact, it was shown that Singapore has a first world economy but a third world wage structure. Compared to developed countries and other NIEs (newly industrialising economies), Singapore has a relatively low wage share and high profit share.[1]

Why have the wages of our bottom 20% remained stagnant despite the economic growth? Why has the income gap between the top and bottom of our society widened?

Part of the answer lies in the liberal foreign worker policy.