Keeping the powder dry for off-budget measures

Keeping the powder dry for off-budget measures

FOR all the attention that the coming Budget statement is getting, it is the off-budget measure that sometimes carries the most punch.

The availability of off-budget options will allow the Singapore government to calibrate its 2016 Budget with the confidence that it can correct the course down the road if the economy underperforms already muted forecasts, analysts say.

Although the annual Budget statement - which new Finance Minister Heng Swee Keat will deliver on March 24 - is typically the main channel for lawmakers to set the country's fiscal path for the year ahead, it is not the only way to determine government finances.

The law provides for off-budget measures, which can be introduced in the middle of the fiscal year, in times of need.

The Singapore government has generally been cautious about wielding that tool - the biggest off-budget measures have generally been used only in recession years, and only when the data made it clear that the economy was headed for a contraction.

In 1985, Singapore's first post-independence recession spurred a S$100 million package for small and medium enterprises.

The catalyst in 1998 was the Asian Financial Crisis, while in 2001 the turmoil of the burst dot-com bubble and the September 11 attacks in New York led to two rounds of off-budget action.

In 2003, the outbreak of the Severe Acute Respiratory Syndrome (Sars) sparked a targeted package that injected aid into the tourism, transport and healthcare industries.

One common thread that connects all of those rounds of measures is that the government acted only when it became clear that the economy was at significant risk of contracting.

Bank of America Merrill Lynch economist Chua Hak Bin said that the government generally adopts a prudential stance of "you don't want to use up your resources too early".

"What if they introduce a package and there's no recession?" he said. "If you look at the behaviour in the past, it's usually more reactive than pre-emptive."

Manu Bhaskaran, adjunct senior research fellow at the Lee Kuan Yew School of Public Policy, said that confidence about forecasts limited the ability to be aggressive about pre-emption.

"Ideally we should anticipate and pre-empt a recession," Mr Bhaskaran said.

"To do this we need good lead indicators that can warn us of an impending recession. I am not sure if our composite lead indicator (CLI) is sufficiently up to the job.

Unlike other countries, our CLI is released quite late and only quarterly whereas other countries give it out monthly, so enabling a more granular look at the economy.

We need to improve the monitoring of the economy - understand better the state of the corporate sector for instance."

Off-budget measures therefore allow the government to quickly respond to new circumstances, allowing lawmakers to address economic slowdowns without going overboard.

OCBC economist Selena Ling said that the government this year will face pressure to respond to a weaker economy.

But with the official economic growth forecast currently at a lacklustre but still positive 1 to 3 per cent, the numbers do not yet call for major fiscal stimulus.

"I think as far as the fiscal position is concerned, it might fall into the position of neutral to slightly expansionary...You don't want to be on tap all the time. I think that will be sending the wrong signal," Ms Ling said.

Ms Ling is not expecting a full-year recession in 2016, and has just about even odds of a technical recession, or two consecutive contracting quarters. But if the economy performs worse than expected and a full-blown recession is in the works, a fiscal response, whether in- or off-budget, would probably be required.

"What we have seen in recent developments is that monetary policy has been quite overstretched already," Ms Ling said.

"You can't just have monetary policy doing all the heavy lifting. All the growth drivers are so lopsided now; manufacturing and export sectors are very weak, so even if you have a weaker currency, it's not going to help very much because demand is just not there."


This article was first published on March 8, 2016.
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