By ALVIN LIEW
GUEST COMMENTATOR

THE latest Singapore Budget for FY2009 was unprecedented in more ways than one. It exceeded most expectations in terms of size and the radical short-term measures (such as co-sharing the trade financing loan risk by the government with the financial sector). On a more sombre note, the record stimulus package should also brace Singapore households and companies for a very difficult year in 2009 while the government also warned that there is no guarantee of a recovery in 2010.

Although Singapore managed to eke out 1.2 per cent GDP growth in 2008, the economy entered a recession in the second half of last year and Singapore could be staring at the worst year yet in 2009 going by the government's latest forecast for GDP to contract this year by as much as 5 per cent. Singapore's worst year to date was a 3.8 per cent GDP contraction in 1964. Such unprecedented times call for equally extraordinary measures, and the government duly delivered a proposed FY2009 Budget with its 'Resilience Package' to the tune of $20.5 billion and projected a record budget deficit of $8.7 billion or 3.5 per cent of GDP in FY2009 after dipping into the national reserves for $4.9 billion.

The key focus of this Budget was to help Singaporeans preserve their jobs, and this laid the basis for an unprecedented bold measure of introducing a Jobs Credit scheme. A key measure we expected in the FY09 Budget was a cut in the employer's CPF contribution rate. This did not happen. Instead, the government implemented the Jobs Credit scheme where cash grants are given to employers (12 per cent of the first $2,500) in four quarterly payments over the course of 2009 for retaining local Singaporean workers on their payrolls.

The Jobs Credit of 12 per cent of wages will be equivalent to a 9 percentage points CPF cut and returns cash to the companies at a crucial time. This move in our view will be significant to save jobs for Singapore at least in 2009, although the flip side is that it may exacerbate the tendency of companies to lower the axe on their foreign employees instead. So we may still see the acceleration in overall unemployment rate while the resident unemployment rate gets this extra protection during the current downturn.

Relief measures

Singaporean households would also feel supported about other relief measures in this year's Budget. Other than enhancing the rebates on conservancy and rental charges, the GST credits provided to defray the higher cost of living will be doubled this year, and the additional GST credits will be paid on March 1 (instead of the usual July payment date) so that it will benefit families immediately. Additional measures were also targeted at less privileged groups and pensioners while tax deductions for 2009 donations to Institutions of Public Character and other approved institutions will be enhanced from 200 per cent to 250 per cent, which in turn will hopefully prevent a significant deterioration of donation flows in a recession year.

Likewise, first-time home owners will receive additional help from the government to ensure public housing remains affordable. Financial assistance to students will also be enhanced significantly (by some 60 per cent) over the next five years, providing for not just the education needs of individuals but also to improve the effectiveness of Singapore future workforce. The public sector's expected increase in hiring by 18,000 positions will be very welcome. Longer-term measures have also not been forgotten as the government will be spending $1.6 billion (and about the same amount over the next three years) to support marriage and parenthood. Investment will also be made in healthcare and education.

One of the biggest surprises to us in this Budget was the cut in headline corporate tax rate to 17 per cent from 18 per cent although personal income tax rates stayed unchanged. I had expected both the corporate and personal income tax rates to remain unchanged because it would seem too hopeful to expect further cuts in personal and corporate income taxes without a commensurate increase in other taxes to compensate for the lost revenue.

Nonetheless, the Singapore government has always run a prudent fiscal policy, and I expect more GST rate increases in the future when the economy fully recovers to make up for the corporate tax cuts we see now and the potential personal income tax rate cuts in the future. We still see the GST being increased from the current 7 per cent to 10 per cent by 2012 as the expected increase in tourism activity in the future will broaden the domestic consumption base, making indirect taxation a more significant contributor to government revenue. And while personal income tax rates remaining unchanged may be disappointing for some, the government did provide the middle-income group some relief with a 20 per cent income tax rebate (subject to a cap of $2,000), a similar measure that was included in the FY2008 Budget.

Helping the property market is always tricky for the government, and may sometimes have the unintended effect of magnifying the boom-and-bust cycles. However, property developers have been hit by a sales slowdown that could extend well into 2009, on top of having paid top dollar in 2006-07 to acquire land for residential projects whose value has since declined.

In addition, Singapore's Urban Redevelopment Authority (URA) said recently there were 10,450 uncompleted private homes purchased under the country's deferred payment scheme, and slightly more than 40 per cent of these homes are scheduled for completion next year.

Domestic property market

The deferred payment scheme, introduced in 1997 and withdrawn in 2007, allowed buyers to buy property under construction without lining up bank financing in advance as long as they made a downpayment of 10-20 per cent. The large potential number of homes under the scheme that may be returned to developers this year could destabilise a domestic property market already suffering from poor sentiment and a potential decline in home affordability (due to the expected lower income earned in 2009).

Therefore, the Budget brought some reprieve for not just property developers but also indirectly for home owners with the government announcing some measures to steady the domestic property market including deferring property tax for land which is approved for development and allowing a one-year extension of the project completion period for private residential projects. For property owners, the 40 per cent property tax rebate should also bring some direct relief in 2009.

The combination of measures should help cushion partially the corporate sector from the impact of recession and, hopefully, save jobs. Latest data and forecasts from the government clearly point to a dismal economic landscape facing Singapore in 2009. The expansionary Budget, which was brought forward to yesterday from late February, is definitely a big help for businesses and households to cope with the pain of the present recession, but we should be mindful that significant import leakage will limit the ability of fiscal measures to prevent a GDP contraction - a point that was also alluded to by the finance minister in his Budget speech. Singapore cannot spend its way out of recession, as domestic demand (which contributes around 25 per cent of annual GDP growth) is significantly tied to the external outlook. Another positive point we took from this Budget was the government's willingness to dip into reserves in a time of crisis, and it also keeps the door open for a supplementary Budget if the year turns out to be much worse than we imagined.

The writer is a regional economist at Standard Chartered Bank Global Research.

This article was first published in The Business Times on January 23, 2009.