By PK BASU
GUEST COMMENTATOR

FINANCE Minister Tharman Shanmugaratnam insists it is a 'Resilience Package' aimed at helping Singaporean individuals and businesses cope with the worst global recession in at least 60 years. He insists no fiscal measures can truly counter a down-draft in economic growth of the magnitude the world economy - and with it, Singapore - now faces.

Pessimism about the efficacy of fiscal policy is a tradition among Singapore finance ministers. But counter-cyclical fiscal policy has always worked here when it has been deployed - although, in the past, it was often deployed late in the cycle and helped kick-start a recovery (as in late-1998) rather than alleviate the initial part of a downturn (late-1997 and early-1998).

But this year's Budget cannot be faulted either on grounds of ambition, scope or timing. It is flawlessly designed to address each of the weak links in this downturn. To borrow a basketball metaphor, it is as close to a slam-dunk as might have been imagined.

The unprecedented size of the package ($20.5 billion) is precisely apposite, given the severity of the downturn.

It contains several innovative ideas, starting with a Jobs Credit subsidy to employers - with the government effectively paying the equivalent of employers' contribution for each CPF-eligible employee.

This does not unnecessarily reduce CPF savings in a downturn, but instead uses government funds to give employers an incentive not to lay off workers.

Similarly, the government will launch a Special Risk-sharing Initiative (SRI) aimed at providing a subsidy to certain types of credit that have become especially crisis amid this global credit crunch - an enhanced bridging-loan programme to enable banks to make credit available to mid-sized companies, and an insurance scheme to cover trade credit (the life blood of Singapore and Asia's economy, which has become suddenly scarce in the past three months).

For the first time, the government will also dip into its ample pool of reserves to fund these two innovative schemes (SRI and Jobs Credit). A modest $4.9 billion drawn from the fiscal reserves will hardly dent them.

But the symbolism of using even a small amount of reserves is the key: we were always told they were there for a rainy day. In the face of the severest downpour of bad economic times, it is only appropriate some of those reserves are being aggressively deployed.

If there is any criticism that can be made, it is that there are caps to the income tax rebate and the Jobs Credit scheme. Those low thresholds will limit the effectiveness of the incentives, as they exclude higher-income-earners - the loss of whose jobs and spending can have a more negative impact on aggregate demand.

Similarly, foreigners (so vital a part of the Singapore work force, including some of the most productive and skilled) continue to be excluded from many schemes. This is short-sighted for an aspiring global city that otherwise is notably cosmopolitan in its policy approach.

Nonetheless, the cut in the corporate tax rate to 17 per cent further hones Singapore's competitive edge, and the tax rebates on property and income tax are cyclically well-timed without sacrificing longer-term prudence.

Before using net investment income and net investment returns (NIR, the proceeds of capital gains on investment income - available for the first time because of last October's constitutional amendment), the basic balance shows a deficit of 6 per cent of GDP.

Including the stimulus in the current quarter (arising because some spending begins in March), the overall fiscal stimulus is close to 7.5 per cent of GDP.

This is undoubtedly an impressive stimulus very much in keeping with the global economic times.

Those who were scrambling to drastically cut their economic forecasts for this year will again be scrambling to reconsider those numbers. Fiscal stimulus can be somewhat blunted at a time of extreme pessimism among consumers and businesses.

By not erring on the side of caution, however, Mr Tharman has prepared the ground for Singapore to be able to post an iota of economic growth even in this bleakest of economic years.

And unlike other fiscal stimulus packages from China to the EU to the US, Singapore distinguishes itself by not needing to borrow a single dollar from the future in order to fund today's stimulus.

That, indeed, is Singapore's greatest source of long-term fiscal distinctiveness.

The writer is chief economist, Asia ex-Japan, at Daiwa Institute of Research (Singapore) Pte Ltd.
The views expressed are his own.

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