BY TAN KHEE GIAP

THE size of the 2009 Budget deficit - about $15 billion or 6 per cent of GDP - is unprecedented.

Both small enterprises and big corporations will benefit from the provisions for credit and special risk sharing; households will benefit from rebates, allowances and income supplements.

All these measures reflect the Government's determination to ease the pain of rising unemployment, which is likely to deteriorate after Chinese New Year. It is nevertheless urgent that we be realistic as to what this unprecedented fiscal deficit can and cannot deliver.

To begin with, Singapore, being the first East Asian economy to suffer a recession in this global downturn, will probably also be among the last to come out of it, notwithstanding this unprecedented fiscal stimulus.

According to estimates by the Asia Research Centre at Nanyang Technological University, Singapore's economy will contract by 4.5 per cent this year, within the lower range of the latest official forecast of -5 per cent to -2 per cent. The economy will recover weakly to 2.6 per cent in 2010 and return to its potential growth rate of 5 per cent only in 2011.

The Government has done a good job diversifying the economy over the past two decades. The 1986 Economic Review Committee addressed the loss of cost competitiveness and was successful in diversifying the electronics-based manufacturing sector with new sources of growth such as petrochemicals, pharmaceuticals, precision engineering and life sciences.

The 2002 Economic Review Committee correctly identified the services sector, including the integrated resort-driven tourism sector, for expansion. This led to the construction and higher-end property market boom since 2006. Yet the global financial tsunami has demonstrated that our efforts to diversify our economy may not be enough.

As a highly open economy, with total trade amounting to about 2.5 times its gross domestic product, Singapore's 85 per cent external-demand-driven economy is still in the midst of diversifying into the Chinese and Indian markets. Until our major export markets - the United States, Japan and Europe - recover, no amount of fiscal deficits will be able to turn the economy around swiftly.

This situation is compounded by the worse-than-expected slowdown of regional economies, including China's. The deepest economic recession Singapore will have encountered in its history since the 1930s, caused by factors not within its control, demonstrate how vulnerable it is. We must continue to be prudent in future budgets in order to cope with rainy days and possible future global tsunamis.

The Government's ability to cushion short-term pain with its ample financial resources cannot be taken for granted.

Resisting populist pressures

THE public must understand that the Government has been courageous in sticking to sound budgeting principles and balanced policies in the 2009 Budget, instead of giving in to populist demands.

We have heard calls from many quarters, including trade chambers on behalf of small and medium enterprises as well as big corporations, that employers' Central Provident Fund (CPF) contributions and the existing Goods and Services Tax (GST) be cut. CPF and GST cuts would at best be inappropriate and premature, as they are untargeted and blunt policy instruments.

More importantly, the current economic difficulties confronting companies here are not due to loss of competitiveness but lack of external demand; not so much due to the rising cost of credit but its availability as financial institutions shun risks.

The sound approach is not to pump-prime the economy indiscriminately.

We know that for every dollar spent here, only 40 cents are retained as domestic consumption, with limited multiplier impact. Unlike China and Japan, which can stimulate their economies with enhanced domestic consumption, Singapore cannot do so readily.

Significantly, the Government did not cave in either to demands from the public for welfare benefits to be institutionalised.

It must manage unrealistic expectations and ensure people understand that massive one-off short-term measures - such as those Minister of Finance Tharman Shanmugaratnam announced yesterday - cannot be repeated during normal times. The global financial environment in the foreseeable future is likely to remain volatile, with prospect of recovery for major world economies uncertain.

Dipping regularly into our hardearned national reserves on a massive scale is not sustainable. It should be remembered that the Government needs to deliver an annual 3.5 per cent return for CPF savings, no matter how hostile the global financial markets are.

Future considerations

CHALLENGING and grim as the current global environment is, we have yet to see the worse. It is important to stay forward- looking and continue with Singapore's unfinished tasks. Like the 2009 Budget statement, future budget statements must take an integrated and targeted approach to strengthen our overall growth in a balanced manner. Three considerations need to be borne in mind:

Consideration 1: As we continue to expand our services sector, we must analyse the repercussions and implications of the current recession. We should rethink the longer-term impact of restructuring our manufacturing sector, especially the electronics segment. We must buy time to ensure the manufacturing sector is retained as long as possible, while allowing the services sector to develop further, including the financial sector, logistics, telecommunication, tourism, education and health care. We may have to ultimately prepare for the day, just as most mature economies have, when services become the dominant sector in Singapore.

The Government will have to continue incurring large expenditure on both soft services infrastructure - including in education, health care and information technology - as well as on hard infrastructure facilities such as public transportation networks and environmental preservation, so that Singapore can remain competitive as a cosmopolitan city state.

Consideration 2: The Government must continue to look into the plight of senior workers and housewives who are in their mid-40s or older, who possess only secondary school education. Social infrastructure must be made available to enhance their labour force participation rate. Double-income households may be inevitable. As these categories of Singaporeans could very well stay in the labour market for a further 20 years, they should build up their retirement nest eggs now, especially given the lengthening average national lifespan.

We must recognise that these groups of Singaporeans would not be in the position to compete with the large, regional pool of unskilled labour, who would readily accept lower wages. Fortunately, given decades of pro-business policies, the size of our economic cake has expanded significantly, and the economy has been able to provide more white- and blue-collar jobs than the resident working population can fill. I am, therefore, confident that the Government can cope with this mediumterm challenge, especially since it has massively increased expenditure on continuing education.

Having experimented with the pilot Workfare Income Supplement Scheme, we must now be prepared to expand it for as long as it is needed. We need to top up the wages of Singaporeans who accept jobs with monthly salaries of under $1,500, as a mean of addressing widening income disparities as Singapore's economy continues to globalise.

As new cohorts of Singaporeans enter job markets, they would be in better competitive positions, with at least a polytechnic or technical diploma. Skill development subsidies should continue to be available to prepare Singaporeans who are ready to take new jobs or make career switches. Life-long learning will become the way of life for modern workers.

Consideration 3: The global competitive environment will require us to continue reforming our tax structures. We will need to shift from direct to indirect taxes, with personal income tax and corporate tax rates possibly lowered further.

As the Singapore Constitution is amended 'to revise the framework for drawing more investment income from our reserves', more financial resources will made available, rendering the long-term provision of public goods more sustainable. Indeed in the 2009 Budget, the Government has, for the first time, dipped into our past reserves for $4.9 billion. The measure has received approval in principle from the President, given the severity of the downturn.

Much as we accept that the economy will continue to be more, and not less, dependent on external demand, we must still work towards enlarging our domestic demand to about 30 per cent of total aggregate demand. We should do this not so much to augment the value-add GDP contributions but more for the potential job creation of small and medium enterprises, which already contribute to about 55 per cent of our total employment.

Indeed, over recent years, we have seen increasing activity in wholesale, retail and commerce services as Singapore's resident population approaches five million. Once the economy recovers and circumstances permit, we must continue to move towards our targeted resident population. This may be unpopular but vital for the long-term stability and growth of this highly open economy.

The writer is Associate Professor of Banking & Finance, Nanyang Business School, and Associate Dean, Graduate Studies Office, Nanyang Technological University.

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