OCBC OneWealth App– Thoughts on the Budget

Economics

Asia Ex-Japan

Outlook

Singapore Budget 2020

Selena Ling

Head, Treasury Research & Strategy, OCBC Bank

Thoughts on the Budget

19 February 2020

New decade, generous budget

DPM and Finance Minister Heng unveiled an extraordinary Budget 2020 on 18 February to tackle the Covid-19 outbreak with $6.4 billion, address economic uncertainties and press on with economic transformation. Below are our thoughts post-Budget 2020 announcement.

A blockbuster budget as promised

The government delivered a blockbuster Budget as promised, with an eye-catching $10.9 billion overall budget deficit equivalent to 2.1% of GDP. This fiscal latitude is unprecedented in terms of dollar amount in nearly two decades but is a clear acknowledgement of the significant downside growth risk posed by the Covid-19 outbreak.

Like we mentioned earlier, the downward revision of the official 2020 GDP growth forecast from 0.5-2.5% to -0.5% to 1.5% had essentially set the stage for a strong fiscal stimulus, coming on the back of the monetary policy easing seen in October 2019. The extraordinary fiscal response to uncertain times sends a clear strong signal that policymakers would do whatever it takes to mitigate and cushion the economic impact of the Covid-19 outbreak.

Singapore is one of the fortunate economies that have the fiscal ammunition to respond to any crisis through its fiscal prudence principle. That said, the domestic economic data has probably not hit bottom yet and we expect the February-March numbers to take another leg down due to the softening business and consumer sentiments, especially for the SMEs. Our 1Q20 GDP growth forecast is for a 0.6% year-on-year contraction.

In addition, it remains to be seen if the realised 2020 Budget outturn will materialise as planned – for instance, the $3.48b deficit planned for Budget 2019, which was supposed to have been the largest deficit since 2015, also eventually became significantly smaller at $1.65 billion (equivalent to 0.3% of GDP) despite the muted 2019 GDP growth of 0.7% yoy, albeit this was attributed to lower-than-expected military and transport spending.

Hurray, there will be no GST hike in 2021

It came as welcome but unsurprising news that the 2% GST hike from 7% to 9% will be delayed beyond 2021, given the lacklustre economic environment. However, the GST hike would still materialise sometime between 2022-2025, albeit it would be coupled with a $6 billion GST Assurance Package that would give all Singaporean adults cash payouts between $700-1600 over five years.

This would ensure Singapore households will get offsets for at least 5-10 years of additional GST expenses. We note that GST remains the third largest tax revenue source after the corporate and personal income taxes, with an estimated $11.2 billion anticipated in Budget 2020.

To fund the ageing population and need to keep corporate tax rates competitive globally, the GST hike still appears to be the fiscally prudent route in the medium term to fund ever-growing socio-economic needs including recurrent healthcare needs. Healthcare spending alone accounts for $13.4 billion in Budget 2020 expenditure, second to defence spending with $15.1 billion.

More help for businesses to tide over challenging period

While more help has been doled out for businesses in the short-term to tide over this challenging period, some SMEs will still ask if these measures are enough given how they badly their businesses have been affected by the Covid-19 outbreak.

In my view, it was a generous Budget with $4 billion in the Stabilization and Support Package, comprising $1.3 billion to the Jobs Support Scheme that will benefit more than 1.9 million local employees, the 25% corporate income tax rebate for YA2020 capped at $15,000 per company, the one-year enhancement to the Enterprise Financing Scheme’s Working Capital Loan to help SMEs access financing, 30% property tax rebate for hotels and MICE venues for 2020 etc. Hawkers in government hawker centers will receive a one-month rental waiver, while qualified tenants in government-managed properties will also receive a half-month rental waiver.

However, the latter may fall short of what the F&B industry for example is hoping for. Some food services and retail businesses had probably hoped for more direct and extended help for a longer duration given the uncertainties about the Covid-19 outbreak.

In addition, the 8% wage subsidy would only come in July and may not come in time for some SMEs facing liquidity challenges. Moreover, we have to wait and see if commercial landlords will fully pass on the property tax rebates, albeit CapitaLand Group has announced that it will fully pass on the property tax rebate savings.

The only sting

The only sting, albeit a modest one, from the Budget 2020 was the tightening of the S-Pass sub-dependency ratio ceilings which will be cut from 20% to 15% for the construction, marine shipyard and process sectors.

This probably comes as unwelcomed news to the three sectors but may signify that policymakers still see a manpower-lean trajectory as the way to go and these sectors still have room to step up. The outlook for these affected sectors may have already bottomed too.

Meanwhile, the S-Pass sub-DRC for the manufacturing sector will not be adjusted at this point given the current economic uncertainties.

But fiscal prudence remains a key principle

From FY16-FY19, the accumulated fiscal surpluses amounted to $18.7 billion. Even after factoring in the planned FY20 budget deficit of $10.9 billion, there is still $7.8 billion to be transferred to Singapore’s reserves.

This is not insignificant even though special transfers ballooned to nearly $22 billion (up 44% from FY19). Note that the net investment returns contribution (NIRC) also surged 9.3% yoy to $18.6 billion for Budget 2020, which is double that seen back in Budget 2015 following which Temasek was added into the NIR framework.

While there is so much market focus on the highly anticipated upcoming 2%-point GST hike, the NIRC is single-handedly the most important revenue source and will stay so in the years ahead.

A good balance

Budget 2020 struck a good balance between the immediate economic needs and medium-term structural needs. Citing structural shifts such as the declining globalisation support, the economic tilt towards Asia, the technological advances and bifurcation, and Singapore’s transition to an ageing population, $8.3 billion (which is 48% larger than the $5.6 billion set aside for the two support packages for firms and households) will be earmarked for enterprise transformation over the next three years.

In particular, I liked the new SkillsFuture Enterprise Credit which is targeted at SMEs to help defray 90% of out-of-pocket costs of transformation, job redesign and skills training, as well as the Enterprise Leadership for Transformation Programme which supports business leaders of promising SMEs (which has been on the wishlist for many SMEs).

The SkillsFuture Enterprise Credit, coupled with the 8% wage subsidy for local employees, should go some way to deter Covid-19 firms from taking the easy way out of laying off workers to cut costs in the short-term.

Addressing consumer confidence

Consumer confidence is still the key to any Covid-19 turnaround. All Singaporeans aged above 21 in 2020 will receive up to $300 cash payout, with $100 additional cash payout for every Singaporean with at least one child 20 years old and below this year.

Singaporeans aged 50 and above in 2020 will also receive a $100 top-up for their Passion card, while there will be an additional 20% of Workfare payments for work done in 2019 with a minimum payment of $100. Eligible HDB households will also receive grocery vouchers, additional GST U-Save vouchers, S&CC rebates, higher pre-school subsidies, enhanced MOE Financial Assistance schemes and bursaries for higher education, enhanced cash payouts for the Silver Support scheme, and healthcare subsidies of up to 80% at Public Healthcare Institutions and aged care services.

This is a comprehensive and holistic approach to addressing Singaporean’s cost of living concerns.

Budget check. Monetary policy is next.

At the end of the day, there are few governments which can unveil a $106 billion financial plan to chart its future. In this sense, the Unity Budget is not one to be sniffed at and may set the tone for regional economies to follow.

The market reaction was relatively muted for the STI, USDSGD and SGS bonds yesterday, maybe because it was already highly anticipated and has no need to draw on past reserves or increase SGS bond issuance.

The expansionary fiscal stance outlined in Budget 2020, coupled with the close monitoring to ascertain the Covid-19 outbreak impact going ahead, gives more confidence that the Singapore economy is in good hands. The next milestone to watch would be the MAS monetary policy decision in April where a further easing is not off the table as yet.

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