January 24, 2009 Saturday

Budget 'will not pull S'pore economy out of recession'

Govt moves factored into experts' predictions of contraction

By Fiona Chan

THE generous Budget unveiled yesterday, with $20.5 billion in recession-targeted spending, will probably add between 1 and 2 percentage points to Singapore's economic performance this year.

But economists said this has already been factored into their negative growth forecasts and will not pull the country out of recession. Even with the record deficit this year, the economy is officially tipped to shrink between 2 per cent and 5 per cent.

'The Budget is an extraordinary package for the gloomy road ahead. However, we are facing a global phenomenon, a problem too large for this unprecedented Budget to resolve,' said DBS economist Irvin Seah.

OCBC economist Selena Ling, who is predicting that the economy will shrink 2.8 per cent this year, said she would have expected a 4 per cent contraction without the massive fiscal stimulus.

Still, she thought the Government 'could have been more generous in terms of helping individuals directly'.

'A lot of the measures were biased towards helping companies because they expect that what helps companies will help individuals,' she said.

'They have prioritised saving jobs as the key theme this year, so they are thinking that as long as you have a job, you are okay.'

There was little help directed at white-collar workers, who belong to the 'sandwiched' middle-class.

Personal income taxes were not cut alongside the 1 percentage point reduction in the corporate tax rate. Instead, taxpayers were given a 20 per cent income tax rebate, capped at $2,000.

This was 'a bit disappointing' as it was exactly the same measure given out last year, during the good times, said Standard Chartered economist Alvin Liew.

But Morgan Stanley economists pointed out that because of high import leakages, Singapore's Budgets tend to be 'defensive' rather than 'stimulatory', focusing on helping companies and households deal with costs rather than spending on demand-spurring measures.

'We do not expect the fiscal Budget to enable the Singapore economy to buck the downtrend, but merely to cushion the overshooting on the downside,' they said.

Morgan Stanley expects the economy to shrink by 3.5 per cent this year.

Mr David Cohen of Action Economics agreed. 'Given the nature of the economy, it would be very hard to prime the pump with more spending,' he said.

'Demand-side measures would not have been all that effective because much of what is purchased here is bought from overseas.'

PricewaterhouseCoopers tax partner David Sandison added that the Government was right to focus on companies.

'Having a job is a pre-requisite to having money,' he said.

'The Government recognises that the current crisis is beyond their control, and domestic spending could only scratch the surface of what is needed.'

Also, putting money in taxpayers' hands through tax rebates 'may have been seen as benefiting the better off, and in this context, there is no guarantee that the extra money would find its way into Singapore shops rather than a cheap United Kingdom property or a Japanese loan repayment'.

Some economists think the Government may have decided to address the problems of companies first because they are more pressing.

'Individuals are feeling pressure, but so far you don't see the widespread malaise of unemployment and large cutbacks in spending,' said Mr Liew.

Since the Government chose to dip into past reserves rather than spending its current savings, it has left the door open for additional so-called off-Budget stimulus measures later this year if needed, economists said.

In earlier recessions in 1998 and 2001, two off-Budget packages were unveiled each year.

'If retrenchments are kept to reasonable levels, they may not need any more measures, but they are probably preparing for the worst,' Mr Liew said.

Some have estimated that the reserves could be as deep as $500 billion to $1 trillion, allowing the Government to withdraw more money, if needed, to improve on the job credits scheme and help defray the cost of living for individuals.

[email protected]