Singapore Budgets 2021: What to expect?

The context: a complicated world places a heavy burden on policy

The pandemic is not the only problem confounding policymakers. Our overall economic policy including fiscal strategy has to contend with multiple difficulties and uncertainties.

First, the growing contest between the US and China raises the possibility of developments in areas such as trade or technology that could hurt Singapore. Moreover, it will almost certainly result in the countries of this region, where the US-China competition is most intense, stepping up defence spending. Singapore will have to factor that into our fiscal policy

Second, protectionism is likely to continue undermining the global trading regime we rely on. While the US, under President Joe Biden, is likely to pursue a steadier and more predictable trade policy, it is unlikely to reverse the protectionist trend that former President Donald Trump brought in. One of Biden’s first acts was to issue a directive that tightens rules requiring US government procurement to favour domestic suppliers. Biden’s economic team has repeated noises about so-called currency manipulation, a charge the US has used in the past to impose restrictions on its trading partners. Trade-driven growth is not likely to be as easily available as before and policy has to take that into account.

Third, competitiveness will be more of a challenge. The acceleration of technological transformation in multiple areas offers tremendous new opportunities for our economy, but it also threatens dislocations. Many jobs could be eliminated by artificial intelligence, robotics and smart automation. Our already-stressed SMEs could face even more pressures on profitability and viability. Technological changes such as 3D printing are changing the structure of competitiveness, making production back in high-cost developing economies potentially viable again, which could lead to manufacturing activity being relocated from our region back to the US or Japan or Europe. The authorities will need to consider whether fiscal policy can be used to provide help to those parts of our economy that will be affected by these potential disruptions.

Fourth, the extreme monetary policies of the past decade may have increased financial vulnerabilities. We have seen the recent wild gyrations in the prices of stocks like GameStop as well as in commodities such as silver. Similar frenzies have been seen in areas such as Bitcoin. Borrowing has soared on the assumption that inflation will remain low and this will keep borrowing rates depressed. Some of this debt has gone into equity and bond purchases, causing their valuations to be stretched. We have seen too many instances in the past where ultra-low interest rates and easy money have tended to make investors careless about risks, often in ways that are not apparent to regulators until it is too late. Singapore must therefore be prepared for another period of financial turbulence by building resilience.

This makes it hard for budget to get the appropriate level of support right

Thus, the economic backdrop to the budget is complicated and that means it will not be easy for policymakers to get the balance exactly right.

First, how much support should the budget provide to the local economy — after a year of fiscal support packages of unprecedented scale amounting about $100 billion?

The local economy is only tentatively stepping up from its worst contraction in recent memory. The International Monetary Fund (IMF) now forecasts brightening prospects for the world economy, with virtually all the major regions of the world bouncing back from the severe pandemic-induced recession of 2020.

Our major markets of the US and China are set for a powerful rebound, with the regional economies around us also seen recovering well. Global financial conditions also remain highly supportive, as interest rates remain low and central banks continue to pump liquidity into their economies — that should help our financial centre activities.

However, the IMF itself warned about continuing downside risks. After all, new variants of the Covid virus seem to be emerging, the vaccine roll-outs appear to be slow in many areas and doubts keep surfacing about the efficacy of vaccines or their potential side-effects which may deter folks from being inoculated. All this may prolong the economic damage caused by the pandemic. For Singapore itself, even a general global recovery will still leave key sectors such as aviation and hospitality well behind, since travel will probably take a long time to recover. Also, we suspect that the demand for jobs may not recover so fast as businesses will remain cautious for a while.

The key takeaway is this: the government must not reduce fiscal support too quickly as the economy remains fragile and hostage to downside risks. Yet, neither can it continue to provide the widespread support it gave to companies last year because that might allow zombie companies to survive for longer than is healthy for a market economy to thrive.

The solution seems to us for a gradual withdrawal of fiscal support, not an abrupt one. It also points to spending being directed in a more targeted fashion to only a few areas — industries which will take much longer to recover from the pandemic and initiatives to bolster our readiness to adapt to technological and other changes. Since some large infrastructure projects such as Changi Terminal 5 are now delayed, other necessary infrastructure projects (such as for mitigating climate change) could be brought forward so as to maintain public investment at decent levels. Also, it will be prudent to plan for some additional spending that can be implemented quickly, in case the volatile global environment throws yet another shock, financial or otherwise, at us.

Second, what can fiscal policy do to help the economy adjust to structural changes?

The recent couple of years have been troubling ones for Singaporeans, especially younger ones. People are eager to get a clear sense of the government’s strategy to deal with challenges, and its vision for Singapore’s position in a changed world. Singaporeans are also aware that some parts of our otherwise well-run domestic policy need to be shaken up. This is one of those times when the budget speech needs to be used to provide clarity of vision and direction for the citizenry and where such rhetoric is backed up by forthright measures. DPM Heng could articulate some of the ideas emerging from the Emerging Stronger Task Force, for instance.

There are a few other areas where there is a rising demand for greater clarity:

• Will the government use its taxing and spending powers to improve income inequality?

After 40 years during which much of the world pursued tax cuts relentlessly, change is in the air. In the US, tax rates are almost certain to increase for high-income earners as well as corporations. It would make sense for Singapore to judiciously raise these tax rates as well and restore a degree of redistribution to the tax system. But political concerns are not only around income inequality, they also revolve around inequality of wealth. Should some form of estate duty be re-introduced or would a form of wealth tax be considered? All this may not be popular with everyone, but judicious changes in that direction are better than risking a surge in social resentment down the road.

In the same vein of redistribution, government spending on social safety nets might also need to be more aggressively increased, especially in areas where there are pronounced gaps such as unemployment benefits and retirement adequacy? Social spending has already increased considerably, but growing economic insecurity and an ageing population suggest that more is needed.

• Should the government revise its approach to funding the budget?

Even if the government does not believe that it is time to address the above questions on taxes and spending, the pressures for such changes will not go away. In time, the fiscal position will have to incorporate these changes. The government needs to offer a revised fiscal strategy of how to finance growing demands for change. This raises two key questions. One is to present a long-term map for revenues. Whether it is a GST increase or increases in “sin taxes”, it might be better for the government to offer a predictable timeline for tax adjustments rather than leave these as ad hoc decisions. This will allow revenue growth to be more predictable and economic agents can adjust to that.

The other issue is to give effect to the idea floated some time ago, for the government to fund infrastructure spending through borrowing. At a time when interest rates and our true public debt levels are so low, this makes eminent sense. Such a shift in strategy would also do wonders to stimulate the bond market in Singapore.

• Another push to improve productivity and innovation

Given Singapore’s weak demographics and the social resistance to large-scale immigration, the only way it can secure dynamic economic growth of 3% or more is through a significant acceleration in productivity growth. And much of that will need to come from more innovation in the SMEs where productivity growth had been particularly disappointing. But the government should not rush into doing more of the same for the SME sector. Much effort is being put into nurturing the SME sector as well as nurturing innovation in Singapore, but the results of those efforts may not have been commensurate with the efforts. It is time to examine why this is the case and what changes in strategy are needed.

Conclusion

On balance, Singapore has managed the pandemic crisis reasonably well. Substantial fiscal packages helped to insulate the economy from the worst effects of the pandemic. Through the bold budgetary measures the government implemented in 2020, our companies have not collapsed and our workers have retained their skills since relatively few lost their jobs. The budget speech will be a great opportunity for the government to set out its policies and vision for the post-Covid era, so that Singapore can emerge even stronger from the crisis.

Manu Bhaskaran is CEO of Centennial Asia Advisors