‘Unusual’ plan to help Covid’s economic recovery

SINGAPORE – As the Singapore economy continues to suffer from the downturn caused by the pandemic, analysts expect the government to run a rare budget deficit at the start of its new term.

“This would be unusual, as the government usually starts the first year of its new term with a significant budget surplus,” Maybank economist Kim Eng, economists said in a January report.

“However, as the economy needs continued support to climb some of the strongest recession in Singapore’s history, the current term of office is likely to start with a deficit in FY2021,” they said.

Singapore held its general election last July in the midst of the Covid-19 pandemic. So budget 2021 – delivered on Tuesday by Finance Minister Heng Swee Keat – is the first for the current term.

According to the country’s constitution, the government’s revenue and expenditure must be balanced over a typical five-year term. In the last few election cycles, the government has built up surpluses early in its term – which has made it possible to finance larger budgets later.

The fiscal prudence of the Singapore government is one of the reasons for the coveted AAA credit ratings by international agencies.

However, Prime Minister Lee Hsien Loong warned that with the coronavirus pandemic hitting the economy, his government could ‘take a while’ to ‘return to prudence and balanced budgets’.

Like many governments worldwide, Lee’s team spent large sums of money last year to mitigate the economic blow of the pandemic. The Southeast Asian city-state has dug up its reserves to fund part of its stimulus package worth more than 90 billion Singapore dollars ($ 67.5 billion) – or about 20% of the gross domestic product.

Economists are divided over the deficit the government can afford so early in its term.

Maybank economist Kim Eng predicted a deficit of about 4% of GDP. Others like Irvin Seah of the DBS bank predicted a smaller deficit.

“Starting the first fiscal year in the red could be a challenge amid uncertainty over the fiscal outcome in subsequent fiscal years,” Seah wrote in a mid-January report. He predicted a deficit of about 2.1% to 2.5% of GDP in Singapore.

“On top of that, the government wants to keep its powder dry to protect against any unforeseen shocks for growth in 2021,” he added.

Seah said budget 2021 is likely to be ‘very focused’.

The economy in Singapore is recovering from the pandemic hit, so the government will channel its finances to support vulnerable sections of society and still struggling industries, the economist said.

This is what economists expect to see in the budget:

• Measures to subsidize wages, create new jobs and support the training of workers, especially for the worst sectors such as tourism and aviation.
• Cash distributions to help households manage living expenses, and schemes to supplement the income of low-wage earners.
• Cash flow support to keep businesses hit hard, and start-up financing to promote entrepreneurship.
• Incentives to encourage broader acceptance of low-emission vehicles; as well as support efforts to increase solar capacity and research on other renewable energy.