Friday, January 22, 2016

Expectations for Budget 2016 as recession looms

Devadas Krishnadas
For The Straits Times

22 Jan 2016

The Budget will be announced on March 24. This is a month later than has been historical practice, to give the new Government more time to formulate its policies and plans. This upcoming Budget speech has several dimensions of special significance.

As the first Budget of a new term of government, it will be an opportunity to set political direction with fiscal policy - essentially to put fiscal bucks behind policy bangs. Voters will be able to perceive the priorities of the new Government from the relative weights of expenditure.

Second, it will be the first Budget for the new Minister for Finance, Mr Heng Swee Keat. His predecessor, Mr Tharman Shanmugaratnam, helmed this vital ministry for nearly a decade, including through the last recession and in response to the political knock of the 2011 General Election when the People's Action Party's (PAP) vote share slid to a post-Independence low.

Mr Tharman achieved national and international acclaim for his policy and thought leadership. He took a cerebral approach to his Budget speeches, with lengthy preambles explaining the thinking behind Budget directions. Mr Heng's first Budget will give an indication of his personal approach to Budget statements and management of the resourcing of policies.

Third, global economic conditions are souring rapidly. The annual growth of the Singapore economy has been marginal and slowing further consistently over the past several years. The outlook for Singapore's heavily export-driven economy in the face of slowing global demand is weak at best, with a strengthening bias towards a recession later this year. Mr Heng's Committee on the Future Economy is focused on the long term and none of its determinations can be expected to affect the economy in the near term.


On the matter of the broader policy directions to which the Budget will give fiscal shape, Mr Heng should explain to the House the longer-term plan for fiscal sustainability. Rising expenditures and weakening growth may present a fiscal scissors crisis where expenditures overtake revenues.

In the last Budget, Mr Tharman announced that Temasek Holdings would be brought into the Net Investment Returns Contribution (NIRC) framework from this year. In 2009, the formula used to calculate returns had also been changed to include long-term expected returns from realised and unrealised capital gains, and not only actual investment income in the form of dividends and interest, as was the case earlier.

These changes should contribute several additional billions to the Government's revenue each year. As it is, the NIRC - with just the contributions from the GIC and the Monetary Authority of Singapore and before the addition of Temasek's - accounted for some $8.1 billion or over 14 per cent of the 2015 Budget.

While it is prudent that the Ministry of Finance is strict about fiscal sustainability, we should not be strict in limiting such concerns to the public purse. Household balance sheets in the context of rising living costs, longer life spans, smaller families and changing consumption behaviour should be closely monitored.

Historically, the convenient assumption has been that Singaporeans are financially prudent but it may well be that household and individual debt and savings levels have moved in opposing directions, to the point that financial resilience is more a desire than a fact for a growing number of households here. This will pressure the Government to do more to subsidise or pick up a part of the contingent liability for unemployment, retirement financing and age-related health concerns.


Beginning in 2006 with the advent of the premiership of Mr Lee Hsien Loong and picking up momentum after the shock of the 2011 General Election, the political pendulum has been swinging to the left. The Government has massively ramped up investments to build capacity in public housing and transport. It has expanded subsidy schemes for everything from education to housing and healthcare. It introduced universal health coverage in the form of MediShield Life and put aside $8 billion to cater to the healthcare needs of pioneer Singaporeans. Most of these commitments are structural and long tailed.

In the 2015 General Election, the ruling PAP regained all its lost ground and then some. While the correlation between the swing of the pendulum and the electoral result cannot be taken as causation, it is also unlikely the two are totally unconnected.

The 2016 Budget will be closely watched to see if and how far more the political pendulum will swing to the left. While the average citizen may welcome a more generous government, he or she must keep in mind that part of the buck will get passed back through higher taxation.

Furthermore, such a sustained political swing can change social values and lead to a permanent crutch mentality in society, ending in some becoming increasingly dependent on government aid. Subsidies are sticky, that is, they are easy to give and near impossible to take away. Rising expectations put pressure on the Government to keep doing more. Singaporeans should be mindful of this slippery slope.


Back in 2009, Mr Tharman announced a $20.5 billion stimulus package to counter a recession due to the global financial crisis.

Upon Singapore's rapid recovery, he intensified the focus on raising productivity with a mix of measures to tighten forward labour supply and incentives for investments that enhance productivity. The former has led to fierce competition for labour and upward pressure on wages while the latter has seen the expenditure of well over a billion dollars in tax credits, grants and subsidies. However, none of these interventions has brought any meaningful change to the national productivity story.

In hindsight, it is arguable that if the Government had not intervened so significantly in 2009, the restructuring and urgency to shift to a productivity basis for growth would have happened naturally as firms struggled to cope, weaker ones faded and stronger ones substituted labour with technology, while workers felt compelled to upgrade or face the risk of redundancy.

[Tough love approach. The implication of such an approach may be a less rapid recover, prolonged recovery, rising unemployment as SMEs "faded" (closed down), and larger/stronger enterprises switch to capital/technology to replace labour.]

Of course, at the time the decision was taken to respond so vigorously, there was genuine fear that the world was facing the prospect of a depression. Today, however, the likelihood is more of a long-cycle slowdown than a massive crash. It remains to be seen if Mr Heng has the political will, in the event of a recession or a lengthy period of very sub-par growth, to refrain from propping up firms and mollycoddling workers, and allow market forces to winnow out weak players and reshape the economic structure, thereby rewarding those willing to become more productive while punishing the unwilling. As Mr Rahm Emmanuel, United States President Barack Obama's first chief of staff, once reportedly commented: "Never let a good crisis go to waste."

Budgets should give direction, inspire confidence and put into effect actionable policies. Mr Heng has a reputation for being practical but he needs to demonstrate that he is also a man of ideas - more business as usual is poor expenditure of the one resource more valuable than dollars - time.

The writer is the chief executive officer of Future-Moves Group, a management consulting firm.

[Unfortunately, economics is economics. Politics is politics. Economically, the "tough love" approach is most appropriate. Politically, it is a "non-starter". Maybe the issue is how to sell economics politically.]

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