Friday, January 23, 2009

What is Lacking in Budget 2009?

Generally speaking, the Budget announced by Finance Minister Tharman is set on the right footing.

As I have mentioned in my the other post "Budget for Crisis of Confidence", the focus of this budget should address the fundamental problem of confidence. Tharman's budget has generally seeked to address this fundamental problem.

However, the size of the budget or even the "intended deficits" (well, you will never know how PAP government will turn it into surplus in the end!) is very small, comparing to the huge amount of money GIC and Temasek have thrown into foreign banks and lost. Besides, the kind of PAP accounting of budget does not include land sales as part of budget revenue and such small deficit of $4.6B is could well be covered by the surpluses that Singapore has gained from the past two years (which has been estimated to be $60B including land sales by some local economist).

$20.5B "Resilience Package" may sound big at first glance but it is just about 8.6% of GDP. Whether such package could negate the impact of a global melt down or re-ignite the engine of the economy is pretty doubtful. Whether it could maintain consumers' as well as investors/banks confidence is yet to be seen.

I was expecting a much bigger package. And interesting enough, we now know the full potential of the PAP government's fiscal strength. Even though with a relatively "big" additional budget of $20.5B, it only incurs a deficit of $4.9B which I believe is a very conservative estimate. The ultimate deficit may be much lesser or we may even end up with a balanced budget eventually. The total budget is about $66B (refer to budget estimate). A "normal" typical budget is about $33B which will normally give a surplus without even taking revenue from land sales into account. And yet, they are pretty stingy on Healthcare subsidies while spending the most on Defence ($3.7B in Health Ministry vs $11B in Defence) which is almost 3 times of Healthcare expenditure.

It means that the actual real surpluses from other years are very much higher than what is being reported. The potential fiscal strength of the whole government is more than $60B. This is a simple rough estimate from the fact that even with a total expenditure of $66B with an expected lower revenue, the deficit is still maintained at $4.9B! Thus it seems that the realized budget surpluses for past year could well be more than $30B per year in good time! Thus the estimate by the local economist that PAP government might have accumulated more than $60B for the past 2 years could well be true! And thus, a $4.9B deficit which is to be financed by drawing down from the reserve is really small in such comparison.

The PAP government could do more in times like this one. We are facing most probably the worst financial and economic crisis for the whole of last century up till now. But yet the PAP government refused to see the urgent need of implementing a more comprehensive social welfare system with unemployment benefits despite the fact that we are expecting an unemployment rate of more than 5% in the months ahead!

More could be done to help Singaporeans to face the imminent hardship ahead. While the idea of Job Credit is pretty close to what I have suggested as subsidizing employer's contribution to employee's CPF, but I don't know the reason why they put a cap of 12% of $2500. For those who could earn well above $2500 to $5000, they are most probably middle management level. Does it mean that they do not need help for companies to keep them on the job? This is why I feel that a 5% subsidized CPF contribution would be a fairer system. Furthermore, the proposed system of handling cash to employers will bound to be abused. Administratively, it is easier to manage to credit into CPF.

There are many redundant taxes like TV License should be removed as well. To maintain economic activities within the system, an additional $5B expenditure in infrastructure is really inadequate in times like this.

Although the increase of the expenditure of Ministry of Health looks impressive, with 34% increase, but from the details, we could still expect the cost of healthcare is going to stay at a very high level. Most of this increase in expenditure goes to direct development. Operating grants has in fact, dropped in this budget! Healthcare cost is always a big concern for Singaporeans and it will be especially so in such time of extraordinary difficulties.

Last but not least, the question of restoration of investors'confidence in the fund investment has not been tackled. The mis-selling of credit-linked financial products are not addressed at all in this budget. If this issue is not solved politically, it will really take decades for retail investors to regain their confidence in investing their hard earned money in any financial products.

In conclusion, although the specific steps taken by Minister Tharman have generally gone into the right direction (except for the tax cut and rebates) but I think the extend of the budgeted amount is not going to be big enough to withstand the onslaught of the crisis of confidence as well as the expected huge unemployment we are going to face in the short future.

Goh Meng Seng


Anonymous said...

I was expecting a good reduction of the electricity rates. The current level is ridiculous. They should review the current formula to prevent further abuse. They claimed that to be fair the tariff rate has to tie to the oil price, and then they set their own oil price at $96 when the market price was about $40.

Anonymous said...

Hi Mr Goh, I find your post very insightful on what the govt could have done more.

But I don't understand this "To maintain economic activities within the system, an additional $5B expenditure in infrastructure is really inadequate in times like this"

Are you saying that increasing expenditure on infrastructure can act as a fiscal stimulus, to boost the economy now?

Goh Meng Seng said...

Dear Aloysius,

There is a rational for fiscal spending on infrastructure during Doom Time.

1) During Boom Time, it is unwise for government to over spend in infrastructure as it would cause higher inflatoin. This is especially so for the past 2 years where government spending in construction along with many other major developments like the 2 IRs have pushed up construction material costs.

2) During Doom Time, where deflation and investment in infrastructure from private sectors are expected to slow down, it is the best time for government spend on infrastructure to cushion this withdrawal of investment from private sector.

3) Beside infrastructure like roads networks, train networks and other physical construction, there is a need for the government to invest more in technology infrastructure. For example, in comparison, our internet surfing speed and costing is very much higher than Hong Kong and Korea. Korean has already invested in High Definition techonology infrastruture while we are lagging behind.

4) For this time, due to the nature of Singapore's open economy, the global melt down will most probably affect 20% to 40% of our GDP output. The only way to cushion impact of the meltdown of global demand is to increase domestic demand via fiscal means. $5B fiscal spending on infrastructure isn't going to help much.

5) The only way for us to come out stronger from this economic crisis is to strengthen our various infrastructure as well as human resouces. There is no better times to spend than Doom Time. And if you want to make significant impart on the economy, there must be a certain critical mass on the spending.

Goh Meng Seng

Anonymous said...

Hi, thanks for the clarification (:

But while fiscal spending can help fill in the gap of a demand deficiency in exports, we must note that a large proportion will be leaked out of the economy through imports. Thus infrastructure spending does not really help the economy NOW, but more for a long-term basis to expand the productive capacity of the economy.

I totally agree with you that S'pore lags behind HK and SKorea in its Internet infrastructure. "There is no better times to spend than Doom Time", yep, the govt could have pumped in more funds into our future resources as well, though they may not aid our present needs.

Once again thanks for your clear explanations!

Anonymous said...

"Beside infrastructure like roads networks, train networks and other physical construction, there is a need for the government to invest more in technology infrastructure. For example, in comparison, our internet surfing speed and costing is very much higher than Hong Kong and Korea. Korean has already invested in High Definition techonology infrastruture while we are lagging behind."

you have missed the point.
First of all, who is been awarded the contract to build the network infrastructure in Singapore ? Your guess is as good as mine. From prudent of view, it is a very good time to build infrastructure due to reduced cost structure during bad tme, but not from government business point of view. In this tough time, GLC will not build these infrastructure but rather purchase the material and resources at reduced price using government money (the GLC, TH, gov are intertwined and benefit from each other), secure contract at low price so to be ready to build them once economy recover.
So what is the rationality behind it ? This is to buy low and sell high. When the economy recover, the GLC will purchase required resources and materials from gov at reduced original price purchased during bad time but now can proceed with project at high markup market price during good times. They will be playing in demand and supply market again where the government will just grant their own GLC with billions of dollars for development.
Isn't this is still government money ? Exactly, that likely how money is siphoned into GLC.

Now, these type of things are probably easy to detect in financial statement, but not so in GLC's company as it is known to be secretive in dealing.

Anonymous said...

Do you think the above is illegal. Hell no, because that is the way government is doing now. For instance, buy the house material at greatly reduced price during bad time, and wait for economy recovery. Once economy recover, start building house (using greatly reduced cost of material) and selling them at market price (therefore citizen will never get to benefit from low cost material). That is how the exorbitant profit is earned by the gov, so obscene that it shroud in secrecy.

Now you know why the gov love the idea of free market (as long as they continue to maintain their secret deal)

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