APPROPRIATION BILL

Order for Second Reading read.

The Financial Secretary (Mr T. M. Hart): Sir, I have His Excellency the Governor's authority to move, "That the Bill be now read a Second time". The Draft Estimates of Revenue and Expenditure for 1956, which form an attachment to the Appropriation Bill, have now been in the hands of hon. Members since Monday.

At the same time a Sessional Paper (Command No. 28 of 1955) was circulated. This paper gives a brief description of the Draft Estimates of Revenue and Expenditure and it is hoped that it may serve as a guide to hon. Members in their consideration of the Draft Estimates.

Before I deal with the Draft Estimates in detail, hon. Members will perhaps wish me to comment briefly on the workings for 1954, the possible outturn for 1955 and on the financial position generally. These matters are covered in some detail in the Sessional Paper.

The accounts for 1954 show a deficit of $41.6 millions. Revenue realised $207 millions instead of the estimate of $214 millions, due mainly to the fact that the collections of income tax fell $13.5 millions below the estimate of $70 millions. Expenditure amounted to $248 millions as against an estimate of $240.5 millions. This included two large items of special expenditure which were unforeseen when the estimates were prepared. The first was for $36.4 millions in respect of the settlement of the Straits Settlements Assets and Liabilities. The second was for $14.5 millions in respect of a payment on account of the purchase of the Oriental Telephone and Electric Company. If these large items are left out of account, normal expenditure amounts to $197.9 millions of which $14.5 millions represents expenditure under Public Works Non-Recurrent and a notional surplus of $9 millions can be shown.

With regard to 1955, it appears likely that there will again be a surplus but this time of only $2 millions. Revenue is likely to fall short of the estimate of $208 millions by $7 millions. It is now clear that collections from income tax were over estimated at $70 millions. It is unlikely that more than $56 millions will be collected. 1954 was a much less prosperous year, particularly for companies, than was thought when the Estimates were drafted. This shortfall will be offset to a certain extent by increased collection on Customs Duties and other items of revenue, but the net collection of revenue is unlikely to exceed $201 millions.

It also appears likely that expenditure will also fall considerably short of the estimate. On the basis of actual expenditure to the end of August, it appears that total expenditure will amount to about $199 millions, including a contribution of $20 millions to development expenditure. The main savings on estimated expenditure have been effected under Head: Defence Services. There has been unavoidable delay in the construction of seaward defence vessels and inshore minesweepers for the Royal Malayan Navy, in addition to other defence expenditure and works, and savings of over $18 millions are expected under this Head. This expenditure will, of course, be carried forward to future years. Savings of about $2.5 millions are expected under Head: Education as well as Head: Medical and Health, and over $1 million in the case of Public Works and Postal Services, due mainly to inability to fill appointment and to savings on Special Expenditure.

The small surplus of $2 millions expected in 1955 compares with surpluses of $42 millions in 1952, $52 millions in 1953 and, as already explained, a surplus on normal working of $9 millions in 1954.

It also appears probable that development expenditure will fall short of the original estimate of $60.5 millions by some $16 millions and that a balance of about $30 millions, instead of $16.4 millions, will remain in the Development Reserve Fund for use in 1956. Under-expenditure has, in the main, been due to difficulties in obtaining and clearing sites and to delays in the delivery of essential material. In addition, a total of $10 millions will have been advanced to the Singapore Improvement Trust by the end of 1955 for the construction of low cost housing. Here again, the efforts of the Trust have been seriously frustrated by difficulties in clearing sites for building.

A statement of the Estimated Assets and Liabilities on 1st January, 1956, is given on pages 6 and 7 of the volume of draft estimates. This statement is discussed in some detail in the Sessional Paper. Perhaps the main point to note is that the Special Reserve Fund which, with interest added, stood at $106.6 millions in the last Statement, has now been revalued at $96 millions, due to the general fall in value of the gilt-edged securities in which it is invested. The Development Reserve Fund, to which interest has also been added, has been reduced from $51.9 millions to $30 millions by drawings for development and revaluation, although in this case, since the Fund is invested in short-term securities, the fall in value has been less marked.

Generally, the position of the Colony's finances as they will stand at the end of 1955 must be regarded as sound. The public debt is very small and adequate provision continues to be made to service it. There is a solid Special Reserve Fund which serves as the sheet anchor of the Colony's finances and which can only be drawn upon by resolution of the Assembly. There is a General Revenue Balance of $130 millions. Attention should however be drawn to two points. The first is that approximately $109 millions of the General Revenue Balance is bound up in long-term loans, the bulk of which are repayable on an annuity basis over a period of 60 years. Therefore, of the General Revenue Balance, only a small part is liquid and available for use in the near future. In fact, a truer picture of the financial position might be shown if these loans were charged to expenditure and the repayments credited to revenue year by year. This matter is now under consideration. The second is that, while the position at present is sound, we are about to enter into a period when mounting recurrent expenditure and the needs of development, particularly in respect of housing and the social services, will make great demands on our resources. It is when we look at the Estimates for 1956 and the probable position in later years that we see the financial position of the Colony in its true perspective.

The Draft Estimates of Revenue are described in some detail in the Sessional Paper. The estimates total $208.4 millions and represent as accurate an estimate as it is possible to give of the revenue which is likely to accrue in 1956, on the basis of existing taxation. Generally, they follow very closely on the pattern of previous years. The fact that 1955 has generally been a more prosperous year than 1954 for commercial interests has been taken into account in estimating income tax collections at $65 millions, compared with actual collection of $56 millions in 1954 and estimated collections of $57 millions in 1955. In estimating collections from Customs Duties, account has been taken on the one hand of the fact that the effects of a Federation boom are usually delayed in reaching Singapore, and, on the other, that the present price of rubber may not be maintained in 1956. Customs Duties of all kinds total over $73 millions and represent approximately one-third of the total revenue. Other items of revenue vary little from the estimates of previous years.

Before commenting on the Draft Estimates of Expenditure, I should like to draw attention to certain changes in the format of the Estimates. New Heads of expenditure have been created for the various Ministries. The various departments in Ministerial portfolios have been grouped in alphabetical order after the Ministry Head. Head: Mis- cellaneous Services, which totalled $30 millions in 1955, has been abolished, and the services previously grouped under this Head have been transferred to other appropriate Heads. This fact should be borne in mind when what appear to be extraordinary increases in expenditure are noted under other Heads. The divisions of the old Department of Commerce and Industry have been reconstituted as independent departments under the Ministry of Commerce.

The estimates of expenditure total $231 millions, including a contribution of $20 millions to development. The first draft estimates submitted by departments, excluding any contribution to development, totalled $232 millions. They were subsequently pruned to $211 millions. In making these reductions, the following objects were kept clearly in mind: the need to limit ordinary departmental recurrent expenditure to the minimum required for the efficient discharge of Government business: the need to make adequate provision for the expansion of the social services: and the need to augment the funds likely to be available for development by a substantial contribution from revenue. Action towards these ends was taken as follows: -

In the case of ordinary departments all applications for new appointments were re-examined. Only those were passed for entry which could be shown to be necessary for the expansion of a service for the public, e.g. postmen; or for the manning of a service which had been provided in a previous year, e.g. crew for a new launch; or which could be shown directly to save expenditure or increase revenue, e.g. collection of income tax; or which were otherwise imperative for the efficient discharge of the government business. With regard to recurrent expenditure, in so far as this was possible, provision was limited to, if not reduced below, the 1955 Estimates. As will be seen from an examination of the volume of the estimates, special expenditure has been cut to the bone.

With regard to the social service departments the needs arising from the rapid expansion of these services were appreciated. The ordinary estimates for the Medical Department are, in total, $1.4 millions in excess of the 1955 figure. The estimates for the Department of Education, if one takes account of increased provision for grants in aid and the contribution to the University transferred from Head: Miscellaneous Services, are also very close to the 1955 figure.

As I have said, the net result was that the estimates of expenditure were reduced to $211 millions and it was possible to make provision for a contribution of $20 millions for development which was required if essential development projects were to be financed.

I have dealt with the ordinary estimates of expenditure in the Sessional Paper under the main divisions of Personal Emoluments, Other Charges Annually Recurrent and Special Expenditure, and it might be appropriate if I now deal with them on a departmental basis, drawing attention to points of interest on that basis.

A table showing the pattern of estimated expenditure is given on page 7 of the Sessional Paper. Further details of departmental expenditure on a percentage basis are given in Appendix A of the volume of the Estimates. The main points of interest arising from that table are the steady growth of expenditure on the social services and the marked rise in respect of education in 1956.

Turning to the various Heads of Expenditure, the new Ministries require approximately $1 million.

Under Head 2: Pensions, increased provision is required for pensions generally and for commutation of pensions. These increases alone make up over $700,000 of the total increase of $1 million under this Head.

The provision made under Head 3: Charitable Allowances, follows the usual lines. The provision for Family Planning has been increased by $25,000 and I am asked to state that this item will be the subject of a free vote in the Committee of Supply. $300,000 has been provided as a contribution towards the capital cost of a new hospital building for S.A.T.A. Under the Social Welfare sub-head, the contributions to S.A.T.A. and voluntary institutions for children have been increased.

With regard to Head 6: Legislature, I understand that certain additions to this Head will be moved in Committee, arising from increases of staff approved by the Standing Committee.

Under Head 10: Audit, provision has been made for certain new appointments but the cost of these is largely covered by increased audit fees.

Estimated Expenditure under Head 12: Chief Secretary has increased from $2 millions in 1955 to $5.7 millions in 1956. The increases, which are almost entirely due to services transferred from old Head: Miscellaneous Services, are explained on pages 4. 5 and 6 of the Sessional Paper.

Under Head 14: Chemistry, provision has been made for the first time for the Inspectorate of Dangerous Materials, an essential service in a city like Singapore.

The provision under Head 16: Defence Services, has been very substantially reduced by eliminating from the estimates all provision, which is unlikely to be spent in 1956. The planned development of the Defence Services has, of course, not been interfered with.

Under Head 18: Botanic Gardens, provision has been made for the first time for a Nature Reserves sub-department which will give effect to the provisions of the Ordinance.

Police Personal Emoluments have increased by $900,000. 69 new appointments appear in the estimates of which 20 were approved last year. Other Charges Annually Recurrent expenditure has been kept within the 1955 figure, despite a substantial increase in the cost of City Services and provision for contributions to the Central Provident Fund. Special Expenditure is only slightly in excess of the Estimate for 1955.

Provision is made under Head 27: Treasury, for the contribution of $20 millions to development. It may be argued that such contributions should not be made from revenue, that capital expenditure should be met from loans, and that the burden of repayment should be shared by all who will benefit from it. The answer to this argument is that the money is required not only for capital development in the ordinary sense of the term but also for special development expenditure, as will be seen from the estimate; that when it is for capital development in the ordinary sense, it is required to build schools and hospitals for the present generation; that future generations will probably have to bear an even greater burden, and that our development requirements are such that we will have difficulty in meeting them, not because our credit is in doubt but because the capacity of the loan market is limited. Contributions from revenue are therefore required as long as we can afford to make them. Provision is also made for the first repayment instalment of the War Damage Interest Free Loan.

Under Head 31: Income Tax, provision is made for additional staff in connection with the planned expansion of the department, and under Special Expenditure for increased staff for the investigation of tax evasion.

Under Head 45: Land and District Offices, provision is made for the new Land Titles Registry. A sum of $796,900 is revoted for the acquisition, drainage and development of land for food production. Of particular note is the fact that no contribution is made to the Rural Board in respect of Other Charges Annually Recurrent expenditure in 1956, the Board having increased its revenue by $900,000. This is a most gratifying move on which the Board is to be heartily congratulated. Last year's contribution in this respect was $405,000. A contribution of $632,000 is made under Special Expenditure, compared with $1.3 millions in 1955. Of this sum, $254,000 is revoted. In addition, $4.4 millions is provided for development compared with $3 millions in 1955, of which $857,000 has been revoted.

Under Head 48: Education, Personal Emoluments have increased from $18.7 millions to $20.2 millions. 964 new appointments have been added, mainly for probationary teachers. This gives a clear idea of the rate of expansion of the department. There has been a substantial increase in the provision required for appointment allowances. The most spectacular increase in estimated expenditure in the whole estimates occurs under Other Charges Annually Recurrent in this Head. The contribution to the Education Board has been increased by $9.4 millions. This is entirely due to an increase in the provision for grants in aid to schools, which has been increased by almost $10 millions. As hon. Members are aware, a scheme for the re-organisation of vernacular education is under consideration and awaits the recommendations of the All-Party Committee. It is impossible at the present juncture to say exactly what the recurrent cost of implementation of this scheme will be. It is, however, likely to be of the order of the cost of full aid on the present basis to all vernacular schools and provision on this basis has been entered in the estimates. It is desirable that this should be done so that the public can see clearly what the cost of vernacular education is likely to be. Put bluntly, it will add about $10 millions to existing costs and from now on, the estimates of expenditure will be increased by that amount. In addition, a provision of $366,000 is made in respect of the Provident Fund and $250,000 has been provided for the cost of staff for the Polytechnic in 1956. Under Special Expenditure, a contribution of $425,000 is made to the Education Board, compared with $1.9 millions in 1955, and $1.4 millions is provided in the Development Estimates. Provision of $2.3 millions is made as Singapore's contribution to the cost of the University in 1956. This was previously shown under Head: Miscellaneous Services. The estimate of expenditure for the department in 1955 was $33.7 millions. If the increased grant in aid to schools and the contribution to the University are excluded, the total estimate in 1956 is $34.5 millions.

Under Head 52: Medical and Health, provision is made for 560 new appointments. These are spread throughout the many departments and divisions of the Medical Department and reference must be made to the Estimates to find out where and what they are. In all, personal emoluments total $18.5 millions as compared with $16.8 millions in 1955. Recurrent expenditure totals $8.1 millions compared with $8.2 millions in 1955. The contribution to the Hospitals Board and Tan Tock Seng are reduced below 1955 levels. Again the special expenditure contribution to the Board is reduced from $1.5 millions in 1955 to $979,000 in 1956. In all, Medical and Health expenditure totals $28.8 millions compared with $27.4 millions in 1955.

Under Head 56: Social Welfare, provision for Public Assistance has been increased from $4 millions to $5 millions.

There has been some re-organisation under Head 58: Civil Aviation. The Regional Headquarters has been disbanded and the Department is now organised on a Singapore basis. The Regional Air Traffic Control organisation however continues. Increased provision in staff and recurrent charges has been made for the Singapore Airport, which is now in operation. The ambition of the Director-General is to run the Terminal Building on commercial lines and make it pay its own way.

The total provision under Head 62: Public Works Recurrent has been reduced from $6.9 millions in 1955 to $6.5 millions in 1956.

There is a deficit of $22.7 millions in the ordinary Estimates of Revenue and Expenditure, a matter on which I will touch later.

The Development Estimates are contained in a separate volume which has been circulated along with the volume of ordinary estimates.

The original estimates of development expenditure submitted by departments totalled $75 millions, including $38 millions for capital works and $37 millions for other development expenditure. It was quite clear that funds would not be available for development expenditure on this scale, even if it could be undertaken. In the end, the estimates were cut to the more reasonable figure of $53.6 millions, which now appears in the Draft Estimates.

In considering the financial aspects of the Development Estimates, it was clear that the only funds likely to be available were the balance in the Development Fund and as substantial a contribution as could be made from revenue. Any funds which we could borrow in 1956 - and we will have to borrow in that year - would be required for other commitments such as housing, telephone development and similar matters which might total as much as $35 millions. It was therefore necessary to frame a development budget within a total of about $50 millions to which would be added any Colonial Development and Welfare Funds accruing during the year.

In the end, the Development Estimates provided $24 millions for Special Development expenditure including purchase of land, cost of resettlement, contributions to Boards and similar projects, and $29.6 millions for capital works, of which $13.3 millions represent revotes. Emphasis has been placed on social service development, and it will be seen that 34 per cent of the money available for capital works has been devoted to Education and 24 per cent to Medical and Health.

Although every possible effort has been made to provide for projects in order of importance and priority, it is inevitable that some very important projects have only been given a token vote or omitted altogether. It is possible that, by the middle of the year, savings will have become available because of the inability of the Public Works Department to make the progress which was expected on certain major items. Should this prove to be the case, and the savings are not required for other purposes, the authority of the Assembly will be sought to switch any available funds to priority projects for which it has not yet been possible to make provision. In this way, it is hoped to make the maximum use of the funds likely to be available in 1956.

As I stated earlier, there are other commitments of a capital nature in addition to those appearing in the development estimates. Funds for the construction of low rental housing will have to be supplied to the Singapore Improvement Trust. It is hoped that the Trust will be able to build new units to a value of at least $18 millions in 1956, although much will depend on whether some solution can be found for the problem of clearing suitable sites. A sum of about $7 millions will be required for essential telephone development. $4 millions will be required as a loan to the City Council for the construction of approach roads to the new Kallang Bridge. Other commitments such as flood alleviation, housing loans, etc., may amount to about $5 millions. In all, these commitments are likely to total about $35 millions. Part of this sum can be met from liquid balances but the great bulk of it will have to be borrowed in 1956. This may not be altogether easy. There will be other borrowers on a not unlimited market.

The position therefore is that we are faced with a deficit of $22.7 millions in 1956. With regard to this estimated deficit, attention will no doubt be invited to the experience of previous years when even larger estimated deficits have been converted into surpluses, admittedly growing smaller year by year, but surpluses just the same. To this I can only reply that this will not happen in 1956. In the first place, the factors, which converted deficits into surpluses in the past no longer operate to the same extent. Public Works Non-Recurrent estimated expenditure no longer appears in the ordinary estimates. Instead, its place is taken by a contribution to development, which is certain to be spent. Equipment for which special expenditure is required is now in free supply and deliveries are no longer delayed as they have been in the past. There is no longer the same likelihood of under-expenditure and consequent revotes as there has been in the past. In the second place, the estimates of recurrent and special expenditure have, in fact, been literally cut to the bone. I can see no possibility of any savings on ordinary departmental recurrent expenditure. Again, having regard to the way in which special expenditure has been pruned, it is difficult to see much likelihood of savings there. On the other hand, I cannot say that there will be no savings. Some savings on personal emoluments are inevitable. They may be substantial. In this respect, performance invariably falls short of expectation. There may also be some savings on grants in aid. The sum entered provisionally for the scheme for the re-organisation of vernacular schools may in the event be found to be more than is required in 1956. Against these savings, however, there are bound to be unforeseen revotes and expenditure on applications for supplementary provision. I would not like to hazard a guess - for it would be no more than a guess - as to the actual deficit which will be shown at the end of the year's workings. Too many imponderables are involved. All I can say, with any certainty, is that the experience of past years will not be repeated and that the actual deficit is likely to be substantial.

It might be convenient to take this opportunity to endeavour to estimate the probable course of revenue and expenditure over the next five years.

I have already endeavoured to show how revenue, on the basis of existing taxation, is tending to level off at about the $205 millions mark, and how, if there were any slight recession of trade, it might well fall lower.

An attempt has also been made to show, in the table, which appears on pages 10 and 11 of the Sessional Paper, how expenditure on the social services has increased over the past five years. It will be seen that actual recurrent expenditure, excluding special expenditure, on Education has mounted since 1951 as follows: - $10.7 millions, $14.1 millions, $15.4 millions, $23.3 millions and $31 millions. The figures for Medical and Health are equally significant and are as follows: - $11.5 millions, $14.2 millions, $15.2 millions, $18.8 millions and $22 millions. If the curve of expenditure created by these figures is projected into the future, and if $9 millions for the additional cost of vernacular education is added to the figure for education, the staggering figure of $106 millions is reached in 1959 for recurrent expenditure on education and medical and health alone. This would be an increase of 100 per cent on actual expenditure over a period of five years. Fortunately, however, it is unlikely that recurrent expenditure on these services will increase at these extraordinary rates. I think that it is now appreciated that the economy of the territory cannot stand expansion on what has been called a "champagne" basis. Standards can and must be reduced without affecting efficiency. As staff is trained and becomes more experienced, it can do more. As the organisation shakes down, extravagances in staff and equipment, which have previously passed unnoticed can be seen and removed. Again, it is perhaps true to say that, in certain respects, the back of the present programme of expansion is some way to being broken and that increases in expenditure in the future will not be quite so steep as they have been in the recent past. It is clear, however, that, no matter what steps we take to reduce expenditure, to increase efficiency and to make our resources stretch as far as possible - and these steps must be taken - recurrent expenditure on social services is going to mount steadily in the future. When one takes into account the inevitable expansion of the Government machine in sympathy with an expanding economy, the increased charges on account of public debt as more and more is borrowed for development purposes, and the planned expansion of defence service, it will be appreciated that the estimate, which was made in the Sessional Paper to the effect that expenditure on all the services of Government might well be in excess of $240 millions by the end of 1959, may not be very wide of the mark. In other words, on the present basis of revenue receipts, we might by that time be facing an actual deficit of over $40 millions. Quite clearly, all practicable steps will have to be taken to increase revenue so that this deficit can be met.

The position with regard to development expenditure also gives equal cause for concern. In so far as one can make an estimate on the basis of the legitimate needs of the various departments, the capacity of Government to execute work, and the capacity of the Singapore Improvement Trust to clear sites and build houses, it appears likely that Government will require an average of about $50-$60 millions a year for development of one kind and another over the next few years. As recurrent expenditure mounts, so ability to make any contribution from revenue to development will decrease and, before very long, we shall reach the stage when we shall be entirely reliant on borrowings or reserves. This raises serious problems. We must take care not to let our reserves run down too far. In fact, they are not very large in relation to the potential demands on them. The local loan market is not unlimited in capacity. There will be other borrowers in the market besides Government. Access to other markets may be difficult to obtain. We may find it difficult to obtain all we require. Clearly therefore we must make sure that our plans include only those projects which are of vital importance to the well-being and development of Singapore, that nothing is included which does not measure up exactly to these standards, and that the money which we do obtain is made to go as far as possible. This may require a re-examination of our development plans in the light of the resources likely to be available. Steps have already been taken to examine the standards of construction and equipment used in connection with Government building.

To summarise, the position is that, on the present basis of revenue, we are faced in 1956 with an actual deficit which is likely to be substantial and that, despite all practicable steps which can be taken to keep expenditure to a minimum, this deficit could easily be of the order of $40 millions by 1960.

It was against this background that the review of the revenue potential envisaged in His Excellency the Governor's Address to the Assembly was undertaken, and the Government's original proposals for increased taxation in 1956 drawn up.

The review was undertaken before the arrival of the Economic Adviser whose expert knowledge and wide experience would have been invaluable. On the other hand, having regard to the time available, it was comprehensive and covered a wide field. Consideration was given to the general principles of taxation in Singapore, the possibility of increasing existing rates of taxation was examined, and the more obvious proposals for new taxation were explored.

In general, the review indicated that: -

Firstly: having regard to the free port status of Singapore and to its almost complete dependence on trade, the whole system of taxation should be as direct and as simple as possible. Any system of taxation which interfered with the free flow of trade, should be avoided as far possible. Secondly: having regard to the close economic ties between the Federation and Singapore, it was generally desirable and in some cases essential, where the fiscal policies of the two territories coincided, to have the same rates of tax. Thirdly: by comparison with adjoining and neighbouring territories, Singapore appeared to be lightly taxed. There appeared to be considerable scope for increased taxation within the existing framework. Fourthly: in so far as it was possible to estimate future needs over, say, a five-year period, it appeared possible that these needs might, and indeed could perhaps best, be met by judicious increases within the existing, established, and familiar framework of taxation.

With regard to the probable deficit in 1956, it was considered that this might be met by an increase in the rate of tax in the higher ranges of assessable income, by increasing the rates of estate duty, and by imposing an additional fee on the first registration of motorcars.

With regard to income tax, it was considered that it would be just to tackle higher incomes before considering proposals to alter personal allowances, lower the minimum level of taxable income or alter the rates of tax on the lower and middle income groups. It is clear that there is considerable scope for increased taxation in the upper income groups. In this connection, I feel sure that hon. Members will have seen the statistics of income tax rates in all Colonial territories which were given in reply to a Parliamentary Question earlier this year. They were published in Hansard and also in the August 6th edition of the publication "Taxation". These statistics indicated very clearly that Singapore is most fortunately placed in the matter of income tax in general but more particularly in respect of the rates of tax in the higher income brackets. These statistics can be made available if hon. Members so desire. As regards the increases, which were proposed for the higher income groups, it was suggested that the rate of tax on incomes of over $25,000 should be increased progressively until a ceiling of 60 per cent was reached on incomes of $100,000 and over. As hon. Members are aware, the present ceiling is 30 per cent on incomes of $50,000. It was estimated that this increase in rate of tax would produce $9 millions in a full year.

With regard to Estate Duty, it had been felt for some time that the rates of tax, particularly in the case of large estates, were too low. It was therefore proposed that the rates of tax should be substantially increased along the whole range. The existing scale reaches a maximum of 40 per cent on estates of $5 millions. The proposed scale gave an effective rate of tax of rather more than 50 per cent on estates of this amount. At the other end of the scale, however, estates of under $10,000 were to be exempted from duty. It was considered, in so far as it was possible to make an estimate that the new scale might yield an additional $1.5 millions in a full year.

The proposals for an additional motor car registration fee, in their original form, aimed at imposing a graduated rate on c.i.f. values, which it was estimated might yield $1 million in a full year.

These proposals were in accordance with the general principles of taxation policy which I have already outlined. They were in accordance with the stated taxation policy of the Government, which aims at placing the burden of taxation on the shoulders of those best able to bear it, and they had the additional advantage, since the first and last required joint action by the Federation Government, that they had all in the past been suggested by that Government.

It was thought that the yield from these proposals would probably go a very long way to meet the deficit which would occur in 1956. Any further revenue, which might be required could be obtained by judicious increases on certain customs duties. These now showed a wide divergence from those in force in the Federation. It seemed clear that, in most cases, the gap between the Federation and Singapore rates could, on the basis of Federation experience, be narrowed without consequences harmful either to the revenue or to the consumer. This major revision of the Customs tariff could remain in reserve for use at a later date. The same applied to any major modification in the main income tax structure and to changes in company tax.

At this stage I should perhaps mention the question of purchase or luxury taxes. Proposals for taxes of this nature have been made from time to time in the past but for a variety of reasons have never met with favour. The proposal was again examined in connection with the review of the revenue potential. It was immediately clear that the matter was fraught with difficulties. Singapore is a free port, almost entirely dependent on trade. If any system of purchase tax on a wide range of goods were to be effective, it would have to be imposed as close to the point of import as possible. Imposition at the retail level would clearly be difficult to control effectively and might well prove impracticable on that account. Imposition at import level would clearly have very considerable effects on the free flow of trade and would have to be subjected to a most searching examination as to its implications, possible yield and effect on trade before any decision was taken about it. This examination could clearly not be completed before the 1956 budget was introduced.

Consideration was also given to the imposition of a luxury tax on one or two commodities which were handled by a comparatively few traders and which did not enter into the entrepot trade to any considerable extent. Apart from lack of experience in Singapore of the administration of such a tax and the difficulty of drafting suitable legislation in the time available, it was found that the yield at the rate of tax which it was considered could be imposed in the first instance would be disappointingly small compared to the yield from other measures of taxation which were under consideration and it was decided not to pursue the matter at least for the time being.

It was therefore decided to suggest to the Federation Government that the rates of income tax and estate duty should be increased as proposed and that an additional motor car registration fee should be imposed in connection with the 1956 Budgets. This was done because of the desirability of having a common fiscal policy and because, for at least two of the proposals, joint action by the Federation was essential.

The proposal was made on the 19th of September and the details were discussed in Kuala Lumpur with cordiality and understanding on the 6th of October. Subsequently they were considered by the Federation Government, and a decision was reached on the 2nd of November. The desirability of a common fiscal policy, in so far as this was practicable, was fully appreciated and the Government had considerable sympathy with the proposals which had been made. It was pointed out, however, that the Government had only come into power in August and had been much pre-occupied since that date. It had not yet had time to consider economic planning which might require increased taxation or to work out a fiscal policy. In fact, in order to gain time to consider these matters at leisure, it had decided to adopt a standstill budget in 1956. In these circumstances, it could not see its way to introduce these proposals for new taxation at the present time.

This decision has placed this Government in an awkward predicament. We cannot for the moment proceed with the proposals for increased tax on the higher income groups and for an additional car registration fee since these two proposals require joint action in the two territories. On the other hand, steps must be taken to meet the 1956 deficit. The whole order of the taxation programme which I have outlined has had to be reviewed.

Before proceeding to outline the results of this review, I should perhaps explain why common action in respect of income tax is regarded as essential. The close economic relations, which exist between the two territories demand that the rates of tax should be the same in each territory. The wisdom of this view has been borne out by experience. The abandonment of this position would give rise to grave administrative difficulties and would adversely affect the yield of tax. The proposals for assessment of combined income would have to be abandoned if different rates of tax applied in each territory, since neither would have jurisdiction to tax income at rates different from those imposed under its own ordinance. Abandonment of the provisions for combined assessment under which a single return is lodged and a single assessment is made in respect of a person having income in both territories would cause trouble and considerably increase the work carried out by the two departments. A more serious consequence would be a fall in the aggregate yield of tax. At present, individuals who derive income from both territories and who are either resident in one territory only or resident in both, receive one set of personal allowances. If there were entirely separate systems, individuals who were resident in one territory would be entitled to full personal allowances in the territory of residence and to relief corresponding to that given under section 36 of the Ordinance in the other territory in respect of income arising there, while individuals resident in both territories would be entitled to a double set of allowances and would have their chargeable income in each territory taxed at graduated rates. Again, fiscal policies considered in isolation would lead to differing rates of tax, allowances and reliefs, depending on the economic needs of the territory concerned. Differences of this kind would encourage taxpayers, particularly companies; to change their residence and capital would tend to flow into the territory where the net yield of income was likely to be greater. From the economic standpoint of Malaya as a whole, the repercussion would be most unfortunate. Evasion of tax would be simplified in the case of persons having incomes arising in both territories Persons carrying on similar businesses in each territory would have little difficulty in making notional transfers of stock at fictitious prices between the two businesses and would be able to manipulate their profits at will. It would be necessary to introduce double taxation arrangements to provide for relief in respect of tax in both territories. These are, in brief, the reasons why a common income tax policy has always been regarded as essential.

A common policy with regard to additional registration fees on motor cars is desirable in view of the difficulties of control, which would arise if unilateral action were taken.

As I stated earlier, the second wave of our proposed taxation programme consisted of increases on customs duties, on liquor, petrol and tobacco. There were differences, in some cases wide, between the Singapore and Federation tariffs. Experience in the Federation indicated that these gaps could be substantially narrowed, if not closed altogether, without harm either to consumption or to revenue. The yields would be substantial. For example, an increase on the duty on cigarettes to Federation levels would yield $19 millions on present levels of consumption. It was proposed to introduce measures of increased taxation progressively, as the need arose, over the years, until we approximated as closely as possible to Federation levels.

Now, in view of the Federation decision, the whole programme has had to be reviewed and switched around. The whole customs tariff has been considered, and it has been decided that it would be undesirable at the present time to increase the tax on cigarettes by even a small amount. The burden of meeting the 1956 deficit therefore fell on liquors and petrol. It was decided to raise the duties on samsu half-way to Federation levels, the duties on still wines and beer, ale and stout to Federa- tion levels and the duties on brandy and whisky beyond Federation levels. The duty on petrol should be raised to Federation levels.

In reaching these decisions, the Council of Ministers had in mind that intoxicating liquor was, in fact, a luxury. It could not, by any stretch of the imagination, be called a necessity. In the circumstances, they had little hesitation in raising the duties steeply, particularly in the case of whisky and brandy.

The increases in customs duties have already been gazetted under the Public Revenue Protection Ordinance. The increases in detail are as follows: -

Brandy and other intoxicating liquor not hereinafter provided for. - The full duty is increased from $61.50 per proof gallon to $76.90 per proof gallon. The preferential duty is increased from $53.80 per proof gallon to $69.20 per proof gallon.

Brandy in bottle. - The full duty is increased from $48 per gallon to $60 per gallon and the preferential duty from $42 per gallon to $54 per gallon.

Samsu(including medicated samsu). - The import duty is increased from $27 per gallon to $31 per gallon and the excise duty from $24 per gallon to $27 per gallon.

Still wines exceeding 26 per cent but not exceeding 42 per cent of proof spirit. - The full duty is increased from $15 to $18.75 per gallon and the preferential duty from $11.25 to $15 per gallon.

Still wines not exceeding 26 per cent of proof spirit. - The full duty is increased from $7.50 to $9.40 per gallon and the preferential duty from $5.60 to $7.50 per gallon.

Ale, beer, stout, etc. - The full duty is increased from $4 to $5.20 per gallon and the preferential and excise duty from $3.60 to $4.80 per gallon.

Whisky in bulk. - The duty is increased from $61.50 to $76.90 per proof gallon.

Whisky in bottle. - The duty is increased from $48 to $60 per gallon.

The price of a quart bottle of brandy and whisky will be increased by $2 as a result of these increases in duty. The price of a peg on a 24 to the bottle basis will be increased by about 8 cents. Making due allowance for a possible reduction in consumption, it is estimated that the increased duty on these two commodities will realise close on $1.5 millions.

The duty on samsu has been raised slightly more than half-way to the Federation level and this increase will result in the price of a quart bottle being increased from $8.70 to $9.37 a bottle. The excise duty has been increased to $27, the differential between the duties on the imported and local product being increased by $1. The cost of a quart bottle of local samsu will be increased from $5.50 to $6. It is expected that these increases will yield about $300,000.

The preferential duty on still wines has been increased to Federation levels, the existing differential between full and preferential rates being maintained. The increased duties are expected to yield $130.000.

The import duties on ale, beer, stout etc., have been increased to Federation levels and the excise duty has been maintained at the same level as the preferential rate. The effect of these increases will be to increase the present price of a pint bottle of beer by 10 cents and a quart bottle by 20 cents. It is expected that these increases will yield about $2.8 millions.

The tax on petrol will be increased from 68 cents a gallon to 73 cents a gallon which is the Federation rate of duty. This increase in the cost of petrol should cause no hardship and it is expected to yield $1.2 millions in a full year.

It is also proposed to increase the rates of estate duty. The rates which are proposed are given in the Schedule to the Bill, which has been tabled for a First Reading today. Attention is invited to certain details of these rates. In the first place, it is proposed to exempt all estates of under $10,000 from duty. The previous exemption limit was $1,000. The amount of duty collected from these small estates, which it is now proposed to exempt, was relatively small. The exemption of these small estates, besides assisting the beneficiaries, will result in considerable saving in the work of collection of duty and allow available staff to concentrate on large estates. Secondly, it will be noted that the same form of graduated scale as applies in income tax has been introduced. This has the advantage of giving a smoother curve in the progress of graduations and obviates the need for special provisions for marginal relief. Thirdly, the scale provides for an increased rate of duty along the whole range. The effect of this can only be fully appreciated if the scale of effective rates, which is attached to the Bill for purposes of information, is studied. For example, the rate of duty on an estate of $220,000 was 9 per cent. The effective rate under the new scale is 13.98 per cent. On estates of $920,000, the old rate was 23 per cent and the effective rate under the new scale is 31.77 per cent and so on. It has been considered for some time that the existing rates of estate duty, particularly in respect of the larger estates, was unduly low and it is considered that the new rates go some way to placing the incidence of taxation on a proper basis.

These measures should yield about $7.5 millions in a full year. This is likely to go only a part of the way towards meeting the 1956 deficit. The balance, when its size becomes clear, will have to be met from reserves or else covered by increased taxation.

These, therefore, are the budget proposals for 1956.

As I have shown, our immediate position is reasonably healthy but the rapid increase of both recurrent and development expenditure means that we are faced with mounting difficulties in future years. To meet these increased expenditures, we shall have to find increased resources since neither our usable reserves nor the possibilities of borrowing are unlimited. In these proposals the Government is taking the first steps towards that increase of our resources and strengthening of our future financial position. I must emphasise that these are first steps only, and further strengthening of the position will be needed in future years.

Before closing, I should like to take this opportunity to thank all those who have assisted in the preparation of the Draft Estimates. Their willing co-operation has made the task much easier than it would otherwise have been. In particular, I should like to thank Mr I. R. M. Willis, the Principal Assistant Secretary, and Mr Lan Ying Fong, the Estimates Clerk in the Treasury, on whose shoulders the full weight has fallen.

Sir, I beg to move.

Mr Speaker: Although this is an Order of the Day, under Standing Order No. 69 (2), I require a seconder, but perhaps I ought to draw the attention of the seconder to Standing Order No. 30 (3) which reads, excluding the exceptions:

"No Member shall speak more than once to any question -

Provided that any Member may second a motion or amendment by rising in his place and stating that it is his intention to second the motion or amendment, without prejudice to his right to speak at a later period of the debate."

The Chief Minister: If it please you, Mr Speaker, Sir, I rise to second the motion before the House and reserve my right to speak later in the debate.

Mr Speaker: The Question, then, is "That the Bill be now read a Second time", but in accordance with Standing Order No. 69 (2), the debate on the Second Reading must now stand adjourned for not less than seven days.

Mr Financial Secretary, debate to be resumed what day?

Mr Hart: 21st of November, Sir.