ANNUAL BUDGET STATEMENT

3.09 p.m.

The Minister for Finance (Mr Hon Sui Sen): Mr Speaker, Sir, I beg to move,

"That Parliament approves the financial policy of the Government for the financial year 1st April, 1977 to 31st March, 1978."

Sir, I have distributed in advance to Honourable Members my Economic Survey of Singapore, 1976. Honourable Members will find it further simplified and improved from last year's Survey to give them a better appreciation of our economy's performance in 1976. I would like nevertheless to highlight some of the features of the Survey before going on to speak of the financial policy for the coming year. Singapore's Economy in 1976

1976 saw the gradual recovery of the world economy, with the industrialised countries in the Organisation for Economic Cooperation and Development (OECD) making a real growth of 5%. There was also less inflation in most countries, with the OECD as a whole registering 8%, down from 11.2% in 1975. Singapore benefited from the world economic revival, with real growth at 7.0%. At current prices, growth was 9.6%. The GDP deflator was a modest 2.4%, indicating the stable price conditions in 1976.

More remarkable, the Consumer Price Index fell by 2% in 1976. This was, in large measure, due to the relatively stable food and oil prices. But Government's anti-profiteering measures and consumers' efforts also played a role in keeping prices down. The unemployment rate for 1976 remained at a low 4.5%, the same as a year ago Unemployment, measured by the number of persons seeking work at the Labour Exchange, fell from 39,500 at the beginning of the year to 30,750 at the end.

Our manufacturing industries, with the exception of shipbuilding, staged a comeback, with a real growth of 10% in 1976 in contrast to the negative 2% in 1975. Trade also increased a welcome 21% after a decline of 7% the previous year. Tourism remained buoyant. Tourist arrivals increased by 13%, very near the average growth rate of the pre-energy crisis years.

Although below the average growth for the past five years, our 7% economic growth in 1976 may perhaps be considered not unsatisfactory. The policy of diversifying our economic activities has made us less vulnerable to the violent fluctuations of the world economy.

Prospects for 1977

World economic recovery, which was strong in the first half of 1976, slowed down in the second half as the major industrialised countries feared, by setting too fast a pace, to trigger off another round of inflation. As a result, there was some stagnation in growth and increased unemployment. However, the Governments of the major industrialised countries have since considered measures to stimulate their economies again to provide more jobs and reduce unemployment in their own countries. For their trading partners, such renewed growth will have the effect of providing an increased demand in export markets.

The fear of causing unacceptable increases in inflation, however, remains. The recent two-tier oil price increases by the OPEC countries will impose further restraints to economic stimulation.

On the whole, therefore, the world may grow more slowly this year than in 1976. The OECD countries are expected to make only 3 3/4% in real GNP growth, down 1 1/4% from 1976. Inflation is forecast to increase by 7 1/2%, the same as last year. World trade is expected to grow at 6%.

Singapore's own performance in 1977 will naturally be affected by these external circumstances. We can, however, try to take advantage of differences which appear now to exist between the developed countries in the less synchronised economic conditions of 1977. We can also, by appropriate domestic policies, counteract some of the more negative effects of a world economic slowdown.

Economic Strategy Programme

It has been five years since I announced in this House our Economic Strategy Programme for the 1 970s. This was aimed at modernising and transforming Singapore's economic structure so that it would become a `brain' services centre. A package of public policies was designed to fulfil the five basic objectives of the Programme in manpower, science and technology, infrastructure, taxation and promotion. The Programme was intended to be flexible. In the event, it had to accommodate the energy crisis and the worldwide recession which followed it. We had to scale down our expectations. It may be useful to review the present status of the Programme.

Let us start with our manpower development programmes in education and industrial training. The annual output of graduates from the technical institutions, including the Singapore Polytechnic, Ngee Ann Technical College. Industrial Training Board and the Joint Industrial Training Centres administered by the Economic Development Board has increased from 5,240 in 1972 to 8,930 in 1976. The training of skills was concentrated on the engineering trades, metal machining and fabrication as well as on selected fields of precision engineering. There are now 5,155 apprentices under training in various industries compared to 574 five years ago The demand for skilled manpower by our industries is being largely met. The technical bias introduced a year ago in our education system will further provide the essential element of correct work attitudes to complement the inculcation of skills.

As for development of science and technology, our manufacturing industries have become more technological and sophisticated. A good indicator of this technological advancement is the value-added per worker. This has increased in real terms from $8,814 per worker in 1972 to $10,088 in 1976. Investment commitments in the higher value-added industries accounted for 84.7% of total investments compared to 78.2% five years ago. Such advancement was achieved across a wide range of industries from electrical machinery and appliances, transport equipment, and textiles to metal fabrication and precision engineering. Our industrial base has also been broadened by greater diversification which gives flexibility in meeting ever fluctuating external demand.

Perhaps more visible are the results in infrastructure development. We have now adequate industrial land and buildings to meet the demands of investors. The Jurong Town Corporation has in the past five years prepared 1,800 hectares of industrial land and completed 252 standard factory buildings and 207,200 square metres of flatted factory space. Communication links have been expanded to meet the needs of our manufacturing, trading and business communities. They can now communicate with 175 countries through the much improved telecommunication facilities. Automatic telex services are now available to 88 countries. Such services are well used. The number of outgoing telex calls rose from 356,000 in 1972 to 2,312,000 last year. Domestically, there are now 374,000 telephone links, almost doubling the number in 1972. The rapid growth in the industrial and commercial sectors would also not have been possible without expanded utilities supplies. The Public Utilities Board has now at its disposal an installed capacity of 1.390 MW electricity compared to 704 MW five years ago. We are now in a much better position to meet demand for infrastructure services at short notice.

Finally, our efforts to promote Singapore as a centre of international finance and tourism have also achieved some success. Financial operations have expanded greatly The number of banks established in Singapore was 72 in 1976. There is a swing towards offshore and international banking with the setting up of offshore and merchant banks. The Asian Dollar Market is now serviced by 69 Asian Currency Units and has expanded from US$2,980 million of deposits in 1972 to the present US$17,350 million. With the raising of 15 Asian Dollar Bonds, our financial centre may be said to have attained maturity. Such development has been made possible by fiscal incentives and by rationalisation of banking procedures.

The rapid growth of the tourist industry is shown in tourist arrivals, which increased from 880,200 in 1972 to 1,492,200 last year. We should now be adding to our 10,255 hotel rooms. Of interest also is the convention business which has expanded significantly. 133 conventions and exhibitions were held last year compared to 80 in 1972.

All in all, therefore, we have laid a sound foundation for sustained growth through the five basic elements of our long-term development strategy. My Ministry's Economic Planning Model predicts that, on this strategy and barring major upheavals in the world economy, we should be able to achieve an annual growth of 6 - 8%.

Turning from consideration of our development strategy, I would now like to discuss the tactics we can adopt to foster economic growth in 1977.

Industrial Development

Despite difficulties and by employing many of its best staff overseas, the Economic Development Board's promotion efforts succeeded in attracting investment commitments of $364.2 million in 1976. However, 58% of this is for expansion by industries already operating here Large unused production capacity and high unemployment in the industrialised countries no doubt affected the drop in new investments from overseas. The task of investment promotion for the coming year remains difficult

While we can only sometimes offset adverse external developments, we must continue to press on with our promotion efforts in the United States, Japan and Western Europe. On the home front, however, we shall maintain a healthy investment climate. We shall do what we can to keep our major production costs stable, and ensure that industrial facilities and services will be readily available for investors.

We shall pay special attention to the relatively smaller but more technology-oriented industries. More industrial finance will be given through the Capital Assistance Scheme beyond the $16 million so far approved. Such finance will also be available through the Small Industries Finance Scheme, in which 14 cases have already been approved, involving a total of $1.73 million. This Scheme should gather greater momentum this year. As a further step, the Jurong Town Corporation will construct smaller factory buildings to suit supporting industries and services. Trade Development

To safeguard our economic interests, our trade, investment and diplomatic offices will be strengthened in key centres. Government and traders must work closely together if we are to counter the increasingly protectionistic attitude of some of our major trading partners, consolidate our established markets in the United States, Japan and Western Europe, and explore new markets especially in West Asia. In the development of new markets, it is vital that we build up as many contacts as possible. We shall therefore consider setting up permanent exhibition centres in West Asian markets to promote our manufactured products and services.

To assist our exporters to meet the very keen competition in international trade, cheaper export finance is being made available. The MAS rate to the Banks for rediscounting export bills has been made more attractive by pegging it at 2% below the average prime rate. Further. the rate is now being adjusted frequently to take into account the regular fluctuations in the prime rate. Our exporters should also make more use of the facilities provided since June last year by the Export Credit Insurance Corporation, especially for sales to lesser known new markets and customers.

ASEAN Economic Cooperation

Since the Conference of ASEAN Heads of Government held in Bali a year ago, some progress has been made by Economic Ministers and officials of the five member-countries on the establishment of five ASEAN industrial projects and on the terms for according each other preferential trading arrangements. The ASEAN Economic Ministers have approved an Agreement on ASEAN Preferential Trading Arrangements and have defined in the Rules of Origin the nature of the products to which such preferential arrangements may be extended. The Agreement will provide the framework for any multilateral or bilateral agreements for preferences between member-countries. Accordingly, our bilateral agreements with the Philippines and Thailand respectively for a mutual across-the-board reduction of 10% of existing tariffs on all products traded between us will be brought within the framework of the Agreement for Preferential Trading Arrangements. Under the terms of the Agreement, however, any bilateral Preferential Trading Arrangements must also be extended, if so desired, to other ASEAN members.

We have therefore made some modest beginnings in ASEAN economic cooperation. If there were a sense of urgency in the political Ieaderships of the ASEAN countries to meet our long term problems, then I am confident there will be the political will and a spirit of give and take, and much more development may be expected in the coming years.

Services Development

By improving transportation and communications facilities, as well as finance and insurance services, Singapore has developed rapidly as a regional services centre. We are now well organised in the offshore banking, insurance and oil businesses. We are equally well-placed to become a centre for regional and international warehousing activities, especially for capital goods and equipment. We shall therefore try to encourage over the next few years international corporations to establish their distribution operations here. As some fiscal incentive may be necessary for this purpose, the Fiscal Policy Implementation Committee has been asked to consider appropriate measures.

There should also be further development of our Financial Centre, Facilities in the forward market for foreign exchange will be further expanded to provide a sufficiently large market in foreign exchange to enable commerce and industry to hedge their future receipts and payments in foreign currencies. The Monetary Authority is also considering further measures to develop the secondary markets in fixed interest securities and Asian Dollar Negotiable Certificates of Deposit.

As for tourism, we shall encourage more convention business in Singapore by both regional and international groups. We would therefore have to expand our convention facilities with more hotel rooms and convention halls, with perhaps one large convention centre which hotels might participate jointly in developing. Convention business can best be secured at source and our hoteliers, airlines and travel agents must redouble their promotion efforts overseas to woo more such business. Government. through the Singapore Tourist Promotion Board and Sentosa Development Corporation, will supplement their efforts by developing more tourist facilities and attractions.

Wages Policy

Our past performance in manufacturing, trade and services has been assisted by policies of orderly wage increases and good labour-management relations. We must ensure that this situation continues, The National Wages Council should now consider the full offsetting from the annual single wage increase award of all increases granted since the last award whether from increments granted in wage scales or from any form of fringe benefits. In this way, we can perhaps hope to keep our wages at reasonable rates for industries competing in an extremely difficult world market, against countries beset with high unemployment and spare manufacturing capacities Countries so afflicted will provide stiff competition not only to the products but also to the services we sell. Our shipbuilding and shiprepair industries know this only too well.

While workers must put in their best efforts, employers have an equal responsibility to improve their management of personnel or of plant and machinery to increase productivity. Employers should consider the introduction of appropriate incentive schemes to reward efficient workers for their productivity. The initiative for formulating such schemes is clearly their responsibility as they have the greater resources and experience in this area. Manpower Development

Our manpower development programmes must now emphasise training in more and more specialised skills, To instil correct work attitudes in our workers, employers must provide a proper working environment, Good employers usually have hardworking dedicated workers.

With basic manpower needs largely met, we should next develop the quality of our managerial and executive grades. The new managers should possess not only management and entrepreneurial capabilities, but also technical competence in the new industries. These managers may need to learn their skills by working their way up through as many plant operations as possible. They will after all merely be repeating the experience of so many of the top management executives in the biggest multi-national corporations.

Concluding Remarks on Economic Policy

We shall continue to pursue our long term economic strategy programme for our economy's transformation to an industrial centre and a base for regional and international services. In dealing with the uncertainties and difficulties of the next few years, we shall need a more flexible approach to developments in the region as well as the major industrialised countries. To react quickly to unfavourable trends, our manufacturers, traders and businessmen must devote more effort to develop new markets, Government will, on its part, do all it can to assist and to safeguard and promote Singapore's economic interests.

FY 77 Budget Estimates

Mr Speaker, Sir, I would now like to move on to the Main and Development Estimates.

The detailed analysis in the Memorandum on the Main and Development Estimates, together with the review of public finance in the Economic Survey, should provide Honourable Members with all necessary information. I propose therefore to be brief in my remarks. But I should perhaps first comment on the changes in format that have been introduced to the Establishment List. These have been made necessary because the Government establishment system has been improved. It has been found desirable to do away with the system of grading of appointments and the payment of acting allowances for such appointments. Officers will now hold appointments in their substantive grades. Promotions will not depend on vacancies in the civil service but be on the basis of merit. The Establishment List for FY 77 will therefore no longer show grades of appointment under Heads of Expenditure. Instead the authorised manpower of each Ministry is classified according to Personnel groups and the number of posts approved for each group is shown in the Establishment List.

Expenditure

The total expenditure being budgeted for FY 77 is $5,459 million, but almost half of this will be spent on Development. This is in line with the rate of expenditure on development that has occurred over the past few years. In FY 75, budgeted development expenditure was $2,188 million and in FY 76, $2,610 million. In FY 77 it will be $2,708 million. The object is to help stimulate the economy and accelerate economic recovery. To this end the major expenditures have been allocated to those areas where Government spending has been most effective in pump-priming the economy, that is, to public housing which at $980 million represents 18% of total expenditure and to airport and road development at $394 million, Direct Government expenditure on economic services will be $1,174 million or 43% of expenditure on development. Of this.$553 million will be spent to further promote public sector investment in industrial and commercial development. The money will be disbursed largely as loans to the Jurong Town Corporation and to industrial and commercial enterprises.

This large expenditure on development will be made possible because of stringent pruning of the recurrent expenditure estimates especially on staff and manpower in the civil service. This will enable a transfer of $611 million to be made from the Main Estimates to the Development Fund. The amount of $611 million compares with $625 million in FY 76 and $500 million in FY 75 Excluding the $61 1 million transfer, total recurrent expenditure under the Main Estimates will be $2,751.1 million. This is only 11% higher than for FY 76. It is the minimum required to maintain the present level of Government services.

Staff increases have been provided only for new functions or the expansion of present activities. The net increase in the permanent establishment for FY 77 is 144 posts or 0.2% over the FY 76 establishment, a record low for the civil service for the past few years. At the same time, it must be recognised that the posts which have been approved are essential and must be filled substantively The organisation and staffing of the civil service plays a crucial role in the ability of the administration to expand judiciously and economically the very large sums of money allocated in the Budget. There are shortages of officers in a number of Ministries, especially Education, Home Affairs, Health and Defence. Recruitment is progressing and will be closer to establishment in the coming year.

In the case of Other Operating Expenditure the increase of $239.4 million or 13.8% has been kept down by stringent controls over expenditure and the more stable price levels that have prevailed in FY 76.

Revenue

We must now consider how the large expenditures in FY 77 are to be financed.

The total estimated revenue for FY 77 at existing tax rates is $3,362 million This represents an increase over the revised estimate for FY 76 of 6.3% and an improvement over the expected growth rate for FY 75 of 2.3%. Income tax is still the largest single source of revenue, with 41% of total receipts, or $1,380 million for FY 77, up 15% over expected receipts in FY 76.

The revenue of $3,362 million will be sufficient to cover the current expenditure and leave a balance of $611 million which will be available for transfer to development account.

In spite of this large contribution from revenue account of $611 million to finance development, there remains a deficit of $1,505 million. Would it not be possible to cover part of this by new or increased taxes?

Tax Changes

Honourable Members who have read the Ministry of Finance Addendum to the President's speech already know that this possibility would make no more than a marginal contribution towards reducing the large deficit. For this FY 77 Budget I am not introducing any new taxes.

Hon. Members: Hear, hear!

Mr Hon Sui Sen: As for changes to existing taxes, I propose only two small increases in taxes which will bring in some $8.8 million. However, I also intend to give several tax concessions, the cost of which will partly offset this increased revenue.

Tax Increases

Let me first take the two tax increases.

(1) Measures introduced by the Government to discourage smoking as a grave health hazard appear to be losing much of their earlier effect and now need reinforcing. I am therefore increasing the duty on tobacco and cigarettes. Duty on leaf tobacco will rise from $35 to $36 per kilo. Import duty on cigarettes will rise from $43 to $45 per kilo while excise duty will increase from $3.70 to $4 per kilo Cigars and cheroots will rise from $40.60 to $45 per kilo and pipe tobacco retail and pipe tobacco bulk will rise from $28 to $30 per kilo and $22.40 to $25 per kilo respectively. Increases are also made on other tobacco products, namely, beedies, snuff, cut rag, ang hoon and tobacco which is not elsewhere specified or included.

The revision of duty which is expected to yield an additional $2.3 million in revenue will come into effect today.

(2)With effect from today also, I am raising the import duty on intoxicating liquors. Import duty on brandy will rise from $165 to $200 per decalitre (dal) while the duty on whisky will rise from $165 to $190 per dal. Rum and gin will also increase from $165 to $190 per dal, liqueurs from $165 to $185 per dal and other spirit beverages from $215 to $240 per proof dal. Import duties on malt liquors and samsu will also increase. Beer will rise from $25 to $27 per dal, stout from $25 to $26 per dal and samsu at 60% proof strength from $125 to $130 per dal. The additional revenue yield is $6.5 million.

Tax Concessions

There will be four tax concessions.

(1) To encourage home ownership and the more stable society comprised of home owners, the present tax rates on estate duty will be revised with effect from 1 April 1977 The exemption limit will be increased from $50,000 to $100,000 and the remission limit will also be correspondingly raised from $230,000 to $280,000. The effect of this concession will be that all properties under $100,000 will pay no estate duty at all. This should cover all HDB and most HUDC flats and possibly some terrace houses. For properties valued between $100,000 and $280,000, the raising of the remission limit will also mean a reduction of tax from what would presently be payable. For example, a $200,000 house would be taxed at $3,337.50 only, instead of $8,837.50, payable under the existing estate duty liability. The easing of the exemption and remission limits on estate duty should ensure that in almost all cases, families will not lose their houses because of too heavy estate duties

(2) This concession is for about 1,700 resident pensioners who are paying income tax on the pensions they receive, mostly as Government pensioners.

I propose to revise the basis of the tax on their pensions. The pension periodically paid to them is similar to the annuity paid by insurance companies for which Members will remember the tax concession I previously gave by remitting the tax on the portion of it representing a capital repayment. Similarly, the pension payment may be treated as comprising two elements, one element being part repayment of capital and the other, payment of interest on the capital. At present. both elements are subject to income tax. Only the interest portion should properly be considered as income and taxed accordingly. This I therefore propose to do. For purposes of assessment, it will be convenient if the interest element is treated as one half of the pension. Effectively, therefore, tax will be payable on only half of the pension. This concession will, however, only apply to resident pensioners. The revenue loss is estimated at $600,000 per year.

This will take effect from Year of Assessment 1977.

(3) To further develop Singapore as a financial centre and its Asian Dollar Market from its present gross size of US$17.3 billion, the tax on income derived from Asian Dollar Market operations will be streamlined. The 10% concessionary tax will now be extended to cover all offshore income derived from Asian Dollar Market operations other than exchange profits and transactions with domestic banking units and residents.

Specifically, income derived from transactions amongst Asian Currency Units (ACUs) and with banks outside Singapore will be taxed at the rate of 10%, and the necessary certification requirements from banks overseas will be abolished. Such transactions include dealings and holdings of foreign currency, negotiable certificates of deposits and bankers acceptances, broking, and dealings. holdings, floatation and underwriting of Asian Dollar bonds.

The present formula of establishing profits to be taxed at the concessionary rate has not worked satisfactorily. The formula will be modified to ensure that offshore operations will enjoy in full the concessionary tax rate of 10%.

This concession will take effect from Year of Assessment 1978, that is, to cover earnings in 1977.

(4) Because of our locational advantage and good business infrastructure, Singapore has the potential to become an important centre for reinsurance business. However, the high tax rate of 40% imposed on the income of resident companies, whether such income is earned within or outside Singapore, has offered little incentive to reinsurance companies to retain their premiums in Singapore. I am therefore changing the tax on income from reinsurance business to a concessionary rate of 10%.

This concession will take effect also from Year of Assessment 1978.

Government Borrowing

As the yield from the two tax increases is partly offset by the loss in tax concessions, the deficit of $1,505 million shown in the Estimates is not significantly changed in amount. To meet such deficit, there could be some drawing down from the Development Fund of the surpluses that have been accumulated over the years. Another possibility is for the Government to borrow to make up the shortfall. How much of this will eventually be met from borrowings and how much by drawing down our reserves, it is too early to say.

Our capacity to borrow is indicated by the increase in 1976 in our domestic debt by $1,501 million, and in our external debt by $117 million. The recent Swiss Loan of 50 million Swiss Francs which was successfully floated at a coupon rate of 5 1/2% and an issue price of 99 shows our high credit standing in international markets.

Concluding Remarks

Mr Speaker, Sir, we have weathered severe economic storms in the last 3 1/2 years I hope nothing as shocking as the 1973 oil embargo and quadrupling of oil prices ever happens again. The weather is getting fine and fair and our Ship of State is in good shape. The command should therefore be "Steady as she goes."

Mr Speaker, Sir, I beg to move.

Mr Speaker: The Question is. "That Parliament approves the financial policy of the Government for the financial year 1st April, 1977 to 31st March, 1978." In accordance with paragraph (1) of Standing Order No. 84, the debate now stands adjourned.

Mr Hon, debate to be resumed on what day?

Mr Hon Sui Sen: On 11th March, 1977.

Mr Speaker: So be it.