ANNUAL BUDGET STATEMENT

3.17 pm

The Minister for Finance, Minister for Education and Minister for Health (Dr Tony Tan Keng Yam): Mr Speaker, Sir, I beg to move,

That Parliament approves the financial policy of the Government for the financial year 1st April, 1985 to 31st March, 1986.

Section I

The Annual Economic Survey (Cols. 513 - 804), which reports on the performance of our economy in 1984, has already been distributed to Members and the details have been widely reported in the Press. My colleague, the Minister for Trade and Industry, has also commented this morning on our economic performance. I, therefore, do not intend to go over the same ground. Instead I should like to take the opportunity in this Budget Statement to look further afield, to try and discern what will be the state of our economy in 1985 and over the next four to five years. What are the economic problems which will loom large? Where are the opportunities that we can exploit? What economic strategy should we adopt in order to enable us to continue our fast rate of economic growth and improve the quality of life of our people.

Before we can chart our course for the future, we must first take stock of our present situation. The outlook for 1985 at this point of time is not as rosy as for last year. Our economic growth this year is likely to be lower than the 8.2% recorded in 1984. But growth there will be and we should not let a temporary slackness in business blind us to the very considerable progress we have made in the last five years.

The Economy in 1980-84

Notwithstanding the prolonged world recession in 1980-82, the most severe the world has experienced since the Second World War, the last five years have been years of exceptional prosperity for Singapore and for Singaporeans. Singapore's gross national product (GNP) grew at an average rate of 8.5% per annum in real terms in the period 1980-84. As a result our per capita GNP increased from $9,400 in 1980 to $12,600 in 1984 at 1980 prices, a rise of 34%. As a proportion of Japan's 1980 per capita GNP of $19,100, Singapore's per capita GNP has risen from 49% in 1980 to 66% in 1984. If we continue to do as well in the next five years as we have in the last five years, we will attain our target of reaching Japan's 1980 per capita GNP before the end of this decade.

Our workers have benefited substantially from this rapid economic growth. We have had full employment throughout the last five years. The highest unemployment rate during this period was just over 3%. The unemployed mainly comprised those who were in-between jobs or fresh school leavers or University graduates. Unlike the situation in almost every other country in the world, no worker in Singapore has been unable to get a job if he wanted one.

With full employment and rapid economic growth the average earnings of workers in Singapore have increased significantly. After discounting for inflation, earnings have increased on average more than 8% per annum over the last five years. Consequently the standard and quality of life of workers in Singapore has improved. More Singaporeans are employed in better-paying and higher skilled jobs. With the setting up of more sophisticated industries and the diversification of our economic activities, the value-added per worker will rise further, particularly for those workers who upgrade their skills.

Despite rapid economic growth we have managed to hold down our inflation at a level which is far lower than that experienced in other countries. The average rate of inflation in Singapore in the last five years was 4.9% in a period when double-digit inflation rates were the rule rather than the exception in many parts of the world. Our low rate of inflation is a direct consequence of our policy of maintaining the free-enterprise open trading system in Singapore so that our traders are able to import our requirements of goods and services from the cheapest suppliers in the world.

Strong economic growth has generated a surplus in the balance of payments every year. The balance of payments rose sharply from $1.4 billion in 1980 to $3.2 billion in 1984. The Singapore dollar is regarded as one of the soundest currencies in the world.

The strong confidence in Singapore by the international business community is reflected in the healthy level of investment commitments. On the average, about $1.7 billion of investment commitments were made annually in the last five years. These investments provide the cuffing edge to upgrade our industries to a higher level of sophistication thereby introducing a new range of skills and products to our economy.

The Private Sector as the Engine of Growth

So much for the past. What of the future? How can we continue to build on our strengths and minimise the adverse effects of our weaknesses? In what areas of economic activity do we have a comparative advantage over other countries? These are the vital questions which I will now address.

By the standards of the older industrialized countries, Singapore is still a very young nation. The economies of the developed countries grew and matured over a period of centuries during which private enterprise flourished, laying the foundation for the modern industrial state to be found in Europe, America and Japan today.

We have not had the luxury of time in Singapore. We are a young, impatient, high-achieving society who will not be content to wait for decades before acquiring the attributes and accoutrements of a modern industrialized society.

To accelerate the pace of development it was necessary for the Government to intervene in the economy on a large scale. And over the last 25 years the Government in Singapore has ventured into areas which would traditionally have been regarded as being the preserve of the private sector and not within the province of government. In my view such intervention was necessary in order to build up our economic base. If the Government had not taken the initiative in areas where the private sector was hesitant, especially in the earlier years when the political climate was unsettled, our economic framework today would be a far cry from the strong, resilient structure which has enabled us to weather so many economic storms.

The Government's involvement in business activities commenced in the early 1960s. Government then had a handful of companies under the auspices of the Economic Development Board and the Ministry of Finance. With intensified industrialization and steady economic growth, other Ministries and statutory boards started to form companies to carry out some of their operations which were more commercial in nature. The original objectives of Government companies were to promote economic growth, provide employment and to encourage domestic capital formation.

But conditions have changed. There is ample capital in Singapore today and instead of massive unemployment we have a labour shortage. Policies which were correct when we were in the early stages of development are no longer appropriate now that we are on the verge of becoming a newly industrialised society. In the 1980s the engine of economic development should be the private sector and not the Government. The private sector must be encouraged to set the pace in leading Singapore to a new economic era.

Towards this objective the Ministry of Finance has over the last year conducted a thorough review of Government's role in business activities. Following the review, the Ministry has decided that the following guidelines should be followed for all Government companies, including those which are owned by the statutory boards:-

(a) Government will invest in new priority industries only where private entrepreneurs do not have the will or the money to undertake projects on their own or where it is essential for Government to provide the entrepreneurship;

(b) Government will divest its shares in companies where it does not have a majority stake and where it is not essential for Government to have effective control;

(c) Unlisted Government companies will, wherever possible, be listed on the Stock Exchange;

(d) For critical companies which are considered to be vital to the national interest, Government will maintain a controlling interest but will invite participation from the public through listing on the Stock Exchange.

The Ministry of Finance has also strengthened its control of Government companies. All companies owned by Government or statutory boards have been brought under the supervision of a high-level committee in the Ministry of Finance chaired by the Minister for Finance. This committee is responsible for reviewing expansion plans and setting the policy guidelines for investment and other important matters. This does not mean that Government is taking over the running of Government-owned or Government-controlled companies. The management of these companies is the responsibility of their respective boards of directors and senior executives and it would not be desirable, in my view, to hobble Government companies to such an extent that the managements are inhibited from making normal commercial decisions without reference to the Ministry of Finance.

The Problem of Labour Shortage

One of the major problems which has hampered the operations of the private sector over the last few years has been the severe shortage of labour. Since the 1970s Singapore has had, in a sense, overfull employment. Our economy has expanded faster than can be serviced by the number of new workers who join the labour force each year. Demographic projections show that in the next five years our indigenous workforce will grow by at most 1.5-2% per annum even if we succeed in encouraging more women to continue working after they have children.

The solution to our labour shortage cannot be an indefinite and ever-growing dependence on foreign workers. The experience of countries, which have indiscriminately allowed large numbers of foreign workers to settle permanently, shows that this gives rise to social and political problems of such a magnitude as to threaten the cohesiveness and stability of their societies. The ultimate solution to a slowly growing workforce must be high productivity and a mature economy.

In the meantime, however, we have to be realistic and recognize that our industries will require some time to upgrade to highly sophisticated brain-intensive industries. Repatriation of the foreign workers who are already here should therefore be more gradual in step with this upgrading process. It must not be too fast or too abrupt as to compound the labour shortage.

Our repatriation policy on foreign workers should provide for the retention and assimilation of skilled workers who can form part of our permanent workforce. Unskilled foreign workers should be limited to sectors like construction and shipyards for those jobs where it has proved difficult to employ Singaporeans or, where necessary, to accommodate temporary shortages. Such unskilled foreign workers can form a revolving pool on short-term work permits. When their permits expire, they should be replaced by other foreign workers so that they will not sink permanent roots in Singapore.

To ensure that the repatriation of foreign workers will not be detrimental to our economic activities, Government has therefore decided that the repatriation will be administered more flexibly taking into account particularly the needs of manufacturers, hoteliers, shipyards, construction companies and working mothers. Government will liaise closely with industrialists and employers so that they do not suffer undue difficulties with regard to shortage of labour.

Let me, however, make clear that this more flexible policy on foreign workers should not be misconstrued to imply that we are re-opening the tap to an unending supply of foreign workers. Over dependence on unskilled foreign labour will retard our economic upgrading as employers will have less incentive to mechanize and automate their operations.

Cost of doing business in Singapore

I now turn to the problem of wages which, for most companies, comprise the largest component of their recurrent expenditure, Rapid economic growth in the last few years compounded by the shortage of labour has pushed up wages, sometimes beyond those warranted by increases in productivity. Now that our wages have risen to a level which is in line with the quality of skills of our workers, further increases can only be justified if there are corresponding increases in productivity.

In addition to direct wages statutory contributions have, to a certain extent, added to the cost of doing business in Singapore. In this respect some employers have raised concern as to whether the rate of CPF contributions which now stands at 50% of wages, half from the employers and half from the employees, is likely to be raised further. It is Government's view that this rate of 50% is adequate in order to provide for the employee's old age needs as well as to help him to buy his home and for his medical expenses. There should be no need to raise CPF contributions any further.

The Skills Development Fund has also been the subject of comment in the Press and among employers' associations in the last few days. The SDF has, in my view, served a useful purpose in that it has focused the attention of employers and managers on the need for training and manpower development and concentrated the minds of companies on the importance of investing in training to upgrade the skills of their workers. However, as the SDF has accumulated a sizeable balance, I am of the view that it would be possible to lower the rate of contribution without jeopardising the scope and effectiveness of SDF programmes. With effect from 1 April 1985 the SDF levy will be 2%. A review will be conducted at the end of three years to determine whether this rate will be maintained or revised.

In addition to statutory contributions we must make sure that costs of operating a business in Singapore are not unnecessarily inflated by other indirect taxes, tariffs and fees.

In this regard I am glad to note that the Jurong Town Corporation (JTC) has decided to freeze its rentals on industrial properties. Also in June this year the Port of Singapore Authority (PSA) will revise and simplify its tariffs in order to give incentives and rebates to make it even more attractive for ships to call here. Vessels coming into our shipyards for repairs will pay up to 25% less in port dues while, for example, a third generation container ship will enjoy a reduction of about 10% in its overall cargo handling bill. PSA and JTC are good examples of statutory boards which have responded sensibly to market forces. Other statutory boards should follow suit.

External Constraints on Growth

I will now discuss the external constraints that can have an adverse effect on the economy of a developing country like Singapore. Among these external constraints, three are particularly worrying:-

(a) Instability of the world's financial system.

(b) Growth in protectionist sentiment, and

(c) The re-industrialization drive in the developed countries.

In 1982 the world's banking system teetered on the brink of collapse as the inability of a number of developing countries to repay their international debts threatened to bring down the fragile structure of international credit which lies at the heart of the world's banking system. Fortunately through swift and timely intervention by the international monetary agencies and the central banks of the major developed countries the crisis was averted and the debts were rescheduled. Since then there have been minor crises, as debts become due for repayment but each time temporary solutions have been found which have postponed the day of reckoning. Nevertheless the vast overhang of the developing countries' international debt amounting to some US$900 billion as at end-1984 still hangs over the international financial system. The situation cannot be regarded as healthy until a more permanent resolution of the debt problem is found.

A further complication in recent years has been the very large budget deficit of the United States which has caused vast amounts of capital to be drawn into the United States from the rest of the world, forcing up interest rates and giving rise to currency instability. The US budget deficit has reached limits which would have been thought to be inconceivable even as short as five years ago. Everyone recognizes the dangers of a sudden loss of confidence in the US dollar at some date in the future but unhappily no economist or monetary expert has been able to come up with a convincing plan to get the world out of this quandary. Fortunately for Singapore our ample reserves, built up painfully over the last 25 years, and our sound currency have enabled us to mitigate the worst effects of the currency upheavals.

A danger equal in magnitude to the instability of the world's banking system and perhaps even more malignant because it is less visible is the steady growth of protectionist sentiment in the developed countries.

High rates of unemployment in the developed countries caused primarily by their inability, due to political and social factors, to make the necessary structural adjustments in their economies have resulted in pressure being brought by the electorate and trade unions on politicians and governments to resort to protectionist trade measures in order to protect domestic industries. These protectionist measures are often taken outside the framework of GATT rules. In almost all our major markets we are facing an increasing array of both tariff and non-tariff barriers.

The danger that protectionism can pose for Singapore can be gauged from the fact that our external trade is more than three times our gross domestic product. What this means is that we are more vulnerable than most other countries to protectionism. Our prosperity depends crucially on our being able to get continued access to overseas markets.

Protectionism affects us adversely in two ways. First, and more obvious, it hinders our exports particularly our domestic exports, thereby impeding the growth of our domestic industries, Second, growing protectionism encourages multinational companies to invest in countries where the markets are rather than in countries which can offer more efficient off-shore production.

If we try to combat protectionism by erecting protectionist barriers ourselves, we shall bring perdition upon ourselves. Our free trade policy has served us well and we will continue this policy. But we will have to work through GATT and other international organizations to press the case for a more liberal international trading system or at least to slow down further encroachments on free trade. The Government will do its utmost in this field but our exporters must also be more aggressive in their marketing strategies.

Our exporters must search for the right niches in the world market where we can be internationally competitive, We must maintain our flexibility and be adept at adjusting to new developments and changes in our markets. Counter-trade, for example, has become a new feature of international trade. Singapore firms must quickly grasp the complexities of these new arrangements and seize the opportunities that will be thrown up.

The Government will draw up appropriate programmes to help our exporters to achieve these objectives. In addition, new entrepreneurial talent will be identified and nurtured to become the next generation of Singapore exporters. The Trade Development Board (TDB) will help Singapore firms to increase their share of traditional markets overseas and to penetrate new markets. The TDB's network of overseas offices will be strengthened and an effective system will be developed to provide Singapore exporters with up-to-date commercial information.

Another hurdle which Singapore has to face in our efforts to attract investments is the re-industrialization drive in the developed countries, sparked off by the large scale use of automation and mecha- nization. When a factory uses automate manufacturing processes on a sufficiently large scale, the unit labour cost is reduce dramatically. This can offset the differenttial in the cost of labour between the developed and the developing countries. Companies which have modernized their factories have less incentive to locate their manufacturing operations in off-shore production centres.

Although we have, on the whole, been able to maintain a high level of foreign investment commitments, we have noticed a disturbing trend in the pattern o investments in the last few years. Excluding petroleum and petrochemicals, slightly more than half of all investment commitments in 1980 were by new foreign investors. In 1984 only 30% of such commitments were new, the balance coming from expansion and diversification by companies already operating here.

To continue our economic growth we must seek to establish Singapore as a producer of specialized products and services. This will require us rapidly to improve the quality and design of Singapore-made products and specialized services so that we can attain world class standards.

In manufacturing, our comparative advantage will lie in:-

(a) the products which we can manufacture for the regional market, and

(b) the production of high value, skill-intensive, low-weight goods for the world market, for example, computer peripherals, medical diagnostic equipment and sophisticated control devices.

There will also be opportunities in the production of high-value custom-designed, one-off products designed for specific purposes, for example, process plants, automation systems and ocean engineering equipment. Such specialized manufacturing will enable us to overcome the barriers of protectionism and distance from our major markets.

However, the greatest promise for Singapore in future years lies in the area of sophisticated services. This is because world trade in services is today growing twice as fast as trade in goods. We must use our expertise and our experience in manufacturing to branch out into engineering and technical services, especially computer software. We should also move more aggressively into banking and finance, telecommunications, transportation and tourism.

Our next stage of development as a financial centre will be in the promotion of fee-based financial services. This is a high value-added economic activity which requires high calibre expertise. It can generate spin-offs for the whole range of supporting services such as telecommunications, legal and secretarial services, financial, printing services, travel and hotel services.

Another major area of promise is travel and tourism. Travel and tourism is the largest internationally traded service. As an economic activity tourism is highly resilient. It has kept on growing even after the first and second oil crises. A Tourism Task Force set up in August 1984 has made a number of proposals which have been endorsed by the Government. The proposals will form the basis of the Singapore Tourist Promotion Board's efforts to develop Singapore as a major tourist destination. Government will provide financial assistance in order to enhance existing tourist attractions and to develop new ones. Tourist projects undertaken by private investors will be given tax concessions. To develop Singapore as an entertainment centre, the duty on most categories of entertainments will be significantly reduced from the current rates of 25% and 35%. Tax benefits will also be considered for those who participate in approved overseas sales missions.

Over the longer term there is potential for the export of construction, hotel management, architectural, legal, accounting and engineering services. With the addition of 15,000 new hotel rooms, a new corps of hotel managers will emerge. Given time our hoteliers will be in a position to sell their services abroad.

Land and Water

Having discussed the domestic and external factors which can affect our economy, I now pass on to the two physical constraints which can ultimately circumscribe our capacity to grow. These are land and water.

Although we have added 3,613 hectares, some 6.2%, to our land stock from 1967 to 1984 through extensive and expensive reclamation, there is no denying the fact that Singapore is a small island and we are severely limited in our land resources when compared to our neighbours. There is a multitude of purposes which compete for the use of land in Singapore: housing, defence, commerce, industry, education, recreation and basic infrastructure such as reservoirs, roads, ports and airports. It is vital that we utilize our limited supply of land as efficiently as possible. The most effective way to ensure the optimum use of our land resources is, as far as possible, to allow market forces to dictate the allocation and pricing of land, We should try to remove bureaucratic hurdles which distort the economic use of land.

As the major owner of land in Singapore, Government should ensure that there is an adequate supply of land in order to prevent prices from escalating. But Government should never release too much land at any one time so as to create a property slump, Until the demand for property catches up with the supply that is in the pipeline, I see no need for Government departments or statutory boards to embark on new commercial or office developments.

There has been some concern in recent years that the high prices of properties and rentals in Singapore have lessened the attractiveness of Singapore as a place to do business. With the increased supply of housing units, shops, offices and factories that are now coming on-stream, the problem will be resolved through the operation of market forces.

We should not let the temporary over-supply of property cloud our judgement. Land is finite in Singapore and it is desirable that we should constantly plan for its optimum utilization. In this respect I am of the view that it is timely to review the pre9ent level of development charge which is predicated at 70% on the enhanced value of land. Development charge is basically a tax on the enhanced value of land as a result of more intensive development or a change of zoning. It is fair that land owners should return to the community a sizeable portion of the enhanced value of land development, but the Government will review whether a lower rate may be more effective in fostering urban development thereby being more beneficial to Singapore in the long run.

Even more crucial than land is our limited supply of water. Average water demand in Singapore in 1984 was 185 million gallons per day (mgd). This was an increase of 7% over 1983 demand and is higher than the average annual increase of 6% recorded over the period 1980 to 1984. In particular, restaurants and some non-domestic users have shown large increases in their consumption of water. We must bring down the rate of growth of our water demand. Otherwise we run the danger of using up all the available water supply in our reservoirs and from Johore in less than 15 years.

Conclusion

I shall conclude this first part of the Budget Statement by reiterating the basic fact that education and training is the cornerstone of our economic upgrading strategy and the key to a better life for our people. This is the reason why over the last five years we have expended great effort and money into expanding and improving our various educational and training institutions. The results of education and training take time to materialize. It is only this year that larger numbers of trained personnel from our institutions are coming on-stream.

Over the last five years enrolment at the National University of Singapore and the Nanyang Technological Institute has risen from 8,640 in 1980 to 14,670 in 1984. In 1980 the total output of engineers was only 265. By contrast in 1985 with the first batch of practice-oriented engineers graduating from the Nanyang Technological Institute, the total output of engineers will increase to 784, a three-fold increase in five years.