SECTION II - THE FY87 BUDGET

The slowdown in our GDP growth since 1984 and the tax cuts introduced in 1985 and 1986 have resulted in a substantial decline in tax revenue. The principal considerations in preparing the FY87 budget have therefore been to:

• ensure that recurrent expenditures are restrained so as to allow the recurrent budget to be balanced or to show a small surplus which could be used to fund development programmes which support economic recovery and longer-term economic growth

• minimize the overall budget deficit so that Government reserves are not run down significantly.

Recurrent expenditure increases for FY87 have been kept to the minimum necessary to maintain current levels of public services. Allocations for infrastructural development and capital assistance to the industrial and services sectors have, however, been stepped up.

Total Government spending in FY87 is estimated to be $18.67 billion, about $2.35 billion or 14% higher than the revised FY86 expenditure. Development outlays account for slightly more than half of total expenditure. As a proportion of GDP, Government expenditure is expected to rise from 43% to about 47%. This is largely due to a "once-off" increase in domestic debt servicing costs. Excluding debt servicing, the expenditure to GDP ratio will, in fact, drop slightly - from 40% to 39%.

Recurrent expenditure in FY87 is projected to reach $8.97 billion, about $2.58 billion or 41% higher than the revised FY86 level. Debt servicing costs account for $2.19 billion or nearly 85% of the increase. Excluding debt servicing, the estimated increase in recurrent expenditure would be about 7.7%, much lower than the average annual increase of 15% over the FY80-85 period.

The larger part of the increase in debt servicing costs is due to a "once-off" payment of $1.45 billion in backdated interest on CPF advance deposits which are expected to be converted to domestic registered stocks in 1987.

Pension payments are expected to rise by $11 million or 6% because of higher ex-gratia payments to officers leaving the Service.

Operating expenditure of Ministries and Organs of State is projected to go up by $389 million or 7.7%. Expenditure by the Ministry of Defence is expected to be $94 million higher than in FY86. Expenditure by the other Ministries and Organs of State will increase by $295 million or 10%.

A provision of $3.23 billion is set aside for the recurrent expenditure of the non-Defence Ministries and Organs of State. Of this, $1.68 billion or 52% is for Expenditure on Manpower, $0.59 billion or 18% for Other Operating Expenditure and $0.96 billion or 30% for Grants, Subsidies and Other Transfers.

Expenditure on Manpower is projected to increase by $89 million or 5.6% - much lower than the average annual increase of 14% over the period FY80-85. The moderate increase is due to the wage restraint policy and a reduction of nearly 1,160 posts from the authorized staff establishment. The reductions are possible following deletions of long-standing unfilled vacancies, implementation of mechanisation, automation and computerization schemes, organisational reviews and changes in work procedures. The reductions are also in line with the objective, which I announced in my Budget Statement last year, of reducing the overall public sector manpower complement by 10% by the end of this decade.

The gradual reduction of staffing levels and restraints on operating costs are part of an overall programme to improve productivity and enhance efficiency in the Civil Service. Members will recall that in my Budget Statement last year I announced the introduction of a programme of manpower scrutinies in the public sector. The scope of these scrutinies will in the coming year be widened to cover not only manpower requirements but also the running costs of activities. The scrutinies will involve a critical "zero-base" examination by Ministries and Statutory Boards of their major activities. Scrutinies will assess whether particular activities are necessary and, if so, whether they could be done at lower costs and with less manpower. Alternative means of achieving objectives including "privatization" of selected services and the contracting out of functions will be examined in the course of the scrutinies. The ultimate objective will be to ensure that public services are provided at least cost to the tax payer.

Other Operating Expenditure of Ministries and Organs of State is projected to increase by $52 million or 10%. The larger part of the increase is due to provision being made for the Ministry of Health to contract out to the private sector the supply of pharmaceutical materials of hospitals consequent upon the decision to wind down an old Government phar- maceutical manufacturing facility and to farm out catering services at the Singapore General Hospital. Because of stringent control of operating costs, Other Operating Expenditure of the other Ministries and Organs of State is expected to increase by less than $22 million or 5%.

An increase of $153.6 million or 19% is expected in expenditure on Grants, Subsidies and Other Transfers. Of this, $50 million is for the creation of revolving funds for the provision of loans to NUS and NTI students to assist them in meeting the planned increases in student fees, details of which have been announced by Dr Tony Tan, the Minister for Education. Another $42 million is to finance the operating deficits of the tertiary and technical education institutions, aided schools and other Government-funded Statutory Boards. The HDB will be provided with a subsidy of $62 million to meet its operating deficit. This would be in addition to loan funds and capital subsidies totalling $6.26 billion provided under the development budget.

Development expenditure for FY87, inclusive of capital grants and net lending to Statutory Boards and public enterprises, is estimated to be $9.70 billion, a drop of $237 million or 2% compared with the revised FY86 expenditure. The drop is mainly due to a substantial decrease in loans to HDB for its construction programme and for purchases of land required for public housing.

Direct development expenditure by Ministries and Organs of State is projected to be $1.55 billion or 75% higher than the revised FY86 estimate. The larger part of the increase is due to the provision of $1.26 billion for the purchase of Government land no longer required by the Urban Redevelopment Authority and the Jurong Town Corporation.

A provision of $3.39 billion is budgeted for capital grants to Statutory Boards and other institutions. Almost a third of this is for the MRT system. A sum of $228 million is earmarked for the expansion of facilities at vocational, industrial training and tertiary educational institutions. Capital assistance by the EDB to industries and the services sector will be stepped up substantially. Such assistance is expected to double to about $200 million. The provision for capital grants includes an allocation of $1.67 billion to finance the losses incurred by HDB on sales of flats and other capital-related expenditure.

Of the total provision of $5.71 billion for loans, $4.6 billion or 81% is for the HDB and the balance is to meet the requirements of the EDB, Temasek Holdings and other public enterprises. Some $1.9 billion of the provision for loans to the HDB is for the purchase of state land required for public housing and the balance to finance construction activities. The EDB's industrial loan scheme is allocated a sum of $600 million, a very substantial rise over last year.