ANNUAL BUDGET STATEMENT

12.16 pm

Order read for Resumption of Debate on Question [4th March, 1987] [2nd Allotted Day],

'That Parliament approves the financial policy of the Government for the financial year 1st April, 1987 to 31st March, 1988.'. - [Minister for Finance].

Question again proposed.

Mr Leong Horn Kee (Thomson): Mr Deputy Speaker, Sir, last year's budget was hailed as a stimulative budget. Several tax incentives were introduced and firm measures were taken to revive the economy. It was a fix-it budget. In comparison, this year's budget does not contain many tax incentives. The Government is allowing the measures implemented last year to continue to work their full effects through the economy. We are already seeing the efficacy of these measures. Within one year we have a rapid recovery of the economy which is being nursed back to health by a strong medicine: a combination of cost-cutting measures and reduction of taxation.

As I see it, Sir, in this year's budget the main feature is the incentive for the third new-born child. The $20,000 tax rebate and other reliefs offered are quite generous. So some Members have called this year's budget as a procreative budget. On the incentive of the $20,000 tax rebate and other reliefs for the third child, I agree with the Member for Bukit Timah who last Friday in this House suggested that the Minister should consider backdating the eligibility to one or two years earlier. A few residents have also approached me on this issue. They felt that the Government should at least backdate the policy to the time when the Government started public discussion of the procreation problem. Couples who took immediate measures to respond to the Government's call to have more babies should be equally rewarded. Otherwise, people would be hesitant in future to act too fast. By catching the stork early, they have now missed the boat.

I would suggest that this flexibility in the approach of the Government should be introduced, especially nowadays when the Government is introducing many new policies. For example, we have the procreation problem, and we have the town council policy and other new policies such as the independent schools. When policy changes are being introduced, the Government should consider that the people are temporarily thrown into a state of confusion. During such transition period, it would be better for the Government to allow for more flexibility. Sometimes for good reasons, even Government policies have been made with retrospective effect. Hence, in this case of the third child incentive, I would appeal to the Minister to consider backdating the eligibility period.

Besides the procreation incentive, I think the other key feature in the Minister's budget this year is the forecasted huge overall deficit of $3.75 billion. This deficit is after taking into account the transfer of $1.5 billion from the statutory boards. Without this payment, the overall deficit would have been higher, amounting to about $5.25 billion. Just to give an idea of the size of this deficit of $3.75 billion. If I were to recall correctly, our national foreign reserves as at last year was about $30 billion, perhaps valued at cost. A deficit of $3.75 billion in one year amounts to about 10% of our foreign reserves. Any man-in-the-street will be much concerned about the need to draw down on the reserves to cover the deficit. Compared to the actual overall deficit of $1.4 billion in the public sector in 1986, the pendulum swing to a projected minus $3.75 billion in FY 87/88 is a most dramatic change.

I know that the Finance Minister has a very strong and capable team of officers in his Ministry. They are known for their very efficient revenue collection and their strict control in expenditure. However, for once, I do hope that they have got their calculations wrong this time. I hope that this deficit situation will not be a sustaining one or a long-lasting one. The Minister has quite rightly pointed out that the Government sector cannot sustain such structural deficits. The Minister stated that the projected $3.75 billion deficit would be financed through two means. He mentioned domestic borrowings and a drawdown on the reserves. Both these measures are only temporary solutions, for we cannot continue to depend on borrowing or a drawdown on the foreign reserves should there be continued structural deficits. The Minister also hinted on the need to impose consumption tax so as to increase revenue. I would like to say that imposing excessive consumption tax will not be very palatable with the people.

The shortcoming of a yearly budget forecast exercise shows up in this particular case where we see a huge deficit of $3.7 billion for this year. I would like to ask the Minister whether he also has a longer term 5-year forecast to let us know how this deficit situation would be like in the next five years. In addition, perhaps the Minister could be kind enough to allay our fear that there will not be such a problem of structural or chronic deficits in future years. Hopefully, he has some magical formula or magical wand to wish all these deficits away in future. In addition, can the Minister elaborate on how he actually intends to finance this $3.75 billion deficit in FY 87 and, if possible, how would he avoid the undesirable measures that would not be quite palatable to the people?

As the deficit could be a structural problem, perhaps I would like to suggest to the Minister to look into how to structure a balance between revenue and expenditure. In this regard, I would like to suggest that at least on the revenue side, the Government should put a hold on any more future changes; ie, not to introduce any more new taxes such as consumption tax and at the same time not to accede to the request of many Members to cut corporate tax or income tax further. The Minister should, in fact, take a hard look at the other side of the equation which is the expenditure column. I would like to propose that there should be a firm and concrete plan on how the Government could trim down the public sector. The Government should hasten its move to reduce its involvement and dominance in the business sector. It should set a certain target to reduce the public sector within a certain period of time. This is in line with the stated policy of passing more initiative back to the private sector.

Rather than bringing the statutory boards into the total accounting of the Government, I would like to suggest that the Minister should, in fact, consider passing back more initiative to the private sector by privatizing more statutory boards and Government departments. However, as most of these statutory boards are functioning as monopolies, I would like to see measures being introduced to check on their efficiency and competitiveness. A good example of how this has been achieved is in the case of the public listing of the Singapore Bus Services and the formation of new bus companies to compete with the SBS. Hence the Government should seriously consider privatizing some large statutory boards. Four examples that come to my mind are Telecoms, PSA, HDB and JTC. While allowing these statutory boards to be privatized, the Government should also allow the formation of new companies to compete with these statutory boards, provided of course, that economy of scale can be maintained. For example, if we were to privatize the PSA, JTC or Telecoms, we should allow other companies to operate and provide alternate services. And in the case of the HDB, perhaps the new Minister for National Development will be now conducive or agreeable to even privatize the HDB and allow private developers to build HDB flats. In this way, perhaps the Member for Potong Pasir, who is presently not in this House, can also consider forming a company to build HDB flats and make huge profits as he has always imagined that he could do.

Sir, on this note, I would like to conclude by expressing my general support for the Government's financial plan for FY 87/88. 12.28 pm

Dr S. Vasoo: Mr Deputy Speaker, Sir, in view of the time constraint, I will try and be as precise as possible. I would like to share the viewpoints expressed by my colleagues on how to stimulate the economy. What is important I think is to examine critically the various assets held by GLCs and see how such assets can be redeployed to activate the private economy.

Sir, turning to the procreation budget, I would like to make some observations. Firstly, I would like to commend the Minister for implementing various policy measures to encourage procreation in order to arrest the declining birth rate. I feel that he is moving into uncertain waters and I hope that his venture will produce results. Sir, the whole subject is a very elusive area because it touches on personal decisions, not necessarily influenced by monetary incentives. One housewife gave a very graphic account. She said, "Do you think we will respond like vending machines to tokens? You have a hope. I hope that your policies will work. It has come too late too little." This is an account given by one of the housewives. On reflection, I think she has a point. But in any case, we will have to try and see how we can institute more non-monetary incentives to help people see how they can participate in reversing the declining population.

Sir, there is this social and psychological cost which outweighs the benefits arising from the tangible monetary incentives that have been allocated. Rational behaviour therefore dictates that people tend to look at these issues before trying to get on with the issue of procreation. Sir, more parents are now reflecting whether the monetary incentives, high salary, extra-professional recognition, can make up for leaving behind an upset child each morning. Even with the best child care, parents still worry about whether it will provide the warmth and support of the child who is left behind. Sir, in a recent study of corporate women officers in the US, the respondents ranked quality time with children as the primary personal sacrifice. Sir, we need to have more than monetary incentive to overcome parents' guilt and concern over the effects of having children and of not being able to care for them adequately. Sir, it is the executive guilt that I think we will have to deal with. I feel that unless we are able to deal with this executive guilt, the procreation policy may not necessarily work.

Sir, may I quote from a study done by Fortune on this aspect. It states:

'Parents generally do not wear their guilt on their sleeves. Those answering the Fortune survey were no exceptions. Most said that they were very satisfied with the child care solutions they had found and were convinced that children of dual career couples are more independent, more socially adept and have interesting role models of parents. But they also admitted to many anxieties. 61% worried that their children were rushed to conform to the parents' schedule and 57% were concerned that their children did not get enough attention.'

Sir, these are some of the crucial issues which, I think, parents, who want to have additional children, will be confronted with. I feel that unless and until more non-monetary incentives could be designed and implemented, we may not actively deal with the whole problem of procreation.

What more non-monetary incentives are being planned by the Government? The current monetary incentives are not too attractive. Further steps could be taken by: (1) Increasing the unrecorded leave to 30 days. This is to enable parents to attend to their children in the event they fall sick. (2) To provide flexible working hours, where necessary, to housewives. (3) Increase the number and the quality of child-care facilities, particularly at workplaces. (4) To strengthen the family day- care programme because family day-care programme provides a more personal attention to children.

Sir, the monetary incentives for enhancing procreation are directed at the top 5% of the wage earners which account for about 40,000 people. This emphasis may not produce the procreation effect because this group of people are more concerned about the responsibilities of parenthood and the psychology of parenthood. They are not concerned about procreation itself.

Sir, how many people would benefit from this special tax rebate of $20,000 for the new-born third child? If the Government is serious about family formation and procreation, it must then direct its effort at encouraging people with less children to have more. It is therefore necessary besides non-financial incentives to increase the enhanced child relief to 20% for the third and fourth child. As you all know, having more children means there is an increased burden of child care, and if we are going to encourage people to have the third and fourth child, more incentives should be given to relieve this child care burden.

Sir, what would be the anticipated tax loss to the Government in implementing this special tax rebate and enhanced child relief for the fourth child? Sir, the child relief for the third child is raised by $250. This is not enough to buy even three months' supply of milk powder. If the third child concept is to be promoted, why not increase the amount to $1,500 in order to register the importance that we are promoting the third child concept.

Sir, on the area of leave of absence, both the public and the private sectors must be encouraged to be flexible in the provision of leave of absence for working mothers who have long term child care problems. Sir, working mothers in the public sector need an assurance that if they go on leave of absence to take care of their young children, they would not later be treated as redundant when they do reapply to return: this is especially so when the public sector is cutting manpower by 10%, and unless this reassurance is given to these working mothers, I think the procreation policy may not work as effectively as it should.

Sir, on the problem of overwhelming response to procreation, have we thought what we would do if there is an overwhelming response? Would the Government then subsequently decide that we have had enough and we should retract and go back to the two-child policy? I think this is one area where people are still very skeptical and they would like a reassurance on this.

Sir, finally, with regard to incentives to promote services. Sir, the promotion of services overseas is rather important as it will widen our market. What promotional activities will benefit from tax incentives besides those by the manufacturing sector? Sir, with that viewpoint, I support the motion. 12.38 pm

Mr Heng Chiang Meng (Jalan Kayu): Mr Deputy Speaker, Sir, I am not too sure whether I should support the motion in the name of the Minister for Finance because I think he can do better. However, I do want to assure him that I can be persuaded.

On paper, Sir, it appears to be a mild expansionary budget. The total budgetted expenditure is $18.7 billion, an increase of 14% over the revised total expenditure of $16.3 billion for financial year 1986. Sir, I say "it appears to be" because the revised estimates for financial year 1986 themselves are $3.1 billion short of the original budget of $19.4 billion. So therefore if this budget is again over-estimated by the same amount, then we probably will have at the end of the financial year a revised budget of $15.6 billion. In that case, Sir, it will not be expansionary but a mild contraction.

Sir, I bring this up not so much as to do magic with figures but more to remind the Minister that the Budget represents the Government's financial intentions for the coming year. Based on these intentions and the longer trend of such intentions, taxes, rebates, reliefs, and other forms of tax matters affecting the economic lives, financial survival and very often, even the social behaviour of our people, we have intentions legislated as laws.

For example, last year and again this year, the Minister reminded the House of the need to introduce consumption tax. The reason given was to compensate revenue shortfall and that the Government cannot afford a permanent budget deficit. But then, Sir, what do we actually have? Many Members of this House have brought up the Government's consistency of over-estimating the expenditure and under-estimating the revenue. I really do not wish to take up more of your time in this area. However, I do wish to point out that since FY 82 the Budget has always been presented with deficits of more than $3 billion. Yet, except, for financial year 1985, the actual picture has been one of surpluses and not deficits. These do not even take into consideration the surpluses in the statutory boards and other Government-owned companies, such as those in SIA, DBS, etc. Also, we have the sales from the proceeds of Government investments in the other companies, such as RDC, UIC and various other companies.

Sir, on this basis, the Minister now comes to this House to say that he wishes to introduce consumption tax because of budgetary deficits. May I remind the Minister of the boy who cried wolf too often. Surely then, Sir, it is not too much to ask the Minister to improve his budgetting estimates. Perhaps we should initiate a system to reward accurate budgetting and penalize inaccurate budgetting in the public sector. After all, we seem to be very fond of incentives and disincentives to influence behaviour.

Yet, Sir, in another sense I cannot even say whether these surpluses or deficits were right or wrong in that they were based on intra-public transfers taken as expenditure or revenue. Last year I tried to show that the distortions caused by these transfers had actually misrepresented the budget and appealed for a simpler presentation of a consolidated public sector budget. This year, Sir, I have tried again but I have given up deciphering the figures. It is just too taxing for my simple mind.

An hon. Member: Keep trying.

Mr Heng Chiang Meng: I will. Perhaps I think that the First Class Mandarins in the Ministry of Finance can really make sense of the actual impact of these financial figures. I am, after all, Sir, only a poorly educated Backbencher. That, Sir, however, does not prevent me from appealing once again to the Minister to help me and people like me. Please give us a simpler presentation of next year's budget.

Sir, may I now touch on several areas of the Budget iself. The Budget rightly focuses on two broad areas - restoring the economy to full health, including more healthy bouncing babies, and setting the direction for the long term transformation of the economy. However, I do want the Minister to know that these broad policy statements are simply inadequate. There are just too many obstacles in the various Government bodies which, taken together, will present almost insurmountable barriers to these policies becoming flesh. Unless some action is taken in these areas, I am afraid the Minister's beautiful policy statement would be precisely just that - statements. Sir, permit me to illustrate.

Upgrading of Local Businesses

Sir, before local businesses can be a solid base of thriving and resilient companies envisaged by the Minister, I would advise him to take a cold hard look at what I call "the non-tariff barriers" of local businesses. Let him look at all the rules and regulations of the HDB, the DBCD, the Fire Service Bureau, the Land Office, the JTC, the Ministry of the Environment, and a host of other Government regulatory bodies. If he thinks that capital and training are the only keys to the success of local businesses, then I think he should speak to those businessmen who are not so successful or who have failed. Ask them for the reasons for their lack of success. I guarantee him that it will be an eye-opener.

The few businesses that have succeeded despite the odds have succeeded not because of the incentives given to them. Unfortunately, these are too few to form a base.

Promotion of Trade

This is not new as the Minister last year identified third country trade in com- modities and countertrade as areas of emphasis in our economic restructuring. These are more sophisticated forms of entrepot trade which our traders have been experts for a very long time. Now it suddenly appears that they have lost their touch. Or is it because they have gone elsewhere to do this business? Perhaps the situation of oil trading may be a telling example. It is known that there is an active market in oil trading in Singapore. It should generate spin-off effects in increased activities in financial services, telecommunication services, legal and other related services. Unfortunately, this is not the case and the reason is that these transactions, while they are being done from Singapore, are actually booked elsewhere, such as in Hong Kong. For tax reasons, of course! Hong Kong plays an important role because if these transactions were booked here, the profits would most probably be taxed at 33%. Sir, this is not a new phenomenon. Most of us are aware of this. Yet why do we let this situation continue? Well, without knowing the Minister's mind, I can only guess.

But, Sir, third country trade is presently treated as entrepot trade in Singapore. The fear appears to be that if we give tax concessions to third country trade we may reduce the overall Government revenue, ie lesser tax being collected on the traditional entrepot trade. While this is a legitimate concern, Sir, I think the Government should look at this problem in another light. Traditional entrepot trade, ie, regional third country trading, is already a sunset business as neighbouring countries bypass Singapore. With advances in telecommunications and cheaper travel costs, it is now very easy to trade in Singapore and book transactions elsewhere. As I said earlier, it is already happening in the oil trading. If we care not, Sir, trading in other types of goods will more and more follow the same route. In the end, we may lose both the traditional entrepot trade and the new business of third country and counter trading.

Promotion of Services

Sir, before I touch on this area, I would like to declare my interest as a bank employee.

The Minister said that we have a comparative advantage in knowledge-based and skill-intensive services. I agree with him and would like to add, particularly, banking and financial services. After all, if the market talks about currency traders earning $1 million or thereabouts per year as employees working in a bank or a financial institution, or if we read more news about major international financial institutions willing to pay hundreds of thousands of dollars to have Singaporeans working for them in New York, then surely this is proof that Singaporeans must have some comparative advantage with the best in the world in this area.

Hence, one would expect that the Minister would do all he can to encourage this type of business in Singapore. Here, I must add, Sir, that he has. Over the years, much has been done to stimulate the growth of the financial services business in Singapore. But, Sir, for the foreigners, ie, the foreign depositors, the foreign investors, the foreign fund managers and all types of foreigners except the locals.

Let me give some examples to illustrate this point. Last year, I spoke on the funds that Singaporeans have deposited abroad because our tax system encourages them to do so. At the same time, we spend much effort to attract funds here. Surely, Sir, this is a lunatic state of affairs. I have already submitted a Question for Written Answer about the tax that we make from such interests. Therefore, if revenue lost is affordable, I would like to appeal to the Minister to consider the abolition of tax on interest in Singapore altogether.

The Minister proclaims that he wants to develop the fund management industry in Singapore. Yet the Government's policies do all they can to stop the development of a domestic fund management industry. The monopolistic position of the CPF resulting in the near absence of long term investible funds and the tax treatment on transactions on local stocks and shares are cases in point. And, Sir, let me point out that the development of a domestic industry is paramount if we wish to develop into a world class fund management centre. With the exception of Switzerland which, for very special reasons peculiar to itself, major fund management centres in other parts of the world have developed only on the back of a strong domestic fund management base. Unless the Minister comes out with some concrete measures to encourage the growth of the domestic industry, Sir, I am afraid that the Fund Management Centre would just be a beautiful concept on paper.

Let me come to the biggest tax anomaly of all - the CPF. While the Minister is concerned about falling tax revenues and budget deficits, he has created the biggest tax shelter and tax planning vehicle out of the CPF. Let me list the ways that the CPF has affected out financial flows.

1. It has askewed monthly salaries in favour of bonuses.

2. It has permitted the purchases of properties, gold, stocks and shares with tax-free money, thereby artificially encouraging investments in this area, not for its own sake but as a tax shelter.

3. It has encouraged the conspicuous consumption of expensive medical services.

4. With the latest topping-up scheme, another tax shelter is yet created.

Hence, the allocation of private sector financial resources has in some way been affected by the tax-related CPF regulations and not entirely considered on market economic factors. At the same time, Sir, these financial flows leave residual balances with the CPF because the outflows for approved utilization from the CPF are only a fraction of the inflows. Therein lies the nub, Sir, because these flows only encourage the public sector coffers to get larger and larger. Where then are the funds for the private sector as an engine of growth?

May I also suggest to the Minister, if he is concerned with insufficient tax revenues, that he examine closely into how the CPF reduces its revenues. Perhaps he could also tell us who the main beneficiaries are. After all, Sir, common sense tells me that usually the rich benefit more from tax planning and tax shelters than the not-so-rich and the poor.

Sir, there is a reason why I have brought up all these bits of tax issues and anomalies. Tax is more than a financial issue. Because money and tax is central to modern living, the tax system and structure affect us economically, morally, socially and now, with the latest baby budget, even privately. As a local wag says, it is from the boardroom to the bedroom.

Our tax laws, Sir, were first enacted for a little trading colony. They were enacted for an economy which was leisurely when international travel was by sea, telephones were scarce, overseas calls were expensive, fund transfers were mainly by postal orders and capital flows were a trickle. We have now grown into a manufacturing, communications and financial centre, very much tied into the international grid. Communications and computers have enabled us to transact businesses with our counterparts in far-away countries as if he is only next door. Capital flows now, Sir, dominate the financial markets. Technology, particularly information technology, is becoming more and more dominant in the way we conduct our businesses, be it in manufacturing or services. Sir, let us make no mistakes about it. We are already part of this brave new world and we will become more and more a part of it down the road.

Yet, Sir, look at our tax structure. It is still the antiquated system suitable for the past, albeit with tinkering changes and amendments along the way. Sir, it is very much like a computer system. At inception, it was the state of the art. As the market changed, it was amended to meet these changing demands. For a while, together with the new amendments, it worked. However, after some time when subsequent amendments, especially to the software, became too much, the overall system because overloaded and broke down. I think we are fast approaching the same point with regard to our tax system. There are just too many contradictions. I would therefore urge the Minister to initiate a comprehensive review of our tax structure and system so as to formulate a new tax structure more suitable to the modern and future Singapore.

12.57 pm

Mr Goh Chee Wee (Boon Lay): Mr Deputy Speaker, Sir, much has been said about the various policies to be introduced by the Government as outlined in the Finance Minister's Budget statement. I do not intend to repeat them and I would like to confine my comments to the contents of the Budget document presented to Parliament, the question of the impact of the increased Government expenditures on our economy and the tax incentives on offshore services.

Sir, it has not been easy to understand the actual financial position of the Government. The format of the Budget presented to Parliament this year is supposed to be an improvement over the previous ones. But if one hopes to get a complete picture of the financial position of the Government by just examining the Budget document, then one is in for a great disappointment. Where are the financial resources and the assets of the Government? They are held by the Government. They are vested with the statutory boards and they are hidden or kept in the Government-owned companies. What Parliament is asked to approve is the budget of the Government which does not include the statutory boards and the Government-owned companies. The statutory boards by themselves operate on a huge budget. Only the amount of grant to be givento those statutory boards which depend on Government funding is stated in the Budget document presented to Parliament. The Budget document makes no mention at all of the self-financing statutory boards, such as PUB, TAS, PSA and STPB. The budgets of these statutory boards are not subject to Parliament control and approval.

All of us know that the statutory boards in Singapore constitute an integral and a sizable part of the whole public sector. The public sector employment to population ratio in Singapore is extremely high, much higher than those in the OECD and other NICs. The Government itself employs about 70,000 people. Another 60,000 people are employed by the statutory boards. Furthermore, the statutory boards employ a large number of high-powered senior officers. It is indeed surprising to note that all the statutory boards, including the institutions of higher learning in Singapore, employ more than 1,000 Superscale officers, more than double the number in the whole Civil Service. And because of the autonomy and the free hand given to the statutory boards, the boards can afford to be more generous in employing and promoting their officers. In terms of income and expenditure, the statutory boards' budget is sizeable too. The total revenue of the seven major statutory boards in Singapore, including HDB, TAS, PUB, PSA, JTC, amounted to more than $6 billion in 1986.

Mr Deputy Speaker: Order. It is 1.00 pm. I suspend the Sitting and will take the Chair again at 2.30 pm.

Sitting accordingly suspended at 1.00 pm until 2.30 pm. Sitting resumed at 2.30 pm