SECTION III - REVENUE AND TAX CHANGES

I now turn to Government's revenue position.

Tax revenue for FY89 is projected to increase by 14% to $7.9 billion over the revised FY88 collection of $6.9 billion. The increase is due to the better than expected performance of the economy in 1988. Consolidated revenue for FY89 is also expected to rise to $10.3 billion, an increase of 5% over the revised FY88 estimate.

Taking into account the budgeted expenditure for FY89, an overall surplus of $639 million is expected. This happy position is the outcome of a buoyant revenue position and prudent expenditure policies pursued over the past years.

Although our fiscal policy is to achieve a balanced budget each year, this should not preclude us from generating budget surpluses in good years. 1988 was a good year which saw the economy recover fully from the recession of 1986. We expect that 1989 will see the beginning of a new phase in our economic development as we move into a period of more moderate growth, representative of a more mature economy. Even at these lower rates of growth, Government intends that sufficient revenue from taxation and other sources be collected to cover recurrent and development expenditures in future years without the need to draw down on our reserves.

Direct taxation will remain a major source of Government revenue. However, high taxes do not necessarily mean more revenue because beyond a certain level, they stifle initiative and effort and drive businesses to more hospitable shores. Countries around the world have come to recognise this and have lowered direct taxes to create an attractive fiscal environment for investment and effort.

This year, there is some scope for sharing the gains of a buoyant economy with the private sector. However, I would point out that our corporate tax rates are still competitive and the economy is not in need of a stimulus, so that any adjustment will be modest and largely aimed at off- setting some of the cost increases that the corporate sector has had to absorb in the past year. It will also be in line with Government's philosophy of taxing the factors of production as lightly as possible.

Domestic demand remains strong and increased consumer spending may exert upward pressure on prices and demand for services, thereby aggravating an already tight labour supply situation. There is therefore no immediate need to adjust personal tax rates, which are already low compared to most other countries. Instead I propose to augment certain income tax reliefs designed to support Government's policy of encouraging family formation and procreation and to ease the cost of home ownership.

In previous Budgets, I have mentioned that in the longer term, we will need to introduce some form of comprehensive indirect tax on consumption to complement our system of direct tax on income. Such a broadly based consumption tax will provide a stable source of revenue which is less sensitive to economic fluctuations. The revenue from it will become necessary if we had to reduce direct taxes to remain internationally competitive, or if the Government has to increase its expenditures substantially, for example on health or social services.

In determining what sort of comprehensive consumption tax will best suit Singapore, whether a Value Added Tax or a general sales tax, we will need to consider its effects on all income groups, and on our exports and tourist trade.

So far, such a consumption tax has not proved necessary because economic growth has been strong, tax revenue has been buoyant, and expenditures have been kept well under control. However, as future growth is likely to be lower, and competition for investments and markets is bound to intensify, I believe we should begin now to put into place a framework of indirect taxes. The Government does not expect to draw large sums from them for many years but if and when larger revenues are needed, the system will already be well established. I am proposing to take the first step in this direction this year, by partially restoring certain consumption taxes, such as the taxes on Public Ulitities Board and Telecoms bills, which were suspended during the 1985 recession. We will also actively examine the scope for introducing other forms of selective consumption taxes.

With this note, I will now turn to the tax changes proposed for FY89.