PART III - REVENUE AND TAX CHANGES

Mr Speaker, Sir, I shall now turn to Government's revenue position and proposed tax changes for FY90.

The Government's revenue position has strengthened as the economy continued to expand into 1989. It is estimated that total revenue for FY89 will reach $15.3 billion, a 12.4% increase from the $13.6 billion of FY88. The substantial increase arises from the two years of high growth in 1988 and 1989. This year, our economy is expected to slow down, in line with the world economy. Revenue growth is therefore expected to be lower in FY90.

Total revenue for FY90 is estimated at $15.6 billion. With total expenditure budgeted at $14.1 billion, a budget surplus of $1.5 billion is expected. This happy outcome is the result of our sound revenue position and prudent expenditure policies pursued over the years.

As I pointed out earlier in my speech, Singapore is a small country without natural resources. We cannot therefore afford to indulge in profligate spending on account of anticipated surpluses. Instead, we should allow surpluses to accumulate when times are good so that when necessary, such as during recession years, we can fall back on the reserves to tide us over.

However, prudence should not be equated with miserliness. Over the years, when the economic situation allowed, the Government has channelled some of its surpluses back to the economy through generous tax reductions and incentives. This is in line with the Government's philosophy to tax factors of production as lightly as possible to encourage enterprise and ensure that our industries are internationally competitive. The tax rebates and rate reductions which have been given since FY80 now total more than $1 billion a year. Consequently, our effective corporate and individual tax rates are still among the most competitive in the world.

There is thus no compelling need to adjust our tax rates at the moment. However, there is scope this year for the Government to share the gains of a buoyant economy with the private sector. I will elaborate on this later.

In past Budgets, I have mentioned the possibility that a broad-based system of consumption tax may need to be introduced when revenue from our existing tax package becomes insufficient to support expenditure. As the FY90 budget outlook is favourable, such a tax will not be needed this year and probably not for some years, as long as our economic growth remains strong and government expenditures are kept under control.

However, we should not assume that this happy state of affairs will continue indefinitely. If ever the Government is pressed for revenue to finance its programmes, it will need new sources of taxation. In nearly all developed countries, a value-added tax is an integral component of the system of revenues. It will complement our system of direct taxes and would provide Government with a stable source of revenue, less dependent on economic conditions.

In the coming financial year, I intend to introduce legislation on a comprehensive goods and services tax. The intention is to have the legislation in place, but to defer its actual implementation for as long as the revenue position permits. This will allow ample time for public discussion and education, uncomplicated by the need for immediate application. The introduction of a comprehensive goods and services tax will mean a major change in our tax system. Experience in other countries has shown that public understanding and acceptance of its workings can only be achieved over an extended period of time.

The economy has responded well to the various fiscal measures implemented over the years, and has consistently performed beyond expectations. With the present tight labour situation and rising prices, there is no immediate need for any additional fiscal stimulus. However, specific tax incentives will promote investments and growth in particular sectors of the economy and help to ensure that growth continues. I therefore intend to introduce new tax incentives this year to promote industries with high potential for growth and greater sophistication.

Several special tax incentives to encourage procreation were announced in the FY87 and FY89 Budgets. These have been followed by an encouraging increase in the number of new births, demonstrating the efficacy of financial incentives for this purpose. Unfortunately, the increase in the birth rate is still insufficient to reverse the decline in fertility. I therefore intend to introduce additional incentives and improve on existing ones.

On this note, I now turn to the proposed tax changes.