III REVENUE AND TAX CHANGES

[Mr Speaker in the Chair]

Dr Richard Hu Tsu Tau: Mr Speaker, Sir, let me turn next to the fiscal position and the proposed tax changes.

Revenue growth is expected to slow in 1998 in tandem with slower economic growth. Estimated revenue collection is $29.9 billion, while operating and development expenditures are budgeted at $27.2 billion. The operating surplus for FY98 is therefore expected to be $2.7 billion or about 1.7% of GDP. As a percentage of GDP, the surplus is much lower than the average of nearly 7% achieved over the five years between 1991 and 1995 and even lower than the 3.8% average of 1996 and 1997.

Apart from the direct impact of the regional turmoil on lowering growth and revenue in FY98, there are two other reasons for the smaller surplus. One is a general slowdown in the growth of revenue collection due to the cumulative effects of tax cuts introduced over the past 12 years. The other is the substantial rise in development expenditures in recent years. Over the 5-year period between 1991 and 1995, development expenditures averaged 4.3% of GDP per year. In 1996 and 1997, development expenditures jumped to nearly 6.5% of GDP when we embarked on major programmes to upgrade and expand our economic and educational infrastructures. Development expenditure will rise further to 7.5% of GDP in FY98 as implementation of the Education IT Master Plan, North-East MRT Line and land reclamation programmes accelerate. These expenditures are expected to peak in FY99.

Despite slower revenue growth and higher development spending, the forecast surplus of 1.7% of GDP will allow us to continue with the policy of adding to our surpluses each year. The need to build up our financial reserves cannot be over emphasised. The regional crisis has clearly demonstrated the importance of such reserves, especially for a small and open economy like ours. If not for our strong fiscal and reserves positions, our currency and stock market would have been much more severely affected by the fallout from the financial crisis. The comfortable reserves position which we enjoy today is the result of prudent fiscal policies steadfastly pursued in the past 30 years. We are committed to continuing with these policies, and remain confident that our strong fundamentals will carry us through the current financial turmoil.

For the FY98 budget, substantial increases in infrastructure expenditure will provide stimulus to offset slowdowns in sectors affected by the regional crisis. Although GDP growth is expected to slowdown substantially this year, a decline to negative growth is not foreseen, so major stimulus initiatives are not contemplated at this time. Our tax rates remain competitive and no major tax changes will be made against a background of declining revenue collections and rising development expenditures. However, as the economic outlook in the region this year is volatile and unpredictable, the situation will be closely monitored. If a sudden downturn should take place, Government will not hesitate to respond with off-budget measures, as we have more than adequate resources to cope with any eventuality. In the interim, we will make some adjustments to lower the cost for businesses. We will also provide some assistance to individuals and households to help them tide through a more difficult year. I will elaborate on the details later. In addition, we will continue to fine-tune our tax incentives to promote activities with high growth potential. In particular, there will be a package of incentives to promote the development of the financial sector. These refinements will sharpen our competitive edge and ensure that when the region recovers, we will be ready to take advantage of the opportunities.

Let me now deal first with the tax changes for companies.