ANNUAL BUDGET STATEMENT

Debate resumed. 3.42 pm

Dr Wang Kai Yuen (Bukit Timah): Mr Speaker, Sir, the Member for Potong Pasir, Mr Chiam See Tong, mentioned yesterday that for our economy to make the next leap, our people must be more creative and more innovative. Further, he said that for our people to be more creative and more innovative, Singapore should have more political freedom. Mr Chiam was right on the first point but, sadly, he was completely awry on the second point. He was right in saying that for Singaporeans to justify a higher income than others, we must provide higher value-added. There is a limit on the premium other people will pay for our better infrastructure, clean and more efficient government, etc. Ultimately, the differentiating factor is our products and services that people are prepared to pay more for. But if that is his point, then he is not saying anything new. Mr Inderjit Singh earlier has also mentioned how to create a more innovative and creative society. The whole emphasis on the Committee on Singapore's Competitiveness towards a knowledge-based economy is to inculcate creativity and the inclination to innovate in our young people. That is the reason why in this Budget the Government is providing more money for education despite the recession.

It is regrettable that Mr Chiam was barking up the wrong tree by saying that we can only do so by having more freedom. I hope he is not equating greater chaos in the countries he mentioned with greater democracy. Perhaps he is advocating freedom to demonstrate and freedom to speak from the street corners as being more democratic. This, he believes, will lead to a more creative and innovative population. Unfortunately, there is a fallacy in his argument. The greater freedom he has advocated is meant for the adult population whereas creativity and innovativeness must be developed and inculcated when the individuals are still very young, maybe starting as young as pre-school kindergarten. Actually, we are talking about two different segments of the population. It is indeed a rare individual who will transform himself or herself into a more creative or more innovative person as an adult just by having greater freedom, ie, freedom of any kind, political freedom, personal freedom. We can verify that by checking with friends and acquaintances who have lived and worked overseas, for instance, in the United States, presumably the model country Mr Chiam is referring to. I have also lived and worked in US for a long time. I do not think I have become more creative and innovative by being there. In fact, there is a saying that one cannot teach old dogs new tricks. So Mr Chiam would have been right if he advocates reviewing our school curriculum to promote creativity and innovativeness. But then it would not be as headline grabbing, would it?

Mr Chiam further mentioned that he would like to see a committee of businessmen and chief executive officers of major corporations to deliberate the issues faced by the Singapore economy and coming up with suggestions without the involvement of a Minister. Perhaps, he has overlooked that the various subcommittees of the Committee on Singapore's Competitiveness are chaired by captains of industries from the private sector. Only the main committee was chaired by two Ministers. The Feedback Unit had in fact conducted several feedback sessions on the report of the CSC. No one had ever complained about the involvement of two Ministers. On the contrary, they welcomed their involvement as an indication of the importance Cabinet has attached to the issue.

Furthermore, the Feedback Unit convenes similar workshops involving notable persons from businesses and CEOs annually with regard to the Budget Statement. And these workshop sessions are typically chaired by Members of Parliament on the Feedback Panel. I believe the participants in those workshops also welcomed the involvement of MPs. They do not see as "control" by the PAP Government but as an assurance that their views will get an airing in Parliament as I am doing right now. This year, the Feedback Unit brought forward this discussion session ahead of the Budget Statement so that this feedback can be considered by the Minister for Finance.

Mr Speaker, Sir, I would like to give a summary of the session chaired by me on 9th February this year. In that particular session, 41 participants from trade associations, Singapore Institute of Management corporate members, trade unions and feedback groups attended the session. Senior Government officials from the Ministries of Finance as well as Trade and Industry were also present. The mood was generally subdued as the Prime Minister had commented earlier that the Budget is unlikely to contain any more surprises or goodies.

From the feedback, let me summarise. On corporate taxes, several participants requested the Government to consider permitting group taxation, or what we call inter-group offsetting, a subject that Mr Heng Chiang Meng has already touched on, by allowing the losses of one subsidiary to offset against profit in another subsidiary within the same group. In this recession, many companies are finding themselves in a very difficult situation where one subsidiary will be making major losses while the other subsidiary will have some profits.

Furthermore, for property development industry, companies are required by law to set up a clean sheet single asset company for each project if they were to bid for Government land. In this case, the entire group is engaged in the same business but only because of the Government requirements, they have to form subsidiary companies. This is especially glaring in this period when the losses of some of those companies could be substantial.

As Mr Heng has mentioned, Mr Speaker, Sir, this request has merits. As it stands today, the way we operate our tax structures is that the companies bear all the risks while the Government does not share the burden of business risks. The basic principle of group taxation, or inter-group offsetting, is basically sound. Companies could have achieved tax savings by not setting up subsidiaries in the first place. However, they are set up for many reasons, often times for efficiency and focus on management attention. Therefore, the current taxation regime penalises this division necessitated by business.

While the concept is basically sound, the devil is in the implementation. It is possible that some companies might take advantage of inter-group offsetting to avoid paying their due taxes. Nonetheless, I think it would be better to tackle the issue head-on than to avoid it just because of implementation difficulties. The basic fact of the matter is that single group offsetting is a reasonable idea whose time has come as this will really help companies caught by the regional crisis.

After giving vent to the concept of inter-group offsetting, it is inevitable that the matter of loss-making foreign subsidiaries was brought up in the discussion. Several participants mentioned that it was the Government who encouraged Singapore to spread a second wing by going regional in the first place. Now that these foreign subsidiaries are losing money, many are requesting that the losses in the foreign subsidiaries be offset against profits in the home company in Singapore. Many CEOs would like to see the Government as a partner in shouldering business risks, as I mentioned earlier. This concept is already in operation within one single company in the sense that losses in one year could be carried forward into the future against future profits. Inter-group offsetting is just taking this concept one step further.

Several businessmen involved in the trading business pointed out the difficulties they are facing as a result of the regional crisis. Current tax structure on inventory receivables is based on estimates. This is problematic in these current years because of the late payment or non-payment of inventory already delivered to the customers, especially those in Indonesia and Malaysia. These companies are facing the cash-flow problems as a result of non-payment or late payment. Yet, they have to pay taxes on estimated profits. So they are asking the Minister to review the tax payable to reflect the actual payments received.

Mr Speaker, Sir, many CEOs pointed out that because of our tax on profit remitted from overseas, many companies or individuals had parked their profits derived from previous years outside Singapore. Now that they are running into cash-flow and credit crunch problems in the current crisis, one participant called for a tax moratorium for several years to facilitate the repatriation of these profits.

Everyone present in the workshop lauded the emphasis on the training of workers. However, they pointed out that there is a lack of incentives for the training of executives and managers. The contributions of these people to the economy is no less important. The participants seem to support a form of payroll taxes for all employees rather than the current SDF which only takes care of the lower income workers. On the other hand, most of the participants would like to defer any action on this idea until the economy has recovered.

Participants also welcomed the reduction of property taxes but commented that property tax assessment by the Department concerned is fast on the upswing but sticky on the downswing. So they would like the relevant authority to be faster and quicker in responding to the market.

Several participants pointed out that to provide and promote promising enterprises, perhaps the Government could provide tax break for smaller companies to allow them to grow into bigger ones. Some of them mentioned that UK has such a law and we could follow that particular model.

On taxes on individuals, the 2% gap between corporate and individual tax ceilings attracted quite a number of comments. The question is when would the Government remove this gap as we have learned in the past that individuals would tend to corporatise themselves to take advantage of lower corporate tax rate. The other ever green topic is that tax relief for non-working spouse should be raised.

It was pointed out that the tax relief for insurance premiums was insufficient. Most taxpayers are unable to claim tax relief for their insurance premiums as their CPF savings had exceeded the maximum.

One participant pointed out the total sum of estate duties raised in the last fiscal year is relatively small. He called for its total abolition.

The minimum income beyond which CPF contribution would be made was set some 30 years ago. To encourage more part-time workers to join the workforce, it was felt that these income ceilings should be revised upwards. Personally, I do not agree with this request because of our ageing population. If anything, my own sentiment is that all incomes should be subject to CPF regardless of its amount. Perhaps, the ceilings were set many years ago to reduce the hassle of implementation in the age when the use of IT and computers was not as widespread.

Several participants pointed out that our current practice of paying taxes of last year's income in the current year is creating some difficulties. Especially in the current recession, some individuals have actually in the current year dramatically lower income, some have even lost their job. Therefore, many find it a burden to pay income tax. To avoid similar problems in the future, perhaps we should move towards a withholding tax system like many developed countries. And we can phase-in this particular structure over time to minimise the burden on the tax payable by people.

One participant highlighted the problem of what they call high net worth bankrupts. At first glance, it sounds like a contradiction of terms. It turns out that these are individuals who have used their CPF savings to buy a high price property. As a result of the recession, because of their loss of jobs or income, they were forced to sell their properties as they no longer could service their mortgage loans. As we all know, CPF has the first claim on the proceeds for such sales. For some individuals, the balance left behind was so small that the banks have no choice but to sue them for bankruptcy. So as a result, these are bankrupts. But they have a lot of money in their CPF account. So the new term is called high net worth bankrupts. The participant asked for relaxation of the return of CPF funds to prevent unnecessary bankruptcies. While I am personally sympathetic with these high net worth bankrupts, my own opinion is that any relaxation of the CPF rules at this point of time is unwise. Individuals should have known the rules ahead of time and be prudent in their use of CPF funds in their investments.

On the topic of bankrupts, it was felt that the restriction on bankrupts from holding any directorship for five years seems to be too harsh and reflects our society being intolerant of failure, which I think Mr Inderjit Singh has also touched on.

Government assistance for small and medium sized businesses drew quite a few comments, and much of these I would bring up in the debate in the Committee of Supply.

A few have suggested that TDB promote more missions overseas to explore new markets. I am glad to note that the Minister has already disclosed in his Budget Statement that TDB would do so.

This concludes my summary of the Feedback Session on the Budget for FY99. I must compliment the participants for being very reasonable and realistic in their proposals. Everyone accepted that we should allow the cost cutting measures implemented from 1st January 1999 to work through the system before the Government evaluates again whether more stimulations are necessary.

Mr Speaker, Sir, I would like now to move on to my own comments on the Budget Statement for FY99. As the last but one speaker, much of what I would want to raise has already been brought up by the 30-plus speakers ahead of me. So I find it quite difficult to bring up new ideas. Therefore, I would like to take a completely different tack and focus on the use of past reserves, this being the first budget deficit after the Presidential Elections Act was passed in this House. I am particularly interested in the interplay between the role of the President and the use of reserves as enacted in the Presidential Elections Act.

Walter Fernandez of the Straits Times in his article "Spotlight on the $5 Billion Deficit" touched on a very pertinent topic, namely, the provisions of the Elected President and the use of reserves accumulated in the current term of Government. I was interviewed by Walter and basically gave him an outline of what I would be covering in this debate.

Mr Speaker, Sir, since this Parliament was returned in January 1997, there are only three fiscal years so far, FY97, FY98 and FY99. Only in FY97, there was a surplus of $5.2 billion. Deficit in FY98 was $0.466 billion. FY99 is projected to have a deficit of $5.05 billion. So just looking at the total sum of budget surplus and deficit, the Government has already exhausted the surpluses accumulated in the current term of Government. Note that I use the word "surpluses" and not the word "reserves". Dr Lee Tsao Yuan, earlier in her speech, has also touched on this particular topic.

One reasonable question to ask is whether the Government could have been more aggressive in stimulating the economy if it has accumulated greater surplus. The budget deficit of $5.05 billion is the largest in memory but only in dollar terms. In terms of percentage of GDP, it is 3.5%. On the other hand, the last budget deficit of a similar magnitude occurred in FY86 when the budget deficit at that point was $2.5 billion. However, in terms of percentage of GDP, it was 6.3%. Moreover, it was also followed by another year of budget deficit in FY87 of $1.16 billion or 2.6% of GDP. So, in terms of percentage of GDP, the budget deficit in FY86 would have a greater impact on the economy than the deficit that we are seeing in FY99. As Mr Inderjit Singh has said earlier, we should take bold steps. The question I would like to ask is: are we being bold enough in this particular Budget?

We all remember the recession of 1985 and 1986 and those were indeed difficult years. The Government's budgets were in deficit for two consecutive years. Yet, was the recession of 1985/1986 more severe than the current one? Probably not, as the Prime Minister and Deputy Prime Minister have mentioned on several occasions that the recession in 1998 and 1999 is the worst since Singapore became independent. If we think that this is the worst recession ever, why are we only having a deficit of 3.5%? So the relative impact of our current deficit on the economy, I think, is only 56% of what took place in FY86. Let us assume that the Government wants to inject the same level of stimulants in the economy as in FY86, 6.3% would work out to be about $9 billion. Whether the economy needs or could take such a stimulus, I do not know. But at least we know if we were to achieve the same rate of recovery as in 1985/1986, the Government could have done more. Would we need to make provision for another year of budget deficit? Would we be short of reserves accumulated in the current term of government if we were needed to do so? When asked by the reporters on 5th March 1999 regarding the issue of past reserves, Prime Minister Goh Chok Tong mentioned that the Government has accumulated sufficient reserves since January 1997 to finance a deficit for another two years, if it is necessary to do so.

Therefore, besides the budget deficit, the definition of reserves must have included other income sources for which the two major ones are investment income and land sales. Investment income was $3.8 billion in 1997, and $4.3 billion in 1998. Land sales were $14 billion in 1997 and $5.9 billion in 1998. If these figures are considered reserves accumulated in the current term of government, then it is absolutely true that there is a lot of money in the kitty. Even if these are considered part of reserves, it still begs other questions in my mind. Should not investment income derived from past reserves accumulated in the previous terms of government be considered part of the past reserves of the past government but not the reserve of the current government? Philosophically, I think part, if not all, of such income should be considered as reserves for the past government. My reasoning is as follows.

A good fund manager could provide better yield but even a mediocre fund manager would yield a return not less than fixed deposit. Therefore, the measure of how good a fund manager is only the incremental improvement in yield rather than the total yield of the investment. Similarly, maybe only part of the investment income from past reserves should be credited to good governance of the current Government and not the total sum of the investment. Before I get all tangled up in this theoretical discourse, perhaps the Minister could give the House a definite answer.

Mr Speaker, Sir, the same rationale, I think, applies to land sales. Could the proceeds from land sales be considered part of the reserves for the current government or is it part of the previous government? If it is considered so, then I have also two issues. State land is an inheritance held by Government in-trust for all future generations of Singaporeans. Other than reclaimed land which is created, all lands are an inheritance associated with the sovereignty of the Government at the time of independence. Land has inherent value and its value at the beginning of the current term of government can be assessed. Land sale to me is a process to realise the value of land or its lease in cash. It would seem reasonable to assume that the proceeds of a sale should not be considered part of the reserve accumulated by the current term of government. In my mind, one should not credit the entire sum of land sale to the current Government as such. Again, if land fetches better prices because of good government, perhaps only the enhancement of its value as a result of the performance of the current government can be considered accruable to good government.

Furthermore, if these two sources of income - investment income and land sales - were considered part of reserves accumulated by the current term of government, then one would question seriously the effectiveness of the provisions of the Presidential Elections Act to protect past reserves. The Government of the day could always make use of these two instruments - sales of land and investment income - to raise the necessary funds to meet this budget deficit without ever going back to the President to exercise the second key.

Whatever the definition of reserves, it would seem that Singapore's economy is a wonder machine. Why do I say so? Because in the current term of government, we have only one good year in 1997, two lean years in 1998 and 1999. Prime Minister Goh said that we could handle two more lean years. So taken together, the reserves generated in one year could handle four lean years without ever going back to unlock the reserves accumulated by the past terms of government. This reminds me too of a passage in Genesis relating to how Joseph interpreted Pharaoh's troubled dreams of seven fat cows devoured by seven lean ones and seven stalks of healthy corns devoured by seven swivelled ones. Joseph interpreted it as seven years of abundance followed by seven years of famine and advised the Pharaoh to make the appropriate preparations, a task which the Pharaoh had entrusted to Joseph. Mr Sin Boon Ann has already alluded to this particular passage yesterday. In the case of Egypt, it took one good year to prepare for one lean year. In the case of Singapore, one good year would have saved enough for four lean years. I think this is very impressive indeed.

Mr Speaker, Sir, one should not compare any mortal with the biblical Joseph. But one cannot deny the strength of the Singapore economy after 33 years of stewardship by the PAP Government. If we look over the past decade during which the present Cabinet was in charge, there were indeed seven good years where the budget surplus exceeded 3.5% of the GDP. Indeed, we are very well-prepared for many lean years if it ever comes to pass. Singaporeans should be thankful that we have a Cabinet worthy of Joseph.

On this note, Sir, I support the Budget.

Mr Speaker: Order. I suspend the Sitting and will take the Chair again at 4.45 pm.

Sitting accordingly suspended at 4.10 pm until 4.45 pm Sitting resumed at 4.45 pm