ANNUAL BUDGET STATEMENT

Debate resumed. 5.20 pm

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Speaker, Sir, I would first like to thank all Members of this House who have spoken on the Budget over the past two days. Given the time constraint, I will not be able to address all questions and issues raised. So I will focus on major issues and leave matters of details to the Committee of Supply where cuts on these subjects have been raised.

Since the release of the FY99 Budget, many have commented that it is prudent, and geared towards the long-term good of Singapore. However, some felt that the FY99 Budget is cautious and contained few new measures to stimulate the economy. Mr Speaker, Sir, the FY99 Budget should be seen in the context of the total response Government has made since the start of this crisis. When the economic outlook deteriorated after the FY98 Budget last February, we did not wait until the FY99 Budget to introduce the $2 billion off-Budget package in June, and the subsequent $10.5 billion cost-cutting package in November 1998. The Government has responded promptly and appropriately as the situation develops. As I have said in my Budget Statement earlier, we should let the cost-cutting measures work through the system first. The Budget therefore did not contain any new major cost-cutting initiatives. The Government will be monitoring the economy and external developments very closely.

Let me share with this House Government's thinking behind the formulation of the FY99 Budget. The Government has consistently adhered to the wisdom of a prudent fiscal policy. We live within our means, accumulating surpluses in good years of strong economic growth and drawing down on our reserves only in years of economic downturn. Government has been able to maintain budget surpluses in normal years, not by overtaxing the people and businesses, but by spending judiciously and fostering economic growth. On hindsight, it is plain that Government has been correct in resisting the temptation to simply spend what we have when economic growth was buoyant. The accumulated reserves now give us a valuable buffer against the present downturn. The policy of spending what we need, and always with an eye to the future, is a fundamental pillar for Singapore's economic health, social stability and long-term security.

For FY98, Government is expected to run a deficit of $466 million. After taking into account the impact of the tax benefits and rebates announced in my FY99 Budget Statement, the forecasted budget deficit for FY99 is $5.4 billion. FY 2000 may still be in deficit, given the carry-over effect of the cost-cutting measures, and the time lag in the increase in tax collection when the economy does turn around. Even so, it is important to bear in mind what the FY99 budget deficit will be incurred for. Firstly, Government has carefully prioritised its spending by focusing on developing long-term capabilities, with substantial increases in spending on social and community services, especially for education. Secondly, FY99 Budget introduces further tax incentives to help Singapore seize the window of opportunity to further develop certain economic activities. Thirdly, the Budget offers relief to individuals and households, both in tax rebates and household rebates.

The Government wants to help our people tide over the current difficulties as best as possible, partly by alleviating costs with rebates, but even more so by miminising job losses through helping companies survive and prepare themselves for future competition. We must understand that Government cannot fully offset the impact of this recession, which is caused largely by the fall in external demand. Adjustment is painful, but unavoidable. We must adapt to changing circumstances. This may mean that many of us will need to tighten our belts or retrain for a new job, or that some companies may have to restructure or even close down.

Mr Speaker, Sir, the present recession has forced us to focus on what the essentials are for building our future. It has exposed the areas which need improvement, and accelerated the pace of economic restructuring which we will need to undergo in any event to remain competitive in the long term. If we act wisely, we will emerge fitter than our competitors after the crisis.

The crisis has also made us less complacent as a people, and to appreciate the significance of the fundamentals, like the upgrading of skills, maintaining competitive costs, having strong reserves, and most important of all, preserving social cohesion. This crisis is not merely a test of the Government's skills, but also a test of the resilience of Singapore as a nation and a people.

Singapore must not just aim to survive the economic crisis. We must emerge from the crisis fitter for the race ahead. I have elaborated in my Budget Statement our five-pronged strategy, which is, cutting business costs, ensuring access to working capital, market diversification, investment promotion and capabilities building. This Budget, as well as the earlier off-Budget and cost-cutting packages, manifests these strategies.

I will now turn to the specific concerns raised by Members of this House.

First, I would like to thank Mr Lim Swee Say for his timely reminder that what the Government has done in the 34 years since independence has been focused not only on creating economic growth for its people, but more importantly, on the creation of a nation from the disparate parts with which it started. The latter is an imperative which is often forgotten by observers when they compare Singapore's circumstances with other countries. I believe that the Singapore of today, a unified nation, with its strong institutions, is perhaps the PAP Government's greatest achievement.

Mr Lim has also pointed out that in moving into the next century, it is important that all sectors of the nation, public, private and individuals, must be prepared to change its collective mindsets, not to work in compartments, but to work collaboratively with a common purpose. I do not disagree.

Mr Lim also urges the public sector to be cost conscious, and work on a new mindset of promoting knowledge-based companies through an incentive package. The latter point I will take up in the Committee of Supply. As for the public sector being cost conscious, we have various systems currently to ensure that we have a prudent public sector that is effective, efficient, responsive and enterprising. Thus, we have the Budgeting For Results framework to promote cost- consciousness and result-orientation, and the Public Service for the 21st Century initiative to promote continuous improvement.

As a specific example, keeping costs low in the construction of Government buildings, like schools and hospitals, has always been a key consideration. We have in place a system of building norms as a measure to control costs. We also pay attention to other factors such as upgradability, and the need to maximise land use. I agree that our Government buildings should not be ostentatious, but neither should we go back to building plain old boxes. Where the architectural finishes will cost virtually the same, whether the architecture style is modern or dowdy, we should go for the modern style. In any case, the finishing of a building only forms a small part of the total cost, the most part being structural, mechanical and electrical works. Notwithstanding this, we are undertaking an exercise to review building norms.

Although Mr Chiam See Tong does not often agree with the Government, this time he is correct in his assessment that the present recession is due primarily to external factors. However, he strays when he claims that Taiwan has coped better with the economic crisis because the country has become more democratic. He also says that the Singapore Government has been too paternalistic and this has stifled private sector initiative.

In making these statements, he has taken a grossly simplistic view that more democracy always means better economic performance, hence, the Taiwan economy has outperformed Singapore. A quick look around the world should convince him that some of the world's most democratic countries are mired in economic problems. He himself has recognised that the Singapore economic performance has been dragged down by the external factors outside our control. Our exports of goods and services have been severely depressed by the economic collapse of our neighbours, whereas Taiwan's economy has been less affected as its export markets are largely to the US and China. Taiwan itself has not entirely escaped from the effects of the financial turmoil in the region. To pump-prime its economy, it has introduced a NT$194 billion, or about S$10 billion equivalent, stimulus package in August 1998.

Mr Chiam's claim that the Government stifles private sector initiative is also contradicted by the International Institute for Management Development. In its 1998 World Competitiveness Yearbook, it rated Singapore top in three areas: first, Government economic policies, second, our political system being well adapted to today's economic challenge and third, the bureaucracy not hindering business development. I should also point out that CSC (Committee on Singapore's Competitiveness) and its various subcommittees were private sector driven and many of its recommendations have been accepted by the Government.

I must also confess that I was grossly disappointed by Mr Low Thia Khiang's approach in criticising the FY99 Budget. His views are myopic. He claims that there is no need for a budget deficit. Since development expenditure accounts for 48% of total expenditure for FY99, excluding development expenditures from the Budget balance would automatically create a budget surplus. He has further said that the Government could have capped its development spending at FY97 levels to avoid going into a deficit. However, if we do as Mr Low suggested, we will lose out in the race to develop our human resources and build up our infrastructure to enhance our long-term competitiveness. In fact, Mr Speaker, Sir, not many governments can afford to spend more in the midst of a recession. Even if they do, the focus will tend to be more on relief measures or measures to pump prime the economy, rather than in the long-term development expenditure. The fact that we are able to spend 50% more on development expenditure in FY99 than in FY97 clearly shows that Singapore has the resources, the will and the confidence to not only overcome the current crisis, but to prepare for the post-crisis future.

Mr Low has also said that the PAP should apologise to the people for the current economic slowdown. I find this request very strange, since even Mr Chiam has recognised that the economic downturn was brought about by external factors outside the Government's control. Astute foreign observers of the Asian economic scene have noted how Singapore has stood out in the region.

Mr Low has also claimed that the special monthly S&C rebates ranging from $2 to $6 are piddling and of not much help to Singaporeans. His analysis is deliberately misleading. If he had added up all the various S&C rebates and grants in the Budget, he would find that households in, for example, 1- and 2-room flats would enjoy annual savings in S&C charges of $170 and $200 respectively. This means that they need only pay between 1/4 and 1/3 of their annual S&C bills respectively. In fact, the Government is passing back some $490 million to Singapore individuals and households in the form of tax and special household rebates.

I would also refute Mr Low's point that the increase in water tariffs shows that the Government does not want to help the people. Water is a strategic and precious resource. It is precisely because the Government has in mind the future good of Singaporeans that the increase in water tariffs has to proceed as scheduled. However, the Government is mindful of the need to offset the increase for lower income households. A total of $114 million will be passed back to 1- to 4-room HDB households which will more than offset the water rate increase.

The Member for Hougang has also questioned the need for the Programmes Central Vote in MOF. This provision is to enhance the Ministry's capacity in the current economic climate to meet high priority and urgent spending needs if and when they arise, and cater for new operating expenditures arising in the course of the year. The central vote is no blank cheque - it has a fixed ceiling. This request for some treasury flexibility amounts to a minuscule 0.4% of total expenditure or 0.8% of operating expenditure.

Mr Jeyaretnam has criticised the disproportionate Budget allocation for defence. Mr Speaker, Sir, we are living in an uncertain world. A strong defence capability is the cornerstone for the development and well-being of Singapore. Without an adequate defence, it is not possible to continue our way of life. It is also not sufficient, as suggested by Mr Jeyaretnam, to rely on defence cooperation and support of international organisations. Ultimately, we have to rely on ourselves. We need to be prepared for all circumstances and for the worst. Therefore, to allocate funds for the defence budget only when we face a clear and impending threat to our security, as suggested by Mr Jeyaretnam, is foolhardy.

Dr Wang Kai Yuen has asked if the budget deficit could have been bigger without the provisions on the protection of past reserves, and whether we would need to draw down on past reserves in FY2000. Mr Speaker, Sir, the Government's fiscal policy in this crisis has not been constrained by the Elected President's safeguards. The size of the cost reduction packages has depended only on what the Government judged was necessary, given the state of the economy and the prospects in the region. The Government has accumulated substantial reserves in its current term of office. It therefore does not expect the fiscal deficits in 1998, 1999 or 2000 to exhaust its current reserves, and make it necessary to draw upon old reserves.

President Ong Teng Cheong has told Prime Minister Goh Chok Tong that if the Government needs to draw on past reserves to deal with the current crisis, he would support it. Mr Goh has thanked the President, but told him that the Government would try its best not to draw on past reserves.

The Constitution protects the reserves that were not accumulated during the Government's current term of office. The reserves that are accumulated during the Government's term of office, and therefore are not subject to the Presidential safeguards, include the budget surplus, as well as net investment income (NII). Net Investment Income is defined as the Government's annual earnings from its stock of reserves. These are current earnings accruing from interest and dividends alone. They exclude capital gains arising from the sales of bonds and equity holdings from past reserves. NII is below-the-line item in our annual budget. As for proceeds from the sales of State lands, these have always accrued fully to past reserves even though these proceeds are treated as operating revenue in some countries such as Hong Kong.

The present Government took office on 25th January 1997. Between 25th January 1997 and 31st March 1998, the Government generated an operating budget surplus of $6,273 million. After taking into account expected deficits in FY98 and FY99, we will still have accumulated surplus of $368 million as at 31st March in year 2000. If we were to add in the NII since 25th January 1997, the Government's current reserves would comfortably exceed this figure. This is because our investments have done well in recent years. Hence, I do not see any immediate need to draw on past reserves that will require the Elected President's approval.

On Mr Chay Wai Chuen's and Mr Seng Han Thong's concern on the filtering down of the cost cutting effects on prices, most of the measures will flow directly to the companies and consumers, such as the CPF cut, reduction in foreign workers levy, rental reductions, transport and electricity tariff rebates, telecommunications tariff reduction and GST offsets. For the property tax rebate, public sector landlords, such as statutory boards, will pass on the rebates fully. Government also urges landlords in the private sector to pass on the rebates. A random survey of landlords conducted last year revealed that the majority of landlords are passing on at least half the rebate savings to their tenants. With the keen competition in the slowing market, rentals and consumer prices have eased considerably in recent months.

Mr Inderjit Singh and Mr Ong Ah Heng have asked how the Government will keep track of the economy and the effectiveness of the cost cutting package. Being a small and open economy, Singapore's economic growth is heavily influenced by external developments. Even in good times, the Government is constantly interacting with businesses to obtain feedback and refine our policies. MTI uses a combination of hard and soft information in monitoring the economy. Hard information includes data on trade and industrial production, while soft information includes surveys of business expectations and regular meetings with industry players.

While we try to be as accurate as possible in our forecast, Government recognises that we are in a period of discontinuity. Non-economic factors such as the confidence of international investors are critical in a state of uncertainty. For this reason, we have adopted scenario planning to complement conventional economic forecasting. Last month, Deputy Prime Minister Lee had outlined three economic scenarios Singapore would have to be prepared for. The world does not run according to our wishes: we must make our future by planning ahead and being able to respond in good time to develop any opportunities that come up even in the midst of crisis.

Mr Tay Beng Chuan and Mr Zulkifli Baharudin spoke on the need to help SMEs. Mr Speaker, Sir, we know that SMEs are most vulnerable in economic downturns. The Productivity and Standards Board (PSB) has just issued a press statement last week which detailed how PSB has helped SMEs on five fronts in 1998 - access to finance, information and IT, technology and innovation, markets, and human resource development.

Mr Speaker, Sir, there are already more than 60 programmes to help local enterprises in various stages of development, with the Local Enterprise Finance Scheme (LEFS) and the Local Enterprise Technical Assistance Scheme (LETAS) as the two flagship programmes. The Government recognises that the top concern of SMEs now is short-term cash-flow. Thus, LEFS has been expanded to $2 billion in June 1998 and enhanced further in September 1998 to cover more SMEs. From April 1998 to January this year, about 1,320 loans were approved under LEFS, amounting to $533 million, which is 32% higher than the amount approved from April 1997 to January 1998. Where feasible and practical, the Government will consider enhancing the scheme further.

To help SMEs reduce operating costs and build up capabilities, LETAS is very flexible and can be used for any aspect of the business upgrading for qualifying SMEs. From April 1998 to January 1999, about 800 SMEs were assisted under LETAS, as compared to 643 companies from April 1997 to January 1998. To help SMEs upgrade the skills of their workers, SDF is positioned to place greater emphasis on skills such as those required in electronic-commerce while continuing to support training that caters to current needs. As at January 1999, about 230,000 places have been approved to support SME training.

Mr Peh Chin Hua spoke on the need for local businesses to seize opportunities in the region, while Mr Ong Kian Min urged that we develop our local MNCs. Mr Speaker, Sir, the Promising Local Enterprises (PLE) programme, launched in 1995, targets to produce a pool of 100 PLEs with a turnover of at least $100 million each by the year 2005. Today, there are about 300 PLEs. Most PLEs were able to weather the regional crisis in 1998 as they served the OECD markets. Just last week, to help PLEs in both the manufacturing and hub services sectors, to be trim and fit for the race ahead when the economy recovers, EDB launched the 3Cs programme - Co-investment, Collaboration and Consolidation. Under this programme, a $100 million fund will be set aside for EDB to take short-term equity stakes of up to 30% in PLEs to support their growth for an appropriate period.

Mrs Lim Hwee Hua has touched on the issue of the credit squeeze arising from the current crisis. Total credit extended by commercial banks moderated significantly through 1998, in line with the slowdown in the economy and a more cautious lending policy by banks given the increased risk environment. Our banks are accountable to their depositors and shareholders to act on sound commercial decisions, and Government cannot and should not put pressure on banks. Nevertheless, the Association of Banks in Singapore has advised its members not to take a short-term view of the viability of their clients' businesses, nor to pull back on loans that are being regularly serviced.

Mr Heng Chiang Meng, Mr Ong Kian Min and Dr Wang Kai Yuen have raised queries on group offsetting and taxation of foreign income. As this is a complex subject, I would reply to their queries in the Committee of Supply.

Mr Heng Chiang Meng has also asked whether we have inadvertently moved towards taxing capital gains, by taxing the recipients of dividends distributed out of capital gains. Whether or not a receipt is taxable depends on the nature of the receipt to the recipient. If the receipt is income, it is taxable. If it is capital gains, it is not. To the shareholders, dividends are returns on their investment and thus constitute income. This applies irrespective of whether the dividends are distributed out of the company's operating profits or capital gains. This tax principle of dividends being income in the hands of shareholders and thus taxable has been confirmed by Courts including those in the UK and Australia. Our tax treatment of dividends does not contradict our system of no capital gains tax.

Mr Lew Syn Pau has asked when we will cut the corporate income tax rate to a long-term level. The Government has just given a 10% corporate tax rebate for Year of Assessment 1999. It is therefore too early to consider reducing the corporate income tax rate at this point.

Mr Heng Chiang Meng may wish to note that the Ministry of Finance continually reviews our tax system, together with IRAS and economic agencies such as EDB, TDB, NCB and the MAS, to align tax rules with changing business environment. The views of the private sector have also been sought, such as through committees like the CSC and the Financial Sector Review Group. IRAS and the Ministry of Finance also have regular meetings with tax practitioners such as the Institute of Certified Public Accountants of Singapore (ICPAS).

Mr Inderjit Singh, Dr Lee Tsao Yuan and Mrs Lim Hwee Hua have spoken on the need to promote entrepreneurship and technopreneurship by creating a conducive environment via a review of regulatory framework, the establishment of a development funding provider and promotion of venture capital funds. Mr Sinnakaruppan also spoke on how the tax treatment of stock options could help companies attract talents. I will address these issues in the Committee of Supply.

I would also like to thank the many Members who have made suggestions on these various matters. Some, like Mr Inderjit Singh, have expressed disappointment with the Budget for not doing enough to encourage entrepreneurship. Time does not permit me to address the many suggestions that have been raised. However, Members of this House should be aware that the Technopreneurship 21 (T21) Ministerial Committee, chaired by the Deputy Prime Minister, Dr Tony Tan, has been set up, complemented by a private sector subcommittee led by Mr Sim Wong Hoo, the CEO of Creative Technology. They will be touching on areas mentioned by Mr Inderjit Singh, Dr Lee, Mrs Lim and Mr Sinnakaruppan. The recommendations of the T21 Committee will be announced this year.

Many Members, such as Mr Seng Han Thong, Mr Lim Swee Say, Mr Sin Boon Ann and Mr Ahmad Magad, have spoken on the need to build up the software and step up workers' training such as via manpower development schemes, and a "Skillsave" CPF account.

Mr Speaker, Sir, there is already an array of initiatives in place to promote lifelong learning and skills upgrading, including among the older and lower skilled workers. Retraining is critical, especially among the less skilled workers, to minimise the adverse impact on people from the transition to a knowledge-based economy. Let me elaborate on these initiatives. For FY99, the budget allocation for the promotion of manpower development is $150 million versus $58 million in FY97. The Skills Redevelopment Programme which aims to retrain the unskilled and semi-skilled mid-career workers has been expanded by $120 million, of which $20 million has been committed to set up a Skills Development Centre. For the Skills Redevelopment Programme, SDF and the Government defray up to 80% and 70% of the course fee support and the absentee payroll respectively. For manpower in leading edge technologies, we have the $800 million Initiatives in New Technology (INTECH) grant scheme, of which $50 million has been set aside for EDB's new Training and Attachment Programme. The Government has also given a grant of $9 million to the NTUC Education and Training Fund to support training by union members. Companies can enjoy tax deduction for their workers' training expenses. Government agencies also work with private training institutions to develop training programmes for the workforce. In recognition that the individuals will increasingly have to be responsible for their own employability, the tax deduction for qualifying educational expenses incurred by individuals has been raised to $2,500 in the FY99 Budget.

The Manpower 21 (M21) Committee is studying what more needs to be done to support in-employment training and lifelong learning by individuals. The use of the "Skillsave" CPF Account is one option, but we have to ensure that the use of CPF funds will not deplete members' CPF savings. The M21 study will be finalised by the middle of this year.

Mrs Yu-Foo Yee Shoon and Dr Teo Ho Pin have spoken on promoting IT awareness and use. I want to assure both Members that NCB aims to create an IT culture where people from all walks of life are comfortable with using computers at home, school, work and at play. First, NCB is already promoting awareness of the benefits of IT through computer roadshows at shopping malls, libraries and schools. Second, IT training and upgrading is accelerated and Government is reaching out to more than 300,000 workers, including mature workers, through the SDF IT Power training programmes. Also, the use of Internet and Singapore-ONE services is being stepped up. For instance, the mobile IT Coach has already reached out to 16,000 factory workers.

Mrs Yu-Foo has also suggested that the Government should upgrade NCB to be an IT Power Ministry which will act as a central ministry responsible for overall IT planning for the nation. There is considerable merit in her proposal. Such a Ministry can bring together the functions of the NCB, TAS and SBA. IT is not only a major new basis of economic activity, but it is also a key capability for making Singapore a fully developed country. IT will change the way we live, how we study, work and enjoy our leisure.

The IT, telecommunications and broadcasting sectors are not only growing rapidly, but are also quickly converging. The Government is actively studying how to streamline and consolidate the agencies concerned with regulating and developing these related sectors. Besides the principal agencies such as TAS, NCB and SBA, other agencies are also involved. For example, EDB promotes IT investments just as it promotes investments in manufacturing and other high value-added services.

Some rationalisation is necessary, but we need to decide exactly what will go into the combined entity, and which Ministry it should come under. There are also a few grey areas that need further study. We hope to make a decision on these matters within a month or two. Creating a new ministry to supervise IT and telecommunications is a longer-term possibility, but to do so in the near future would be premature.

Mr Kenneth Chen has suggested that GLCs should not be competing aggressively in the local market to give our local companies more breathing space. Whether or not a GLC should compete with businesses in the local market or venture overseas is a commercial decision which the GLC and not the Government should make. Also, many of our GLCs are publicly listed, and are accountable to their shareholders for their corporate decisions. More fundamentally, with the increasingly global business competition today and Singapore's relative free and open economy, it is wishful thinking that we can give our local companies breathing space simply by removing GLCs from the playing field, as new competitors will always be there. Where Government can help in a meaningful way, as has also been suggested by Mr Zulkifli Baharudin, is to facilitate our companies, whether GLCs, SMEs or PLEs, to compete successfully overseas, for example, by encouraging our local companies to form clusters or to tie up with GLCs under a Singapore Inc approach to maximise collective leverage.

Mr Lew Syn Pau and Dr Wang Kai Yuen have talked about corporate tax grouping for property developers. For property subsidiaries which are required to be set up because of the prudential requirements in Government land tenders, they will be wound up after the specific project for the tendered site is completed. Unlike other companies, these property subsidiaries are therefore unable to carry forward their losses on the project. Mr Lew may wish to know that REDAS and IRAS are already in discussion on how to resolve this tax constraint arising from the prudential requirement of Government land sales.

Dr Teo Ho Pin and Mr Kenneth Chen have asked whether more could be done to assist retrenched workers and families, such as allowing them to use their CPF savings or setting up a safety net. There have been many calls on the use of CPF savings such as for training and living expenses. However, we must not forget that CPF savings, are meant primarily for members' old age, basic housing and for medical needs. To help alleviate the difficulties these workers face to pay their mortgage loans, Government has already allowed them to use their Special Account savings from February 1999.

The best way to assist retrenched workers is to help them seek re-employment as quickly as possible. Even before the regional economic downturn, the Ministry of Manpower had taken steps to expand its Employment Services Department (ESD) to help unemployed Singaporeans or Permanent Residents. When large numbers of workers were retrenched in 1998, MOM not only allocated more resources to ESD but also introduced several new initiatives, such as strengthening the partnership with NTUC, SNEF, CDCs, and self-help organisations, to extend the reach of the Government's job assistance services. On Mr Simon Tay's concern for the retrenched workers and their families in financial hardship, there are a number of assistance programmes which such workers can tap on. These include the community assistance programme administered by MCD, the CDCs, the National Council of Social Services, self-help groups and VWOs. MOE also helps to pay the educational expenses of the families' school-going children. The Ministry of Health's Medifund scheme helps to ensure that no one will be denied of basic health care just because they cannot afford it.

Dr Vasoo and Mr Lim Swee Say have suggested more tax reliefs for those supporting their parents-in-law and dependants such as jobless spouses. The aged parents' relief, which also applies to parents-in-law, and the wife and child relief can be claimed by those who are supporting these two groups of dependants. We have only recently raised these two reliefs with effect from Year of Assessment 1998. For the aged parents' relief, if the taxpayer lives with his parent in the same household, he can enjoy an additional $1,000, on top of the normal $3,500 relief. As for the wife and child relief, it has been raised from $1,500 to $2,000. I would like to stress again that tax reliefs are not meant to fully defray the cost incurred for the maintenance of dependants, but rather serve as a form of recognition.

In response to Mr Lew Syn Pau's and Dr Wang Kai Yuen's query, I would like to say that there is no need to reduce the top marginal personal income tax rate from 28% to 26%, in line with the corporate tax rate. Our individual income tax rates and brackets have been reduced over the years. The last change was effected in the Year of Assessment 1997. Our individual income tax burden is amongst the lowest in the world. For the 35% of the population who pay personal income tax, the effective tax rate is in fact considerably lower than 28%, because 28% is only the marginal top rate, and there are various reliefs and rebates which reduce the effective tax rate. Government is mindful of the impact on our people and has thus given a 10% tax rebate on personal income tax.

On Dr Wang Kai Yuen's suggestion for the abolition of estate duty, I should point out that estate duty still has a role in helping to moderate the distribution of wealth in Singapore, despite the relatively small collection which is mainly due to our generous exemption limits. Countries such as Hong Kong, the United States and UK also have estate duties or inheritance taxes.

Mr Ong Ah Heng has asked whether workers will have to go through another round of CPF and wage cuts. Mr Speaker, Sir, Government is fully aware and appreciates the workers' anxiety over further cost-cutting measures if the recession worsens. Government hopes that such a move is not necessary. We and the NWC urge companies to implement the flexible wage system, which will enable the companies to adjust their wage costs by varying the payment of variable components such as the annual wage supplement or the 13th month salary and bonuses without affecting the workers' basic wages. In this way, the reduction in CPF and basic wages can be avoided. To date, more than 70% of the companies have adopted some form of flexi-wage scheme with variable wage components. 16% of total annual wages are made up of variable components, averaging 2.3 months of basic salary.

On Dr Vasoo's query of more pension for lower income pensioners, I should point out that pensions are calculated on the last-drawn salary at the time of retirement and the length of pensionable service, as provided under the Pensions Act, and are thus not subject to change. However, to help lower income pensioners cope with inflation, the Government had in April 1974 introduced an ex-gratia allowance called the Singapore Allowance. The Singapore Allowance was last revised in August 1997. Since then, the Consumer Price Index has dropped. Thus, there is no ground to review the Singapore Allowance at this time. Besides, to keep on raising the Singapore Allowance of pensioners may be unfair to other Government officers who had retired under the CPF scheme.

Dr Lily Neo has appealed for more funds for the Ministry of Health. MOH's FY99 budget has been kept at a reasonable level, notwithstanding the tight fiscal position. MOH's FY99 operating grant to voluntary welfare organisations is $63 million, as compared to $44 million for FY98. MOH has also been allocated a block budget of $200 million to cover medical research and development for FY97 to FY2001.

As for disease prevention programmes and training, the budgets have not been reduced. An inter-Ministry committee led by the Minister for Health is looking into the financing of old age medical needs. The Government is committed to preparing Singapore for an aging population and to maintain our lead as a regional medical centre. Having said all these, some issues which Dr Neo raised cannot be solved by more funds alone. Dr Neo has spoken on the need for giving free screening for mammography. However, in a recent study to establish the cost-effectiveness of mammography, less than half of the women accepted the free screening.

Mr Yeo Guat Kwang has spoken on the funding for Medifund, CDCs and VWOs. The Medifund was established on 1st April 1993 with an initial contribution of $200 million. This will be increased by $100 million each year to reach $1 billion eventually. To date, the Government has already contributed a total of $600 million to the Medifund. No contribution is proposed for FY98 and FY99 as we do not expect budget surplus in these years. However, our assessment shows that the expected income from Medifund will be more than enough to meet disbursements for needy patients in FY99.

Mr Iswaran has suggested riding on the CDCs to implement a more targeted approach for helping Singaporeans in need. Government gives CDCs a resident grant of $1 per resident per year. Government also gives matching grants of $3 for every dollar raised by the CDCs, and $4 for every dollar of residents' donations through the GIRO system. The total Government matching grant is presently capped at $24 million per year from FY98 onwards and will be reviewed every two years. For VWOs, the total Government FY99 funding is $129.9 million, as compared to $90.38 million in FY98. The Government has thus not cut back on its support for VWOs despite the tight revenue position.

Mr Gerard Ee has commented that with only 1.66% of the budget being allocated to the Ministry of Community Development (MCD), a $10 million fund could be set up through a one-off contribution to provide a safety net to help families in difficulties until the economy turns around. Mr Speaker, Sir, Government believes that to build a resilient community, individuals ought to rely on family and self, then community, and only lastly the State for financial assistance. Nevertheless, Government has a fairly comprehensive safety net to help those in genuine financial difficulty, but without destroying the incentive for the individual to work hard. MCD's budget alone does not adequately reflect Government's spending in the social safety net. There are schemes funded by other Ministries or off-budget measures, eg, Service and Conservancy rebates reflected under the Ministry of National Development's budget; Medifund, Edusave Endowment Fund and so on.

Mdm Claire Chiang has asked why MCD's budget has fallen for FY99. I want to point out that development expenditure is subject to fluctuations according to the progress on major projects. In the case of MCD, the drop of $25 million or 14% can be attributed to major projects nearing completion, such as the Singapore Boys' Home, Grassroots Recreation Clubhouse and the new sports facilities at Bishan and Jurong East. However, in terms of capital grants to VWOs, we have in fact increased the sum from $14 million to $16 million. As for operating expenditure, there was an 8% drop in MCD's allocation, primarily due to the 15% wage and CPF cuts, and not due to a scale-back in activities. In fact, transfers to various financial assistance schemes and operating grants to VWOs and self-help groups have gone up by about $20 million or 20% if we exclude the 3-year one-off advance for Mendaki Tertiary Tuition Fee Scheme from the revised FY98 estimates.

Mr Speaker, Sir, I would like to sum up by reiterating the point made in my Budget speech that despite some initial signs of economic turnaround, there still exist many risk factors and uncertainties in our external environment. The health of the US and Japanese economies, as well as the socio-economic political developments in our neighbouring countries, will have a big impact on our economy. There are other uncertainties, as some Members of the House have rightly pointed out, that given China's strategic and economic weight, the performance of the Chinese economy could also impact on us.

Faced with an uncertain environment, we will do well not to over-react before the signposts become clearer and at the same time, retain the flexibility to allow us to respond quickly and appropriately to the out-turn whatever it may be. The FY99 Budget has therefore adopted the approach of continuing with the economic fundamentals that have served us well in the past, develop the capabilities needed for our future growth, and be dexterous in dealing with change. With this approach, I believe that Singapore stands in good stead to capitalise on an upturn, and meet the challenges that we will face in the year ahead. [Applause]

Mr Low Thia Khiang: Mr Speaker, Sir, may I have your permission to clarify part of my speech which was misinterpreted by the Minister for Finance?

Mr Speaker: All right.

Mr Low Thia Khiang: Sir, I wish to clarify that I did not suggest in my speech that the Government should not incur a deficit in this Budget, nor did I suggest that the Government should cut back on development expenditure. I also wish to further clarify that there are basically two underlying messages in my speech in my attempt to analyse FY99 budget deficit. One is that the deficit is not alarming because the Government's revenue estimates are more than sufficient to cover the operating expenditure. Secondly, the deficit is the result of greater development expenditure and is not due to more schemes or expenditures to help the people weather the economic crisis.

Dr Richard Hu Tsu Tau: I thank him for the clarification. The implication was that if we exclude development expenditure, then there is a surplus, which means we should not spend on development. Is that right?

Mr Low Thia Khiang: That was not my intention.

Dr Richard Hu Tsu Tau: Then who pays for development? That is the problem.

Mr Low Thia Khiang: Sir, the point is that the revenue estimated by Government is sufficient to cover the operating expenditure. So, the question is how much do we want to spend. The Government has decided in this Budget to spend more on development expenditure, and that has caused the deficit of $5.1 billion. That was the point I made.

Dr Richard Hu Tsu Tau: Precisely. And that is what we have said all along that we are spending heavily on development to prepare for the future.

Mr Low Thia Khiang: I do not disagree with that.

Dr Richard Hu Tsu Tau: That is fine. Thank you very much.

Question put, and agreed to.

Resolved,

That Parliament approves the financial policy of the Government for the financial year 1st April, 1999 to 31st March, 2000.