CIVIL LIST (Motion)

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CIVIL LIST:

(Motion) The Second Minister for Finance (Mr Lim Hng Kiang): Mr Speaker, Sir, I beg to move,

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That this Parliament, pursuant to section 7 of the Civil List and Pension Act (Chapter 44), resolves that the Schedule to that Act be varied by deleting the figures "$2,391,600", "$113,000", "$2,653,200", "$945,600" and "$1,000" in the second column and substituting them for the figures "$2,126,000", "$116,000", "$2,376,300", "$941,600", and "$11,500" respectively.

Sir, I propose that a provision of $2,245,600 be supported for Class I expenditure for FY 2004. Class I expenditure would cover the President's salary, his entertainment allowance and the acting President's allowance. The lower provision is to cater for the wage cuts which have been applied to the Privy Purse since November 2001 with the agreement of the President and which are in line with the wage cuts for political appointments.

The provision for Class II expenditure is meant for the salaries of the Istana personnel. The provision is lower at $2,376,300 because of wage cuts and a further reduction in the CPF contribution rate for employers from FY 2004.

A provision of $941,600 is required for Class III expenditure to meet the expenses of the Istana's household. This provision is slightly lower than the amount required in FY 2003. A higher provision of $11,500 for IT-related expenses is required for Class IV expenditure.

It is therefore necessary to vary the provisions in the schedule to the Civil List and Pension Act (Chapter 44) as indicated in the Motion before the House.

Sir, I beg to move.

Question put, and agreed to.

Resolved,

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That this Parliament, pursuant to section 7 of the Civil List and Pension Act (Chapter 44), resolves that the Schedule to that Act be varied by deleting the figures "$2,391,600", "$113,000", "$2,653,200", "$945,600" and "$1,000" in the second column and substituting them for the figures "$2,126,000", "$116,000", "$2,376,300", "$941,600", and "$11,500" respectively.

Mr Speaker: Order. I will take the break now. I suspend the Sitting and will take the Chair again at 3.20 pm.

Sitting accordingly suspended

at 3.10 pm until 3.20 pm.

Sitting resumed at 3.20 pm

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[Mr Speaker in the Chair]

ANNUAL BUDGET STATEMENT:

The Deputy Prime Minister and Minister for Finance (Mr Lee Hsien Loong): Mr Speaker, Sir, I beg to move,

That Parliament approves the financial policy of the Government for the financial year 1st April, 2004 to 31st March, 2005.

PART I - OUTLOOK AND CHALLENGES:

2003 - Ending on a **: Positive Note **

In the last six years, the Singapore economy experienced more volatility and uncertainty than it had encountered over the previous 30 years. Beginning with the Asian Financial Crisis in 1997, a series of external shocks buffeted our economy and ended a decade of uninterrupted growth. We were all hoping for a quick turnaround last year, as our economy had bounced back quickly from previous downturns. But SARS and the war in Iraq dashed our hopes. We had a very difficult first half.

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But the economy showed clear signs of turning around towards the end of the year. In the fourth quarter, GDP expanded by 4.9% compared to the previous year. On an annualised quarter-on-quarter basis, GDP grew by 11%, with the manufacturing sector expanding by 17% and the services sector by 11%. This brought growth for the whole year to 1.1%. The recovery was reflected in increased exports, investments and employment.

Both manufacturing and services benefited from an increasingly favourable external environment. As the recoveries in the US , Europe and Japan gained momentum, their appetite for imports increased. Our non-oil domestic exports grew by 15% in 2003, driven by pharmaceuticals, chemicals and semiconductors. Strong external demand also caused the wholesale and retail sector to grow by 6.7%.

Foreign direct investments (FDIs) began to return to the region as the fears and uncertainties from SARS and the Iraq war subsided. Last year, Singapore attracted $7.5 billion of fixed asset investments in the manufacturing sector and $1.9 billion of annual business spending in the services sector. These investments will generate $8.6 billion in value-added each year for the economy.

Employment also improved. More jobs opened up as companies regained the confidence to start hiring again. About 12,000 jobs were created in the second half of 2003, partially making up for the 30,000 jobs lost in the first half. The seasonally adjusted unemployment rate dropped from the peak of 5.5% in September to 4.5% in December 2003.

Macroeconomic policies helped support the economy. MAS maintained a neutral policy stance for the trade-weighted exchange rate of the Singapore

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dollar, after re-centering the policy band at a lower level. The Government introduced two off-budget fiscal packages to support the economy, and help households and businesses tide through a difficult period. We had a SARS relief package in May, and another package to accompany the CPF changes in September. These prompt measures helped to maintain confidence, buffer the shocks, and boost economic activity. In the absence of support from monetary and fiscal policies, GDP growth last year might have been flat instead of 1.1%.

2004 - Gathering **: Momentum **

Our recovery is picking up. There is a palpable optimism among Singaporeans and businesses. The December Straits Times Consumer Confidence Index surged 82 points to 294, bringing it close to its levels in 2000, when the economy was growing strongly. Retail sales in December rose by 21% month-on-month and 10% year-on-year.

We have revised our growth forecast for this year upwards to 3.5-5.5%. But we have to look beyond the cyclical pickup in our growth rate, and achieve sustained long-term growth by transforming our economy. That will depend on our ability to carry through our economic restructuring, upgrade our industries, and create new and better jobs to replace the old jobs that are being phased out. Our commitment to restructuring is a key reason why analysts and investors are confident about Singapore 's long-term prospects, and why MNCs still want to put their projects in Singapore .

The Economic Review Committee's recommendations, the CPF changes, the cut in direct taxes, and wage reform lay the foundations for a globalised, diversified, and entrepreneurial economy. These fundamental changes reflect our

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resolve to stay relevant in an increasingly competitive world. Let me review our progress in restructuring, and what more needs to be done.

** Growing Manufacturing and Services **

First, we continue to grow the manufacturing and services sectors. We are strengthening our position as a global business hub and one of the most attractive places in Asia for investments and talent.

Singapore remains competitive as a manufacturing location, especially for high-tech, high value-added activities. In the past year, many MNCs have either committed to expand their existing activities, or to establish regional headquarters in Singapore . For example, Hewlett-Packard recently decided to invest another US$1 billion in the next five years to expand its operations. ST Microelectronics has announced $425 million of new investment commitments; Seagate Technologies announced a $200 million investment in recording media and $300 million in high-end hard disk drives; and Agilent Technologies has committed to another $156 million of investments.

However, overall the manufacturing sector is not likely to generate many more jobs. MNCs are shifting to higher value-added, less labour-intensive activities, and will increase output per worker rather than hire more workers. So to create jobs for Singa­poreans, we also need to put strong emphasis on the services sector. We are developing established services such as trading and logistics, info-communications technology, financial services and tourism; while fostering emerging services such as education, healthcare and the creative sector.

More so than manufacturing, a vibrant services sector depends on

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people - including foreign professionals, executives, businessmen, technicians, tourists and consumers - being able to travel in and out of Singapore with minimum hassle. In particular, we must facilitate travel for visitors from ASEAN, as well as from China and India .

Singapore does not require entry visas for visitors from most countries. The Immigration and Checkpoints Authority (ICA) has reviewed our remaining visa requirements. As a result, we lifted visa requirements for visitors from Cambodia , Laos and Vietnam last year. We have also made it easier for businessmen to obtain long-term Multiple Journey Visas (MJVs), valid for up to five years. We will allow reputable Chinese and Indian companies to recommend their own staff for MJVs. Social visitors from the PRC are now granted visas valid for up to five weeks compared to three weeks before, while the period of stay granted is now up to 30 days, double the previous 14 days. Similar facilities are also granted for visitors from India , Myanmar and the Commonwealth of Independent States. Since the beginning of this year, we have proliferated the visa application points for PRC travellers, from 67 branch offices operated by 3 appointed travel agents, to 322 branch offices operated by 43 appointed travel agents across China . ICA is exploring other innovative measures, such as on-line visa applications, to facilitate the entry of bona fide visitors to Singapore .

The easier visa rules will attract more tourists here. Visitor arrivals have already recovered to pre-SARS levels. This year, STB expects 7.6 million visitors, up from 6.1 million last year. STB is stepping up marketing efforts to regional countries such as China , India , and ASEAN. Last year saw the largest foreign direct investment in a visitor attraction in Singapore - the $200 million "Singapore Flyer". Sentosa Development Corporation has also drawn up a 10-year, $8 billion

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plan to revamp and refresh Sentosa. It has been aggressively drawing in projects and has already attracted about $500 million of new investments, half of them from the private sector.

We have also done well promoting other service industries. Globally, many MNCs are centralising and outsourcing their corporate functions. To save costs and ensure business continuity, banks are relocating many functions, traditionally performed in New York , London and Tokyo , elsewhere in the world. India is attracting many call centres and business process outsourcing (BPO) operations. Singa­pore is not a competitive location for call centres, but we are an attractive site for support centres hosting higher-end activities, particularly for financial institutions. Over the past year, 10 banks, including Credit Suisse First Boston and Barclays Capital, have centralised their regional and even global processing operations here.

Outside the financial sector, we attracted over 30 shared services and BPO projects last year. For example, Europe 's largest software company SAP chose Singapore as the launch market for its Shared Services Centre in the Asia Pacific. Polaris and IBM have set up disaster recovery operations here. Toyota Tsusho, ExxonMobil and DFS are all using Singapore as a centre for shared services and business continuity activities.

In healthcare, EDB has launched the Singapore Medicine initiative to develop Singapore into a leading destination for healthcare services. Singapore Medicine will bring together the efforts of many public sector agencies, including MOH and STB. One pre-condition to make Singapore a regional medical hub is to have enough doctors, particularly specialists, who can practise in Singapore . To ensure this, MOH has expanded the list of recognised foreign universities and

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medical schools from 24 to 71. To alleviate the shortage of nurses, MOH will continue to recruit nurses from diverse sources, and streamline the recognition of nursing qualifications from the Philippines , Myanmar , China and Indonesia . In addition, MOH will relax many current restrictions on advertising by healthcare institutions so that they can promote themselves in the region. A new set of Publicity Rules will be gazetted within the next few months.

Labour **: **

Market **: Reforms **

The second strategy we are pursuing is to reform our labour market so that companies and workers can respond to fast-changing business conditions. The CPF changes and the ongoing push for wage reform are important parts of this effort. They will help to preserve existing jobs and create new ones for Singaporeans.

CPF Changes

We made major changes to our CPF scheme last year to maintain our cost competitiveness. Employer contribution rates were reduced, and the CPF salary ceiling will be brought down in steps. This has lightened the burden on employers and made Singapore workers more competitive. At the same time, we are raising the CPF Minimum Sum and tightening withdrawal rules at age 55, so that Singaporeans will be better prepared for their retirement needs.

Wage Flexibility

The CPF changes are long term structural adjustments, not tactical responses to transient conditions. They will strengthen our competitiveness, but we still cannot be sure that our wage levels will never become too high again one day. Should this happen, we should

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not bank on another large cut in CPF rates to restore our competitiveness, as we did in 1985 and 1998. The CPF is a blunt tool for cost reduction. And now that we have reduced the rate to 33%, there is less room for further reduction. This makes it more important to have flexible wage structures, so that companies can respond quickly to changes in the business environment. This will help companies stay viable and preserve jobs in a severe downturn, while giving them the confidence to reward workers and increase employment in good times.

I am happy that the tripartite Taskforce on Wage Restructuring has given strong backing to wage reform. Its report explains clearly how companies can implement wage restructuring for greater flexibility and competitiveness. Achieving wage flexibility will require strong commitment from employers, unions and workers. Employers must put in place schemes that link remuneration to individual and company performances. Unions must take a broad long-term view of workers' interests, and persuade them of the benefits of these changes. Finally, workers must recognise that in a more volatile and competitive environment, flexible wage structures offer the best chance of job security. We must make a concerted effort to achieve our wage reform targets.

Training and Upgrading

Even as the economy recovers, we must not let up on retraining and upgrading our workers. This will enable our workers to seize new opportunities and adapt to the changing needs of the economy.

The Singapore Workforce Development Agency (WDA) will strive to upgrade the skills of workers, especially those with secondary education or less, so that they

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can stay employable and take on new, higher-skilled jobs. WDA will launch new training programmes, and make it easier for workers to enrol in them. There will also be programmes for professionals, managers and executives, so that they can support the upgrading of their industries.

These programmes are partly financed by the Skills Development Fund (SDF), which employers contribute to through the Skills Development Levy (SDL). The 1% levy applies to all workers with a gross monthly salary of $1,500 or less. The current levy rate and salary ceiling are not enough for the SDF to cover its annual commitments. Had the Government not injected $500 million into the SDF in 2001, the fund might have been exhausted by now.

Over the next five years, WDA estimates that the SDF's annual commitment will rise from $120 million for 600,000 training places in FY03 to $176 million for 766,000 places in FY08. MOM will therefore raise the SDL salary ceiling from $1,500 to $1,800 with effect from 1st July 2004 . The levy rate will stay at 1%. This will increase SDF's income by $22 million per year.

Foreign Workers

When the Asian Crisis struck, the Govern­ment reduced foreign worker levy rates temporarily, to save costs for employers. As the economy recovers, the Government needs to progressively adjust levy rates to reflect the prevailing market conditions.

The levy for skilled Work Permit holders is currently $30, reduced from $100 previously. As part of the changes to the foreign worker scheme for the construction sector, MOM increased the construction skilled worker levy to $50 with effect from 1st July 2004 . In line with this, MOM will also raise the skilled

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worker levy rate to $50 in all other sectors, with effect from 1st July 2004 . The levy rates for unskilled workers will remain unchanged.

For our economy to grow, companies must be able to recruit skilled workers. The higher value and skill-based industries we are attracting all depend heavily on skilled workers, technicians and professionals. A particular concern is manpower at the diploma and post-secondary level. If we lack these middle-tier skilled workers - whether local or foreign - we will choke off the growth of these industries or drive them elsewhere. The shortfalls are already evident in healthcare where there is an acute shortage of nurses, in the IT industry where we lack computer programmers and IT technicians, and in aerospace and pharmaceuticals.

MOM will modify the current work pass system to meet this demand for middle-level skilled manpower. We will introduce a new category of work passes, called 'S' passes, to replace the current 'Q2' passes.

The main criteria for an 'S' pass will be a minimum salary of $1,800 and an acceptable tertiary qualification. MOM will supplement these two criteria with a system of points, to take into account experience, skills and job type when assessing eligibility. The 'S' pass will be subject to a quota, to begin with 5%, as well as a levy, initially set at $50. The scheme will be implemented from 1st July 2004 .

** Encouraging Entrepreneurship **

A third major strategy is to boost entrepreneurship. This process takes time, because we are not just changing Government rules, but seeking to shift mindsets. The Government is doing its utmost to foster a conducive environ

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ment for entrepreneurship. The Action Community for Entrepreneurship (ACE), chaired by Minister of State Mr Raymond Lim, is nurturing entrepreneurship, pursuing entrepreneurship promotion programmes, and acting as the interface between the private sector and Government.

A key hurdle facing start-ups is financing. The Government is helping start-ups gain access to financing. EDB's Start-up EnterprisE Development Scheme (SEEDS) helps early-stage start-ups with equity financing. Every dollar raised by a start-up from third-party investors will be matched by EDB up to a maximum of $300,000. In two years SEEDS has raised nearly $59 million - $27.3 million from Government and $31.6 million from the private sector - to support 103 innovative start-ups. We also recently established Deal Flow Connection, an online portal that helps link up entrepreneurs with financial institutions, venture capitalists and angel investors.

The Government is also helping our entrepreneurs to venture beyond our shores. We have negotiated many FTAs, including those with key economic partners like the US and Japan , to improve access to these markets. Our businessmen can now tender for projects contracted out by the governments of our FTA partners, on an equal footing with their local companies. IE Singapore actively promotes the development of Singapore 's external wing. It helps local enterprises take advantage of government-to-government agreements, such as air services agreements, investment guarantee agreements, and avoidance of double taxation agreements. IE Singapore also recently launched the iPartners Programme to encourage companies to band together when venturing overseas. Already, this programme has helped three consortia of Singapore companies to venture into East Asia , Africa and the Middle East .

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To bring in entrepreneurial talent, MOM launched the EntrePass Scheme. Entrepreneurs can set up operations in Singapore on the basis of their business plans, rather than academic qualifications or salary.

The Government is also reviewing its rules and licensing requirements to ensure that bureaucracy does not stifle enterprise in Singapore . To date, the Pro-Enterprise Panel has reviewed 1,080 suggestions, of which it has accepted 57%. The Rules Review Panel is also making headway. In the past year, the Panel reviewed 2,913 rules, 23% of the total. It removed 373 rules, updated 772, and re-affirmed the remaining 1,818. By 2005, public agencies will have reviewed all their existing rules, to remove outdated ones and streamline the rest. It does not mean that the job is then done. Thereafter, it will be time to start reviewing all the rules again. Our plan is to review all rules regularly, on a rolling five-year cycle.

However, the Government can only do so much to create a Best for Business environment. Ultimately, entrepreneurs need to take their own risks and develop their own ideas, in order to create and seize new opportunities in overseas markets. Entrepreneurship is, ultimately, a challenge for our whole society.

** Enhancing Competition **

A fourth major strategy is to promote competition and free markets in all sectors of the economy. Competition spurs firms to be more efficient and innovative, and more responsive to customer needs. It prepares our firms to be internationally competitive and to hold their own in the region. Consumers enjoy wider choice and better products and services, and often lower prices. The economy as a whole gains from higher productivity and more efficient allocation of resources and,

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in the longer term, also from more innovation and job creation.

This is why our basic economic stance is pro-competition. Right from the start, Singa­pore was a free port. For trade in goods, when we first began industrialising in the 1960s, we did impose entry barriers and import tariffs to protect domestic industries, but we soon abandoned this infant industry argument and shifted to an open competitive regime.

For services, we pursued the same policy of open competition in wholesale and retail trade, IT and business services. In other industries like telecommunications and power generation, we used to operate vertically integrated state-owned monopolies, like many other countries. But in the last 10 years, we have moved a long way from that model. We privatised statutory boards, deregulated the industries and opened them up to competition. In the financial sector too, we have liberalised and freed up, causing a major transformation of the industry.

However, fostering competition is not always the same as taking a passive, hands-off approach. Sometimes, we need to intervene to structure the industry to allow competition. Otherwise, instead of healthy competition, we may end up with one or two players wielding monopoly power to the detriment of consumers.

Take the telecommunications industry as an example, which is now fully liberalised. Competition in that market has increased significantly, especially in mobile and wholesale international call services. But IDA still needs to act as a referee, because several segments of the telecommunications market are not or cannot be effectively competitive, as in the case of "last mile" access infrastructure. IDA's role is to guard against abuses of market power, and to

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set rules which help smaller players connect to infrastructure provided by larger players. IDA's regulations seek to keep the market contestable, and ensure that competition produces benefits for consumers over the long-run.

Or take the power industry. Singa­pore Power was an integrated monopoly operator, generating, distributing and selling electricity and gas to every home and factory. To introduce competition, we first had to split up Singa­pore Power into several different companies, create the right regulatory framework and set up the Energy Market Authority (EMA) to oversee the industry. We made each power plant a separate generating company (genco), competing against other plants. We created a sophisticated mechanism for the gencos to bid to sell electricity into the grid, called the pooling and settlement system. As for the power grid, which is a natural monopoly, we made it a separate, tightly regulated company. Only then were we ready to have different suppliers compete to sell electricity to consumers, starting with the large consumers. The process has taken eight years, and is still not quite complete.

Our small domestic market is an important practical constraint to promoting competition in industries where scale is important. So we have only three local banks, two media groups and two public transport operators. Our market simply cannot support more players. We cannot manage such industries in the same way as we would the retail trade with thousands of players. We have to accept that in these circumstances, limited competition or even sometimes a single operator is the best arrangement, and find other ways to prevent the companies from exploiting their position or becoming inefficient and uncompetitive.

The container port business is such an industry. In this case, the relevant market

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extends beyond Singapore . Today, transhipment is an international business. Within our neighbourhood alone, Tanjong Pelapas, Port Klang and Laem Chabang, are all vying to replace PSA as the hub port for Southeast Asia . Competition in the port industry is not really domestic but takes place on a regional or even global stage.

The Govern­ment is determined to consolidate Singa­pore 's status as a hub port. The Maritime and Port Authority (MPA) has approved PSA's application for land to build five new berths at Pasir Panjang Terminal to support its growth in container traffic. This will allow PSA to strengthen its competitive position in the international arena.

Jurong Port will continue to operate at its existing facilities in Jurong, where it can handle one million containers a year. Given the intense regional competition, Jurong Port will not for now expand its container capacity by building additional berths at Pasir Panjang, but will review this decision when conditions change.

However, MPA has not granted PSA a monopoly on container operations in Singa­pore , nor will it do so. The port industry is dynamic. If and when industry conditions make greater local competition necessary, and new operators judge it viable to enter the business, the Govern­ment will not stand in the way.

This year, MTI will be proposing to Parliament a competition law covering most sectors of the economy. To complement the liberalisation and deregulation of our economy, we need a means to stop companies from engaging in anti-competitive behaviour and undoing the benefits of efficient and innovative markets. The competition law will adopt a pragmatic approach. It will take into account differences in the various sectors, in terms of their industry structure and stage of market development. It will not

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burden businesses with unnecessary regulatory costs. Such an important initiative will need inputs from businesses and the public. A draft version of the law will be released soon for public consultation.

** Building on Our Fundamentals **

We face formidable challenges in restructuring and upgrading our economy, and coping with shocks and uncertainties in our external environment. But our capacity to overcome these challenges is much greater than ever before. Our financial resources are larger. Our infrastructure and physical assets are better developed. Over the years, our workforce has become better educated and more highly skilled.

As we develop new capabilities and strategies, we must continue to build on and make the most of our strengths. Three fundamentals have been the pillars of Singapore 's success and will allow us to sustain our growth and prosperity. These pillars are:

i. Effective Government . A Government that delivers sound public finances, responsive fiscal policies that help to stabilise the economy, and good financial practices that ensure value for money in public spending.

ii A Strong Society . A resilient and cohesive population, and a strong social compact between Government and the people that helps see us through good and bad times together.

iii A Land of Opportunity . A place where every individual has the chance to be the best he can be, a home where people want to raise their families, an economy which attracts talent and investments, and a centre for businesses to pursue new and exciting opportunities.

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The Government's financial and budget policies will bolster these three fundamentals.

PART II - EFFECTIVE GOVERNMENT:

Importance **: of **

Sound **: Public Finance **

One of the most important contributions any government can make to economic growth and resilience is to put public finances on a sound footing. A balanced budget and a trim and efficient public sector will make for stable macroeconomic conditions and a pro-business climate. Only then can the private sector grow and create wealth for the people.

Fiscal prudence has been a hallmark of Singa­pore 's economic management. Some people accuse us of being too prudent, but we must continue to maintain fiscal prudence, despite stronger spending pressures and tighter budgets. We will spend more in a downturn if we need to, even if it means going into temporary deficit, as we have done in the past two years. But we must never fall into the trap of structural budget deficits, with a permanent shortfall of revenue. On average, over the course of the business cycle, we aim to accumulate a modest surplus, putting aside something in good years so that we have some savings to draw upon in bad years.

Living Within Our **: Means **

In order to live within our means, we must keep Government expenses in check. This means confining the Government to essential functions and preventing the bureaucracy from bloating up. This will also free up talent and resources for the private sector, and create space for private initiative and enterprise.

The Ministry of Finance (MOF) controls the budgets of Ministries by

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capping their spending as a percentage of GDP. To provide some stability in spending from year to year, the budgets are pegged to a six-year average of GDP growth. And to provide flexibility, MOF allows ministries to take advances from future years' budgets, and accumulate and carry forward unused funds to subsequent years. This way, ministries can plan on a multi-year basis instead of being limited by yearly expenditure limits.

MOF will also extract 'productivity dividends' from the operating budgets of all ministries, with effect from FY04. Instead of allowing ministry budgets to grow at the same rate as GDP, MOF will reduce the ministry budgets by a percentage equal to the productivity growth rate, and collect the sums into a central pool. The aim is to encourage ministries to improve their productivity by at least as much as the private sector, and to free up resources to fund new priority projects. For example, MOE will receive additional funds for preschool education and special needs education, while MITA will receive funds to develop the creative industries.

** Revised FY 2003 Budget Estimates **

I will now review the FY03 Budget. I refer Members to the second column of the budget statistics table on the screens and in your handout*.

*Cols. 519-20

When I presented the budget last year, I estimated operating revenue at $26.6 billion and total expenditure at $29.9 billion. With Special Transfers of $600 million to provide for the ERS and Net Investment Income (NII) Contribution of $3 billion, the projected deficit was $900 million.

As the third column of the table shows, the revised operating revenue and total expenditure both turned out about $1 billion less than budgeted. There was also a $1 billion shortfall in NII

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Contribution. The revised Budget Deficit is $1.8 billion or 1.1% of GDP.

The revised FY03 expenditure is $1.1 billion or 0.7% of GDP lower than the budgeted amount, mainly reflecting lower expenditure on development projects across-the-board. This was due to lower contract costs and construction delays, as well as cancellation or deferment of projects. The more significant items of under or deferred expenditure are MND's SERS programme ($59 million), the Singa­pore Management University campus (about $60 million) and the new Supreme Court building ($58 million). While about $600 million worth of construction projects were brought forward in the September 2003 off-budget package, most will start only in FY04 and have thus not led to an increase in spending in FY03.

The revised FY03 budget estimates also include supplementary estimates of about $125 million for six Heads of Expenditure, the bulk of which goes to MTI ($61 million) for the Utilities Save scheme, which was extended in the September package.

** Projected FY 2004 Fiscal Position **

The Government faces a very tight fiscal position in FY04. Operating revenues should rise, but so will spending needs. Despite the improved economy, we still project a budget deficit.

To reduce the revenue shortfall, I am permanently cutting by 2% the budget caps of all ministries except MINDEF, from this financial year. This will save about $450 million a year. More importantly, it will instill financial discipline by encouraging ministries to reprioritise their projects and cut non-essential expenditures.

I am treating MINDEF differently from the other ministries because defence

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provides the peace and security that Singapore needs for economic progress. Government has therefore for many years been prepared to spend up to 6% of GDP on defence. In practice, in recent years defence spending has been 4.5% to 5% of GDP. I will maintain this policy.

The 2% expenditure cut will trim the projected FY04 budget deficit to $700 million, smaller than the $1.8 billion deficit in FY03. This is not inappropriate, as the economic recovery is still in its early stages. But I intend to balance the budget by FY05, assuming the recovery continues on track.

It would therefore be prudent for all ministries to assume that their budgets will continue to be tight, and that they will need to find more economies and do more with less. Barring exceptional conditions, next year (FY05) I intend to apply a further across-the-board cut of 2% on average in the budget cap of each ministry, except MINDEF. I am confident that ministries will make full use of this early notice to adjust their plans and work within the resources available.

Let me now present the FY04 Budget, which is summarised in the last column of the table.

Projected operating revenue is $28.3 billion or 16.6% of GDP. Receipts from GST are estimated to increase by $700 million as a result of the increase in the GST rate from 4% to 5%. Collection from property taxes is also projected to increase by $400 million because the concession period for rebates ended in December 2003, while statutory boards' contributions in lieu of tax are projected to increase by $776 million.

The total supported expenditure is $30.4 billion or 17.9% of GDP. This is an increase of $1.6 billion or 5.6% from the

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FY03 revised expenditure. Larger budgets for MINDEF and MOT account for two-thirds of this increase. MINDEF has to incur additional expenditure for new functions that need to be undertaken due to the current security situation. MOT requires additional funds to finance the construction of the Circle Line and the Kallang-Paya Lebar Expressway.

The sectoral distribution of the budget* remains largely unchanged, with the largest share of the budget still going to Social Development (44.0%), followed by Security and External Relations (37.0%), Economic Development (13.4%) and Government Administration (5.6%).

*Cols. 521-2

After Special Transfers of $900 million, mainly for the third tranche of ERS, and NII Contribution of $2.3 billion, we expect a Budget Deficit of $700 million or 0.45% of GDP.

** Ensuring Value for Money in Public Spending **

It is not enough that we restrain our overall expenditures to live within our means. We must also extract maximum value for money in what we spend. We do this through three initiatives: Best Sourcing, the Cut Waste Panel, and Economy Drive .

Best Sourcing

Last year, I announced that MOF would introduce Best Sourcing for new services. Best Sourcing requires public sector agencies to undertake "market-testing" so as to compare the cost of providing their services in-house against the cost of having private sector vendors provide the services. If the private sector vendor can deliver the services more economically, it will be engaged to do so. The public sector agency will then discontinue the function, and either redeploy or release the affected staff.

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The services that are being market-tested include facilities management, IT services, business investigation, enforcement, and procurement functions. Agencies which have started Best Sourcing include MOH, URA and HDB. The functions that they have "best sourced" and subsequently contracted out in FY03 resulted in $17 million worth of contracts for the private sector. The annual cost savings from outsourcing these functions are estimated to be $1.8 million per year. The numbers are still small, but it is an encouraging start.

In FY04, we will extend the Best Sourcing programme to non-core functions. An overall target of 5% of the value of non-core functions will be market-tested this year by ministries, Organs of State and statutory boards. Public sector agencies are understandably cautious, but MOF will encourage them to be bolder and move faster, so as to benefit earlier from Best Sourcing, without affecting the smooth delivery of services to the public.

Cut Waste Panel

The Cut Waste Panel was established last year to seek feedback from the public on how the public sector can reduce wasteful practices, remove frills and reap savings in the delivery of public services. The response has been overwhelming. So far we have received more than 2,200 suggestions. I am not sure how many are from the MPs. The Panel, chaired by the Head of Civil Service, agreed with almost 85% of the suggestions and feedback. Many suggestions had already been implemented earlier though the public may not have been aware of them. But we also received valuable new suggestions. For example, one writer pointed out that even after late payments for foreign worker levy had been cleared, the Work Permit Department was still sending reminders via registered mail, which was a waste of money. The Department has

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responded to this suggestion by developing a more efficient tracking method to ensure that once a late payment is settled, reminders are no longer sent out. This has saved $187,000 a year. The Cut Waste Panel is an on-going effort and we look forward to more suggestions from the public.

Economy Drive

The Cut Waste exercise and Best Sourcing programme are but parts of a wider Economy Drive for the whole public sector, launched in May last year.

Public officers at all levels have contributed ideas. The aim is not to cut expenditure arbitrarily but to inculcate a stronger 'value for money' mindset in the public sector. The Economy Drive is critical in this new era of fiscal constraints. The only way to meet future challenges and afford new programmes is to get more out of every dollar we spend.

The Economy Drive has produced some encouraging results. For FY03 up till December 03, it had achieved savings of about $475 million. Let me give you some examples.

MOE saved about $30 million in FY03 by revising the norms and standards (such as space requirements and design features) for school buildings.

MINDEF saved about $24 million in FY03 by revamping the training system for NSmen to achieve a reduction in In-Camp Training days without compromising the operational readiness of the SAF.

MOF and its statutory boards have saved about $19 million by re-configuring IT infrastructures, freezing headcount, and restraining rise in wage costs.

The Economy Drive will not compromise the effectiveness of public

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service. Agencies will continue to deliver quality public services. However, excessively high standards inevitably lead to unnecessary costs. Every dollar saved is a dollar that can be released to meet new and pressing demands. Hence, we will review public programmes and expenditure more critically than before, and scale back or remove those which are less useful or not cost-effective.

** Excellence in Service Delivery **

A cost efficient way of delivering many public services is through electronic means, or e-Government. The $1.3 billion 2nd E-Government Action Plan (EGAP-II) from 2003 to 2005 will build on the success of the first plan. Practically all 1,600 public services that can be delivered electronically have become e-services. EGAP-II will provide the public even better and faster online public services by integrating different agencies' processes. For example, a common bill payment website will be implemented, where the public can pay both Government and private sector bills online.

For those who have difficulty using online services, there is an e-Citizen Helper Service available in 22 e-Clubs found at community centres, community clubs and void decks. The Government will extend this Helper Service to ensure access for all Singaporeans. Other e-Citizen outlets already in operation include 8 NTUC Income premises and 2 Office1 Cybermarts.

For businesses, the Government has also developed an online portal - Business eTown (www.business.gov.sg). This is a comprehensive repository of G2B content and e-services that will be especially helpful to SMEs that lack administrative resources. The portal will provide links to Government services such as licence

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applications, and information on tax incentives, assistance schemes, and business opportunities with the Government and abroad.

The Government will also make greater use of e-Government as a channel for public consultation. We have established an online consultation portal where public agencies post consultation papers to seek feedback and ideas. From there the public can see, at a glance, all the on-going discussions.

** Divesting Non-core and Non-strategic Activities **

Keeping Government lean and trim also means divesting activities that are no longer core or strategic to the public sector. I announced last year that the ministries would conduct a review of their companies every three years, so as to determine which should be retained, and which can be divested. The ministries have completed the first review. A number of statutory board companies, for example HDBay and Cleantech Services, have been identified as no longer relevant to the ministries and have been divested. More will be divested within the next few years.

The Temasek Charter spells out the raison d'ªtre of Temasek Holdings and its companies. The role of Temasek is to grow companies with international or regional potential, provide stewardship for companies that the Government needs to own for strategic reasons, and divest those which have no international growth potential or are no longer strategic.

In 2003, Temasek fully or partially divested its stakes in 12 companies. SingTel has divested 69% of its wholly-owned subsidiary, SingPost, through an Initial Public Offering (IPO). Other divestments include the sale of CPG Corp (formerly PWD Corp) in April 2003, and

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Temasek's remaining 10% stake in 98 Holdings in October 2003. In January this year, Temasek completed a $2.1 billion placement of SingTel related securities, thus reducing its shareholding in SingTel by up to 5%. Annex A* lists the divestments by Temasek over the last year.

Temasek will continue to consolidate and rationalise its stable of companies. It will divest those that are no longer relevant to its mission, at the right time, at a fair price, without unsettling the market, and after installing a competent team to manage the companies after divestment.

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Enabling Initiative and **: Enterprise **

As much as the Govern­ment strives to be lean and effective, we must recognise that the state by itself cannot create wealth or jobs. Neither can it force citizens to adopt an enterprising mindset. But the Govern­ment can and will create the environment for private enterprise to flourish, for investments to take place, and for individuals to realise their dreams. This in turn will create jobs and wealth.

Ultimately, our success will depend on the flexibility, nimbleness and fortitude of all Singaporeans. The Government will put in place policies and measures to equip and prepare us for the challenges that will come our way. But each of us must seize the initiative to pursue and realise our aspirations.

The last few years have shown how uncertain and volatile a world we live in, but also how much difference resolute leadership and cohesive response makes. Despite the severe storm, we avoided any social or political unrest. Instead we pulled together, restructured our economy and prepared for the next wave of growth.

The next crisis, and there will bound to be one, will be very different from the

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last. But I am confident that when it happens, we will again muster the resolve, cohesion and the ingenuity to overcome it.

Mr Speaker: Order. I propose to take a break now. I suspend the Sitting and will take the Chair again at 4.35 pm.

Sitting accordingly suspended

at 4.12 pm until 4.35 pm .

Sitting resumed at 4.35 pm

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[Mr Speaker in the Chair]