VISIT OF DR KATALIN SZILI, SPEAKER OF THE NATIONAL ASSEMBLY OF THE REPUBLIC OF HUNGARY, AND DELEGATION (Presence in Gallery)

VISIT OF DR KATALIN SZILI, SPEAKER OF THE NATIONAL ASSEMBLY OF THE REPUBLIC OF HUNGARY, AND DELEGATION:

(Presence in Gallery) Mr Speaker: Order. On behalf of hon. Members, I welcome Speaker Dr. Katalin Szili, and her delegation from the National Assembly of the Republic of Hungary, who are present in our Gallery today. [Applause.]

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ANNUAL BUDGET STATEMENT:

PART III - STRONG SOCIETY:

_Building a Strong _ **: Society **

Mr Lee Hsien Loong: Mr Speaker, Sir, after effective government, the next important fundamental for Singapore 's survival and success is a strong society. Stable families, social cohesion, racial and religious harmony, secure homes and streets - these make Singapore a strong society and an attractive place in which to live, work, and play.

A strong society is marked by a high degree of self-reliance, resilience and social responsibility. The migrants from

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China , India , and the Malay archipelago who built modern Singapore relied on themselves, their families, and their communities to make a living against great odds. These values of self-reliance and social responsibility will become even more relevant in future. Local communities and the people sector must launch more self-help initiatives, and take on a larger role in society.

Government will provide a safety net for those who cannot help themselves and cannot find help elsewhere. We walk a fine line here. If we offer too much protection to citizens, it weakens their resilience and saps their spirit to survive on their own. Our social safety nets must therefore be carefully targeted, and must not undermine our will to work and to improve ourselves. Subsidies should focus on those who need them most, and in areas which yield the most public good. Means testing will therefore become an important feature in providing public services and social assistance.

Let me elaborate on our social policies in four areas:

˜ Achieving excellence in higher education;

˜ Keeping healthcare affordable;

˜ Building the next generation; and

˜ Ensuring adequate finances for retirement.

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Achieving Excellence in Higher Education: _

Our education system has enabled a growing number of our citizens to benefit from higher education. 35% of our working adult population now have either a university degree or a polytechnic diploma, triple the 12% just 10 years ago.

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Today, 60% of each cohort graduate from a local polytechnic or university. As our schools improve, more students will qualify for university admission. The proportion of each cohort entering local universities will increase from 21% today to 25% by 2010.

However, good university education is not cheap. One-quarter (24%) of our education budget goes to the university sector. More students entering university, more good professors, and more overseas attachments for students can only mean more spending on university education. The Government's total spending (operating and development expenditure) on universities has already grown from $1.11 billion in 1998 to $1.56 billion in 2002, a 41% increase in five years, mainly because of larger student enrolments. If this trend continues, we will be forced to squeeze resources from primary and secondary education in order to fund university education.

This is not desirable. From the economic point of view, universal primary and secondary education benefits society much more than it benefits individuals. Society as a whole is better off when everyone is literate, equipped with basic skills, and able to become a good citizen. He can be a good colleague, good neighbour, good fellow national serviceman. The whole society gains. Hence it is sound public policy to subsidise primary and secondary education heavily. In contrast, the benefit of a university education accrues mostly to the individual. A rigorous and relevant university degree will make the graduate more employable, and enable him to earn much more during his working life. Furthermore, only the top 25% of the cohort will make it to university, unlike schools, polytechnics or institutes of technical education. The argument for funding university education heavily from general taxation is therefore much weaker.

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From the universities' perspective, it is better for them to be less reliant on the Government for funding. The more universities raise their own funds from fees and donations, the more autonomous they will be, the more flexibly they can respond to student needs and market demands, and the better placed they are to achieve academic excellence. This has been the experience all over the world. In the UK and Europe , universities are funded mainly through Government grants, and the result has been mediocrity and declining standards. In contrast, US universities have to compete actively for both state and private funding, on the basis of quality. American students pay higher fees, and take student loans to a much larger extent than European students. The US universities have produced peaks of excellence unmatched in any other country, and higher standards overall. The US is a large country and its multi-tiered model of state and private universities cannot be replicated here. But we should move in the direction of greater competition and self-reliance to allow our universities to achieve excellence.

It is therefore fair to ask undergraduates to pay for a larger part of their university education themselves. They do not necessarily have to pay while studying, but can do so later when they are working and earning stable incomes. With this approach, no student should miss a university education because he cannot afford it. We will make sure of this through generous scholarships to outstanding under­graduates, bursaries for those from low-income homes, and student loans readily available to all who need them. That we can promise.

Our current formula is for undergraduates to pay 25% of the operating costs of university education. The Govern­ment pays for the remaining 75%, and also bears in full the

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infrastructure costs of our universities, which is substantial. Going forward, we need to establish a more sustainable and equitable cost-sharing formula between the state and university students.

There will be no university fee increases this academic year. However, MOE and the universities are reviewing the basis for setting university fees in future, and expect to reach some conclusions this year.

Keeping Healthcare **: Affordable **

Our publicly funded hospitals provide quality care to all Singaporeans, at an affordable cost. But advances in medical technology, while enhancing healthcare, continue to push up its cost. For example, in 1990, the standard treatment for blocked heart arteries was angioplasty. By 2000, it had progressed to angioplasty with stents. This has lowered the recurrence of blood vessel blockage but has tripled the cost of treatment from $1,300 to $3,500.

Our ageing population will put further pressure on the healthcare system and on our ability to finance good healthcare for all Singaporeans. MOH will do its best to contain medical inflation. This requires cooperation and understanding from all stakeholders in the healthcare system. Providers have to cut out inefficiencies and frills. Patients have to be realistic in their expectations. And all Singaporeans should adopt healthy lifestyles.

Ultimately, Singaporeans have to be responsible for themselves and not rely on the Government to provide for every need. Our healthcare financing framework, based on the 3Ms - Medisave, MediShield and Medifund - has fostered an ethic of self-reliance, kept healthcare spending down, and served us well.

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_ Medisave for Self-Employed _

Originally the self-employed did not fall within this 3M framework, because they did not contribute to Medisave. But in 1992 the Government amended the CPF Act to require self-employed individuals who earn above a certain salary - currently $6,000 a year - to make compulsory contributions to their Medisave accounts. We wanted to make sure that the self-employed regularly put aside savings for their health needs and not expose themselves to unnecessary financial risk when they or their families fall ill.

However, compliance has been patchy. Only 47% of self-employed CPF members have paid their full Medisave contributions. Another 36% have made partial payments, while 17% have not contributed at all, which means that about half of the self-employed are storing up bigger problems for themselves in future by not contributing fully to their Medisave.

Henceforth, the CPF Board will enforce Medisave contributions more strictly for self-employed Singaporeans, just as it does with other employers and employees, to ensure that self-employed Singaporeans set aside enough for their health needs.

Health Insurance and MediShield

With medical costs increasing, so will the risk that large healthcare expenses will exhaust one's own savings. Health insurance schemes can help stretch our Medisave dollars through better pooling of risks. We should therefore supplement Medisave with health insurance schemes which are properly designed to avoid the "buffet-lunch abuses" so common in other countries. This will help us to realise portable employer-provided medical

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benefits. MOH is also examining how we can enhance the coverage of MediShield, to give Singaporeans better protection against large bills from catastrophic illnesses.

Means Testing

Besides relying more on medical insurance, we also need to target our healthcare subsidies more precisely, to reach those who need them most. Nationally, one-third of the total healthcare expenditure is financed by the Government. In hospitals, many services are subsidised even more. For example, all patients in Class C wards are subsidised 80% of the cost of their stay.

Currently, we link the level of subsidies to the class of ward. We do not take into account the patient's ability to pay. A poor patient in a Class C ward enjoys the same 80% subsidy as a high-income patient, even though he needs the subsidy much more.

If we continue subsidising healthcare this way, one of two things will happen. Either the Government will have to spend a lot more on healthcare - which means raising taxes, or it must lower the quality of healthcare provided to all Singaporeans. Neither is desirable.

The Feedback Group has proposed pegging the amount of subsidy to the financial status of the patient rather than the class of ward, in other words, means testing. It will be more difficult to implement, as we will have to assess the financial means of each patient. But means testing is ultimately more efficient and equitable as it will enable us to focus subsidies on those who need them, and so make the most of our healthcare budget.

Means testing is not new. We already practise it in the step-down care sector. In community hospitals, nursing homes

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and home nursing, patients' incomes are assessed to determine the subsidies they receive. Means testing is also used for primary care services for the elderly who seek treatment in private clinics, through the Primary Care Partnership Scheme. Eligible patients pay the same fees as they would if they had visited the polyclinics. These schemes have been well received and accepted.

MOH is studying how to extend means testing to general hospitals. MOH will proceed cautiously, so as to gain more experience with means testing and give patients time to adjust. It will need to determine where best to start, because hospital services span a wide range, from inpatient care to day surgery to specialist outpatient care.

Even with means testing, a high-income patient can opt for B2 or C class treatment, and pay less than for A or B1 class treatment. But when he does so, he will be subsidised less than a poorer patient getting B2 or C class treatment. And I think that is fair.

_ Medisave and Medifund Top-ups _

Even with means testing and enhanced medical insurance, some older Singaporeans will face difficulties in coping with increased medical expenditure and paying their MediShield and Eldershield premiums. Older Singaporeans were midway through their working lives when the Medisave Scheme started in 1984. As a result, they have lower Medisave balances than younger workers. Furthermore, workers aged 50 to 55 will face deeper CPF employer contribution rate cuts in the next two years.

I have therefore decided to top up the Medisave accounts of Singaporeans aged 50 and above. The amount ranges from $50 to $200, and will vary based on age of the recipient and his existing Medisave balance, as shown on the screens*. This

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will cost the Government $104 million.

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I will also be injecting an additional $100 million into Medifund to help needy patients who cannot afford to pay their hospital bills even after subsidies. This injection will bring the total size of Medifund to its targeted size of $1 billion.

** Building the Next Generation **

Our children embody our hopes for the future. Singapore 's birth rate is way below replacement level and falling. This is a serious problem. A declining birth rate will sap the vitality and resilience of our country.

Over the years, we have introduced many measures to encourage and support parenthood. After our first package in 1987, the total fertility rate (TFR), which reflects the number of children a woman is expected to have during her lifetime, jumped up to 1.96, as seen in the chart*. This was partly because 1988 was a "Dragon" year, but the impact of the package was felt through the first half of the 1990s. Unfortunately the effect seems to have worn off over time, and the underlying trend of a falling TFR has reasserted itself. By the next "Dragon" year in 2000, the TFR had declined to 1.60. I am not sure what the next dragon will be. It may be a lizard! The Baby Bonus scheme and further generous tax incentives introduced in 2000 have failed to reverse this trend. We give out over $200 million annually in tax reliefs and rebates, and more than $100 million has been disbursed under the Baby Bonus scheme. Yet the TFR for 2003 dropped to a historic low of 1.26. This is one of the lowest birth rates in the world. Only 36,000 babies were born last year, far fewer than the 50,000 babies we need to replace ourselves.

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The accelerated decline in TFR since 1998 was partly caused by economic

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uncertainty - these were the years of the Asian financial crisis and the two recessions. But the underlying downtrend in birth rates is real and will continue unless we take decisive steps now.

Our existing measures are not enough. We must take a more comprehensive approach to solving this problem. We must encourage young people to marry and marry earlier, and make it easier for young couples to start and raise a family. And we have to take a long-term view. The impact of our policies on birth rates may not be felt immediately, because changing attitudes, mindsets and practices take time and patience.

We need to shift social attitudes towards having children, even while we recognise that having children is a very personal decision which couples have to make for themselves. There is no single magic solution. The approach must be both holistic and coherent, addressing parents' concerns from childbirth through the years of bringing up their children. As these are complex issues that require thorough discussion and deliberation, the Government will study them in depth over the next few months, before deciding on the most effective set of measures. Today I shall set out the principles that will guide our thinking.

Firstly, the aim of our measures must be not just to produce more children, but to produce the next generation of Singa­pore citizens. We want to grow the total population of Singa­pore , but equally important, we also have to reproduce and maintain the core group of citizens who will build and defend our country, and without whom we would not be a nation. Thus our measures must focus on encouraging more Singapore citizen babies.

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Secondly, the problem is more serious for the mothers who are more educated and earn higher incomes. The higher the woman's career attainment, the less likely she is to get married and the fewer children she is likely to have. This is true not just of graduates, but also of women with secondary education. It is understandable because the more a woman is able to earn a living, the heavier the opportunity cost to her of having children. Therefore while our measures must cover all families, we must especially make sure that the incentives are effective for the better qualified women.

Thirdly, while encouraging procreation is critical, realistically it will be very hard to raise our TFR back to the replacement level of 2.1. Even other countries which have managed to reverse falling birth rates have not achieved replacement fertility. We therefore need to boost our population through other ways. In particular, we need to open our doors to immigrants who can contribute to Singa­pore . After getting them here, we need to help them settle down and integrate into our society. We need the right policies to encourage them first to become permanent residents (PRs), and then to take up citizenship. This means treating PRs and citizens differently, so that PRs have incentives to take up the privileges and responsibilities of being Singaporeans.

As for specific measures to encourage procreation, a comprehensive approach should include adequate support facilities such as infant and child care arrangements, better balance between work and family life, and of course financial help measures.

To start with, we have to consider the issue of maternity leave. We have hitherto been reluctant to increase statutory maternity leave. But many working mothers feel that the current two

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months is too short. A major worry of working mothers is that they will have too little time with their children, particularly in the first few months after birth which are crucial to bonding mother and child. We may need to extend the period of maternity leave, but without overburdening employers with added costs.

Next, when the mother returns to work, she will often want to put her child in affordable and reliable child care facilities. The Government already subsidises child care, but infant care is more expensive. We will therefore look into providing more financial help for infant care.

Next, we need to strike a better balance between work and family life. Many couples cite the lack of family time and flexible working arrangements as an impediment to having more children. As an employer, the Government will review civil service work arrangements, without affecting essential public services. We will set a clear example to companies of how employers can create a work environment that is supportive of families.

Finally, while families should not have babies just because of financial incentives, tax reliefs and rebates for parents and working mothers appreciably lighten the financial burden of bringing up children. We need to simplify and enhance the existing tax incentives, to make them more accessible and attractive to couples. In fact, I find them quite hard to understand too. I think my wife has figured them out.

Two civil service teams visited Europe recently to study how other countries are tackling their falling birth rates. One went to Italy , the Netherlands and France , and the other to Norway and Sweden . Norway and Sweden have one model. They are both welfare states and they have succeeded in bringing their birth

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rates up. Netherlands and France have succeeded in bringing their birth rates up. Italy has not. We wanted to know why one worked and the other did not. We will study the lessons drawn and come up with our own measures. As several ministries are involved, I have tasked Mr Lim Hng Kiang, Minister in the Prime Minister's Office, to take charge and to make specific proposals. He will be assisted by an inter-ministry civil service Working Committee on Population chaired by Mr Eddie Teo, Permanent Secretary in the Prime Minister's Office. I have asked the committee to complete its work before National Day.

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Adequate Finances for Retirement: _

With the ageing of our population, we have to ensure that working people put aside enough resources to support themselves in their old age. Today, most of the elderly in Singapore receive some financial support from their children. But longer life spans, rising singlehood, and low fertility rates are making it harder for old people to rely on their children for support. There is a pressing need to make sure that Singaporeans are self-reliant and financially independent in their old age.

Under the CPF Minimum Sum Topping-Up Scheme, individuals are allowed to make top-ups to the CPF Retirement Accounts belonging to themselves, their spouses, parents and grandparents. They can make top-ups in cash or out of their CPF Ordinary Account, up to the Minimum Sum in the Retirement Account. Currently, individuals making such cash top-ups enjoy a tax relief of up to $6,000 per year.

With lower CPF contributions and the higher CPF Minimum Sum, we want to encourage more people to voluntarily top up their own or their family members' Retirement Accounts. I am therefore raising the tax relief ceiling on cash top-

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ups from $6,000 to $7,000, with effect from YA 2005.

Non-working spouses, such as full-time housewives, may also be financially vulnerable in their later years. At present, individuals are not entitled to any tax relief when they make cash top-ups to the Retirement Accounts of their non-working spouses. We should encourage individuals who have the means to contribute to the financial security of their non-working spouses to do so. I will therefore be extending the tax relief to individuals making cash top-ups to non-working spouses who are 55 years old and older, and who earned not more than $2,000 in the preceding year.

I hope these steps will help bolster the financial resilience of Singaporean families.

PART IV -:

LAND:

OF:

OPPORTUNITY:

Making **: Singapore ** ** a Land of Opportunity **

Singapore is what it is today because it has been a land of opportunity for enterprising people from all over Asia . Our attractions are unique. We are at the crossroads of East and West, a modern, cosmopolitan city connected to the world of finance and business, yet rooted in the ancient cultures of our forebears. We offer a vibrant economy where people can earn a good living, a stable society where they can raise strong families, and opportunities for all to build a brighter future. And now with Asia on the rise, we must remake Singapore as a land of opportunity.

A **: Competitive ** **_ Tax Regime _ **

Reducing Corporate Income Tax

A key element of our efforts to remake Singapore is a globally competitive tax

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regime. Lower direct taxes encourage businesses to make new investments and individuals to work hard and achieve. In 2002, Government accepted the ERC's recommendation to lower the corporate tax rate to 20% by Year of Assessment (YA) 2005 and as the first step, brought it down to 22%.

I have decided to reduce the corporate income tax rate to 20% with effect from YA 2005. This is expected to cost the Government $800 million annually. It will make Singapore a more attractive business hub, encourage new investments, and spur entrepreneurship.

Deferring the Reduction of Personal Income Tax

The Government had also set the target of lowering the top personal income tax rate to 20% by YA 2005. While this remains our target, the unexpectedly difficult economic conditions in the last two years have forced us to reconsider the timing of the reduction.

First, our spending commitments have increased, as I explained earlier. To balance the budget by next year, we not only need to tighten our spending, but also to husband our tax revenues.

Second, the delay in raising the GST rate to 5% has dented Government revenues. The extra year taken to phase in the GST increase cost $700 million in revenue foregone, more than the $425 million that would be lost annually if we reduced the top personal income tax rate to 20%.

Third, while we expect stronger growth this year, we are not certain if this will be sustained into FY05 and FY06. Should the US economy slow down after the Presidential election, our growth and fiscal position will be affected.

I have therefore decided to defer lowering personal income taxes for the

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time being. However, a 20% top personal income tax rate remains the Govern­ment's goal. The Government will watch the budgetary position and economic outlook carefully, and will reduce personal taxes as soon as conditions permit.

Exempting Individuals' Foreign-sourced Income

Currently, foreign-sourced income received in Singapore by Singapore resident individuals is subject to tax unless specifically exempted. Last year, I announced a foreign-sourced income exemption regime under which foreign dividends, branch profits and service income are exempt from tax. This mainly benefits companies , with individuals benefiting only insofar as they earn dividends or service income from abroad.

The ERC had recommended that all foreign-sourced personal income remitted to Singapore be exempted from tax too. This would encourage Singapore resident individuals to remit their offshore funds to Singapore for investment and management. This in turn would boost our private wealth management industry.

I have therefore decided to exempt from tax all foreign-sourced income received in Singapore by resident individuals from YA 2005. With this change, Singapore will now tax individuals on a purely territorial basis.

Exempting Individuals' Singapore-sourced Investment Income

I have also decided to exempt from tax all Singapore-sourced investment income derived directly by individuals from financial instruments. This will help ensure that the exemption of foreign-sourced income does not bias individuals against investments in Singa­pore

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instruments. More importantly, it will align the tax treatment of different kinds of investment income, and encourage individuals to save and plan for their retirement.

The tax exemption for all financial instruments other than standard deposits, for example bonds, annuities and unit trusts, will take effect from YA 2005. For standard deposits, last year I announced a partial tax exemption on interest income for YA 2005, to be followed by full exemption from YA 2006 onwards. These arrangements still stand.

These two changes - exempting individuals' foreign-sourced income and exempting Singapore-sourced investment income derived by individuals - will cost the Government about $42 million each year. Details of the scope of both exemptions are set out in Annex B * .

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Promoting **: Singapore ** ** as a Business Hub **

Regional HQ incentive

To be a land of opportunity, Singapore must continue to be the choice location in Asia for MNCs to base their HQ operations. But we face increasing competition from within and outside the region. I have decided to extend the maximum duration of the existing Regional HQ scheme from three to five years, with immediate effect. Companies that have already been here for more than a year will now also be eligible for this scheme. This will strengthen Singapore 's reputation as a prime location for HQ operations and attract more HQ companies to Singapore .

Pioneer Incentive

We must also attract and root new MNC activities in Singapore , to create

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new jobs and opportunities. This is why, even as we diversify our economy and build up our domestic sector, we must stay attractive to MNCs. But competition for MNC investments has increased in the last decade, making EDB's task more challenging than ever.

Our response is two-fold. First, our workforce must have the skills and expertise to undertake more knowledge-intensive and higher value-added activities. Second, the package of tax incentives that we offer to MNCs making large investments in Singapore must remain attractive. To this end, I have decided to extend the maximum duration for the pioneer incentive from 10 to 15 years, with immediate effect.

Withholding Taxes on Royalty Payments

Exploiting new knowledge and ideas is important if Singapore companies are to compete internationally. As our economy upgrades, more Singapore companies will develop their business by exploiting Intellectual Property (IP). Much IP is held outside Singapore and our companies have to pay royalties to the IP owners to be licensed to use them. Withholding taxes on royalties is a business cost that will discourage Singapore companies from exploiting IP.

I have therefore decided to lower the withholding tax on royalty payments from 15% to 10% with effect from 1st January 2005 . This will be of greatest help to smaller businesses that are not enjoying any of the existing incentives for royalty payments. Withholding tax is usually an item for negotiation in avoidance of double taxation agreements, but we are taking a unilateral step in our own interest to spur our transition to a knowledge-based economy.

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_** Encouraging Entrepreneurship ** _

Tax Exemption for New Companies

New companies represent our hopes for a more entrepreneurial economy. Government will give these start-ups every opportunity to thrive and succeed. I have therefore decided to fully exempt from tax the first $100,000 of normal chargeable income (excluding Singapore dividends). This exemption will apply to new companies for each of their first three years of assessment that fall within the period YA 2005 to YA 2009. This, together with the current partial tax exemption feature of our corporate tax regime, underscores our commitment to keep statutory costs on entrepreneurs as low as possible. Details of this scheme are provided at Annex C * .

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Financing for Start-Ups

One of the key pre-occupations of new enterprises is access to financing. Currently, the Technopreneur Investment Incentive (TII) encourages private angel investors to fund high-tech start-ups. But not all successful start-ups need to be high-tech. Some succeed by selling mundane items, from coffee, sushi to hamburgers, in innovative ways. I have decided to expand the current Technopreneur Investment Incentive (TII) to include all forms of start-ups and not just high-tech start-ups. The TII will be renamed Enterprise Investment Incentive (EII). Investors in start-ups awarded the EII will enjoy tax deductions for losses incurred if these companies fail, or if they have to sell their shares at a loss. The EII is expected to cost Government $36 million each year.

The Government will also embark on a SME loan securitisation project this year to help a wider pool of SMEs gain access to financing.

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Promoting **: Financial ** ** Services **

In financial services, we have a unique opportunity to become the private wealth management centre of Asia , serving high net worth individuals from the region and beyond. The industry estimates that there are 1.8 million high net worth individuals in the Asia-Pacific region, with private wealth totalling US$5.7 trillion. This wealth will grow even more, with the rapidly rising incomes and high savings rates in the region. Our strong economic fundamentals, socio-political stability, efficient legal infrastructure, and sound regulatory regime place us in a good position to service their needs.

We have done well so far. Existing private banking players have expanded their activities in Singapore . We continue to attract new players, who bring a diversity of new products and business models that have added depth and range to our financial markets. Employment in this industry has nearly doubled over the past three years. The tax exemption of individuals' foreign-sourced income and Singapore-sourced investment income that I have just announced will make Singapore even more attractive as a wealth management hub.

As financial sector activities are continually changing and ever mobile, we have updated our existing incentives to keep them relevant and help maintain Singapore 's attractiveness as a leading financial centre. Among other changes, I have decided to enhance our incentives to promote the short-term debt market, the structured finance market, processing services for financial institutions, commodity derivatives trading, secondary loans trading, and SGX trading. (Details are at Annex D *.)

I have also decided to expand the scope of income that will be exempted for

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Designated Unit Trusts (DUTs) and the tax exemption schemes for foreign investors and foreign trusts. Examples of income covered by this expansion in scope are rental and discount income derived from outside Singapore and received in Singapore . (Details of these enhancements are at Annex D .)

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** Other Tax Changes **

Approved International Shipping Enterprise Scheme

To retain and attract international ship owners and operators to operate from Singapore , the current Approved International Shipping Enterprise (AIS) scheme will be expanded. Currently, the onshore charter income of an AIS company is not tax exempt, except when the charter income is received from another AIS company. With effect from YA 2005, all onshore charter income received by an AIS company will be tax exempt.

Streamlining the Processing of Estate Duty

I am streamlining the processing of estate duty. For deaths occurring on or after 1st January 2005 , the first six months from the date of death will now be an interest free period. Administrators/Executors will now have six months to file a complete return before interest starts accruing. Also, after the Notice of Assessment has been issued by IRAS, a grace period of 30 days will be provided for payment of estate duty where no penalty is levied. The penalty only kicks in after the grace period expires. This new arrangement ensures that administrators/executors are not unduly penalised if they co-operate with IRAS to file complete returns and make payment promptly.

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Motor-Vehicle Taxes

To lower the upfront costs of car ownership, I have decided to reduce the Additional Registration Fee (ARF) from 130% to 110% of Open Market Value (OMV). This will apply to cars with COEs obtained from the first COE bidding exercise in March 2004 onwards.

Taxis and cars have previously been taxed differently. Our policy has been to progressively harmonise the ARF and Excise Duty (ED) that they pay. Thus I am raising the ED for taxis from the current 10% of OMV to 20% of OMV, the same rate as that for cars. This will be effective today. Taken together with the ARF cut, new taxis will still enjoy a net reduction in upfront taxes of 10% of OMV.

Liquor Duties

To rationalise our liquor taxes and to bring them in line with our international obligations, I am raising the excise duties on certain types of liquor and reducing them for others. The new rates will take effect today and are set out at Annex E *.

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Currently, Singapore Customs assesses the duty on liquors based on standard sizes. Most liquors are sold in standard sizes, but brandy, whisky and sake occasionally come in non-standard size bottles. Singapore Customs will therefore stop the practice of assessing liquor duty based on standard bottle sizes, and instead assess liquor duty based on exact volume. The removal of standard sizing will save the liquor industry about $3.7 million in duties each year.

Tobacco Duties

A local study by NUS shows that healthcare, absenteeism and loss of productivity stemming from smoking-

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related diseases cost between $700 million and $800 million in 1997. I have decided to further raise the excise duties on all tobacco products with effect from today to discourage smoking, especially among our young. Excise duty on cigarettes will go up from $255 per 1,000 sticks to $293 per 1,000 sticks. I am also harmonising the excise duties on other tobacco products with cigarettes. The new duties are at Annex F * .

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Overall FY 2004 Fiscal Position: _

Mr Speaker, Sir, this Budget will deliver $1 billion of tax savings and Medisave and Medifund benefits for businesses and individuals. It will support our economic recovery this year. More importantly, these measures will build long-lasting competitive advantages for the economy, enhance our capacity to deliver good public services particularly in healthcare and education, and provide more help for families with dependents. The tax changes and incentives I have announced will increase the deficit from the $750 million projected in the FY04 Budget Book to $1.35 billion. The Government is able to finance this deficit from funds accumulated in its current term and will not need to draw on past reserves.

PART V - CONCLUSION: 2003 was a tough year, but we emerged from it stronger. Our response to SARS demonstrated our resilience as a people. We are well-placed to ride the upturn in the global economy this year. Most importantly, we have what it takes to sustain Singapore 's dynamism and growth over the long term.

But we must also be prepared to encounter more shocks and uncertainties. Fresh terrorist attacks could undermine confidence in the region. New diseases more dangerous than SARS or avian influenza may emerge. China and India

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will pose fresh challenges as they continue to open up to the world.

Our strategy in this environment of growing competition is to keep our economy open and continually enhance our competitiveness. This means upgrading our skills, making our wages more flexible, encouraging entrepreneurship, and promoting free markets. We must not seek to shield ourselves from competition but to meet it and excel.

We are on the right track. We are lowering taxes, spending only on essentials, and maintaining a prudent fiscal position. We are creating the conditions for new businesses and enterprises to flourish while building on our strengths in manufacturing and services. And we are creating opportunities for enterprising Singaporeans, while targeting social safety nets at the truly needy who lack other means of support.

Looking ahead, there is much to be hopeful about. We are at the heart of a resurgent Asia , midway between the booming economies of China and India . Opportunities abound in the region and beyond. The Government will play its part to make things possible. And I have every confidence that Singaporeans will seek these opportunities, grab the openings and create new possibilities for ourselves. We will adjust to change, overcome adversity, and confront

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challenges courageously and imaginatively. We will press on with confidence, and reach out for success. Together, as one Singapore , we will build a future of opportunity for ourselves and our children.

Mr Speaker, Sir, I beg to move. [ Applause. ]

Mr Speaker: The Question is, "That Parliament approves the financial policy of the Government for the financial year 1st April, 2004 to 31st March, 2005 ." In accordance with paragraph (1) of Standing Order No. 86, the debate now stands adjourned.

Debate to be resumed on what day, Mr Lee?

Mr Lee Hsien Loong: Monday, 8th March, 2004.

Mr Speaker: So be it.