SG_T_budget

This article was first published in the May 2016 Singapore edition of Accounting and Business magazine.

After the bold initiatives of the SG50 Jubilee Budget and with economic uncertainty in the air, many predicted that this year was going to see a less ambitious agenda. However, minister for finance Heng Swee Keat - giving his first Budget speech - still spoke in bold terms of not allowing pessimism to take hold and become a self-fulfilling prophecy, as he laid out a well-balanced Budget that continues the recent focus on restructuring the economy for greater value creation. He appears to have achieved the Holy Grail for all finance ministers – increasing spending with no significant tax increases and a Budget surplus, all within the constraints of slow economic growth.

Small and medium-sized enterprises (SMEs) were clearly the beneficiaries of this year’s Budget, with easier access to funding and higher corporate tax rebates. However, more could have been done – for example, by increasing the cap for the tax rebate specifically for SMEs.

One of the most interesting facets, and one that shows an insight into the government’s current thinking, was the decision not to lift cooling measures for the property market in an effort to keep property prices stable. The measures, in place since 2010, have seen private home prices fall 8.4% after reaching their peak in 2013 and many experts supported this decision for the time being. However, this was a double whammy for property developers as manpower costs will increase due to the non-deferment of the previously announced increase in foreign worker levies for the construction industry.

Focus on economic transformation

The three key structural issues facing the Singapore economy are well-documented and remain unchanged: increasing competition from neighbouring countries and China; rapid technological advances disrupting traditional business models and potentially displacing Singaporean workers; and an increasingly ageing population.

Singapore’s 2016 Budget took further steps towards a long-term transformation of the economy while still addressing some of the short-term pressures through increasing corporate income tax rebates, extension of the Special Employment Credit and deferment of the foreign worker levies for the marine and process sectors.

Tackling these three key structural issues during potential cyclical economic weakness will be difficult, but some of the measures offer great potential. For example, SMEs are still being actively encouraged to ‘step up, scale up and go out’:

  • Attempts to make grant application easier through the Business Grants Portal will encourage SMEs to ‘step up’; a wide range of schemes administered by various government agencies will now be under one roof and organised to be more enterprise-centric.
  • Through the S$4.5bn Industry Transformation Programme, SMEs will have increased opportunities to ‘scale up’; the S$400m Automation Support Package in particular will help with grants and investment allowances; it goes beyond the support offered by the Productivity and Innovation Credit scheme but is subject to approval (and hence scrutiny) by the authorities. Meanwhile, the enhancement of the mergers and acquisitions scheme – effectively doubling allowances – should allow SMEs to take advantage of possible low valuations in the downturn. Following on from 2015 Budget enhancements to the scheme, this shows the government is serious about helping local acquisitive players to grow.
  • International Enterprise Singapore will continue to support SMEs venturing into new markets via existing programmes and the extension of the Double Tax Deduction for Internationalisation will support them as they ‘go out’.

The National Trade Platform (NTP) was one of the most talked-about initiatives in the Budget. This one-stop system should encourage data sharing among businesses and the government with the goal of streamlining the processes and cutting costs for SMEs in key sectors like logistics and trade-finance – replacing TradeNet (for customs purposes) and TradeXchange (for data sharing). However, many experts advise that the experience in other countries has been one of slow uptake and that some incentives are often required to get companies on board – especially with concerns over confidentiality and security of the information that they must provide.

Other countries in ASEAN and across the world are also working on improving and integrating trading systems; the aim is to simplify movements of goods cross-border. But to achieve this, the systems need to balance country requirements, security in the supply chain and differing practices across countries and trading blocs. The government suggests that the NTP system, which will cost S$100m to develop, could save S$600m per year in time costs for businesses.

Meanwhile, the very real threat of disruptive innovation through technological change is addressed through a number of measures including more funding for the National Robotics Programme; a top-up of the National Research Fund; and the TechSkills Accelerator, which will help with skill development and job placement to allow Singaporeans fill the pressing human capital needs of the information and communications technology sector. The creation of the new Jurong Innovation District – labelled by many commentators as Singapore’s Silicon Valley – will help bring together innovation, research and production in a campus-style environment that will focus more on the long-term benefits of value creation and growth.

Focus on community support

The increasing ageing population continues to be a threat on the horizon for a country with a limited social ‘safety net’; the extension for another three years of the Special Employment Credit, which encourages companies to hire older workers, and the first payout under the Silver Support Scheme, which was introduced in the 2015 Budget, in July 2016 (primarily to retirees), will also help build on the Pioneer Generation Package of 2015.

In this vein, the Budget continued the strong focus on social policies from previous Budgets with further incentives for contributing to population growth in the form of the Child Development Account First Step grant, as well as initiatives such as KidSTART and Goods and Services Tax (GST) vouchers to support both youths and the elderly, as well as low-income workers. People with disabilities also saw increased support from the Budget, with further developments to come from the Ministry of Culture, Community and Youth.

For tax advisers, it was an uneventful Budget – with more focus on the expenditure than the revenues. The finance minister honoured the word of his predecessor, deputy prime minister Tharman Shanmugaratnam, in not increasing GST, surprisingly did not increase ‘sin taxes’ and only tinkered with personal income tax relief caps and corporate tax rebates.

Rounding up the business tax announcements were extensions and enhancements to incentives for the finance, insurance and maritime sectors – most of which were widely anticipated. There were some interesting measures around tax deductions for volunteerism in companies to help build the social fabric of a ‘caring’ and ‘resilient’ society but it was surprising that the finance minister did not make any announcements in his speech on Singapore’s adoption of the Base Erosion and Profit Shifting (BEPS) minimum standards proposed by the OECD. Groups operating internationally will hope for more clarity soon on Singapore’s approach.

Spending landscape

With the government projecting a S$14.7bn contribution from the investment returns of Singapore’s reserves (Net Investment Returns Contribution; Temasek’s contribution is becoming more and more important) – now easily the largest source of income for the government – and a 19.3% expected increase in revenue from vehicle taxes and Certificate of Entitlement, the headline will be of a Budget offering a surplus balance of S$3.4bn, versus last year’s S$4.9bn deficit (although this was much better than the S$6.7bn deficit originally forecasted). However, there is a feeling that the government may be leaving ‘something in the tank’ for the coming years in case any off-Budget measures are required should the economy take a turn for the worse.

The slight increase in spending on public infrastructure projects and some smaller construction projects may help mitigate some of the concerns of a prolonged downturn or slide into recession, as will the continued support for the Wage Credit Scheme up until 2017, but there is still a feeling that we are entering the unknown.

The finance minister was at pains to stress that ‘we have no instruction manual for our future… Together, we must be prepared to change’ and that Singapore does not find itself in the same situation as 2009, when expenditure and income policies were clearly targeted at countering the recession. There is a sense that the government feels that this current downturn can probably be ‘ridden out’ and that the bigger threats are still down the road, given the latent structural issues. This Budget was all about schemes for productivity and community support, and is clearly set out to build a solid base for the next 20 years or so for Singapore’s future.

It is probable that another reason for the somewhat cautious expenditure this year may be the current sitting of the Committee on the Future Economy; there will likely be large-scale recommendations when that committee publishes its recommendations later this year, and we can expect that many of those will require and receive funding support through the 2017 Budget.

Overall, this was a prudent but well-targeted Budget: the minister’s theme of partnership to transform Singapore is in the right direction, as he painted a picture of stakeholders working together to grow Singapore’s economy and building resilience in the fabric of our society.

Businesses, workers and the government must work hand in hand to grow our enterprises; our corporates, communities, people and the government must work together to strengthen our nation and this Budget can help lay the foundations beyond SG50 for possibly challenging years to come.

Ong Siok Peng is tax principal, James Walton is clients and markets principal and Chua Kong Ping is tax senior manager at Deloitte Singapore