Budget 2012: Pragmatic in the face of a downturn

~by: Simeon Ang~

Pragmatism, an attribute that our government is known to propagate in all of its policies, is clearly evident in this year’s budget. Analysts were right to tone down expectations about the possibilities that Budget 2012 would pump a huge stimulus into the economy on a short term basis.

Deputy Prime Minister and Finance Minister, Tharman Shanmugaratnam, mentioned from the start of his speech, that even though the estimated GDP growth of one to three percent for 2012, was lower than previously anticipated, it was still somewhere within the medium term growth potential of three to five percent for Singapore. Thus, setting the stage for its utilitarian budget that is expected to yield a $2.8 billion primary surplus for FY12.

A few key thrusts emerged from the budget that would directly affect businesses in Singapore. These thrusts would significantly affect the labour market, and three different sectors in the economy, namely, the tourism sector, the public transport sector and the healthcare sector.

Populist Labour Measures?

Off the bat, the finance minister remarked of the need to “reduce (the economy’s) dependence on foreign labour”. What came next could be widely contrived as a populist move to stymie increasing criticism from the ground about pro-immigration policies. The minister sought to introduce a reduction in the dependency ratio ceiling (DRCs) in the manufacturing and services sectors.

While the writer will not go into details about the changes, it is notable that the steps taken by the government could instead lead to higher inflation. This additional focus to hire locals as well as boost lower income wages could cut both ways as prices for goods and services will likely be driven up as businesses push cost increases to consumers. As OCBC’s review aptly puts it, “In the end, whether your income growth outstrips inflation or inflation outstrips your income growth will be the key determinant of whether your real wealth goes up or down”.

An Investment into a Tourism Hub

In a further boost to the local tourism industry, the government intends to inject a further $905 million into the Tourism Development Fund (TDF) as it jostles with other tourism destinations for the coveted tourist dollar. The fund, previously announced in 2004, seeks to ensure that Singapore has sufficient world-class infrastructure and tourism amenities to compete with regional rivals. It also helps the private sector to organize “iconic events” which boost tourist traffic. One such example is the Formula One race which is partly funded by the fund.

While the view that Singapore aspires to be a hub in all-too-many-places continues to be validated, it can be said that the tourist dollar is more attractive than most. In a way, the tourist dollar is a foreign direct investment in particular to the retail industry. While that direct investment could aid and cushion any impact domestically, it comes with its own price. For instance, the drive for the tourist dollar has led to the two integrated resorts that grace our shores and has reaped incredible revenues both in the retail industry as well as tax revenues. However, the social ills of which, cannot be ignored.

An Election Bugbear Addressed

OCBC contends that this year’s budget has addressed one of the main bugbears in the 2011 general election. In its review of the budget, OCBC said that budget 2012 recognises that transport infrastructure has not quite kept pace with the growth in the workforce. There is thus expectation that transport spending will increase by some 17.8 percent.

The government has also earmarked $1.1 billion to increase the supply of buses and reduce crowding and waiting times for buses in the short term. 550 buses will be publicly funded, with the remaining privately funded by the PTOs. The finance minister stressed that this investment would on a one-time basis and that bus operations will ultimately rest on PTOs’ improvements in efficiency as well as fare revenues. Whether these capital expenditures will be linked to future fare hikes, remains much to be seen, however, this writer feels that it will be more likely than not.

Tuning in to the Graying Heart of the Nation

Singapore will be doubling the amount it spends on healthcare in an attempt to address the concerns of a graying population. Yearly healthcare expenditure is set to increase from the current $4 billion to $8 billion over the next five years. The increase will go towards enhancing healthcare infrastructure as well as increasing healthcare manpower, including doctors and nurses.  Support for the middle class on the taking up of private healthcare services was also on the cards as the government sought to assuage fears of burgeoning healthcare expenses.

OCBC feels that the significant investment is in line with the government’s aim of portraying the nation as a medical hub and will go some ways in attaining that goal.

Pragmatism in the Face of a Downturn

Notwithstanding the commercial aspects of the above, it is imperative to note that the government has not taken too kindly to stimulus measures, opting instead, to invest on a long term basis. However astute as it might be, this leaves the short and medium term vulnerable to exposure to an external shock.

The writer notes that in a separate statement by Bank of America in which the banking giant said that, "While the consensus has shifted (about a US economic turnaround), we haven’t,” said BOA. “We continue to argue that the recent improvement is due to a recovery from the oil and Japan shocks, but ultimately will be reversed by shocks in the second half of this year. Moreover, in our view, recent news underscores, rather than undercuts our forecast of a very weak second half.”

Being an export driven economy, we are often faced with upheavals in the economic and financial market. In particular, any shock factors experienced in the US market is felt exponentially here in Singapore. That is not to say, that if such a doomsday-prediction were to be realised, our government would be caught with their pants down. The government still has the reactionary ability to create an additional discretionary budget to combat a steeper than expected downturn. In the meantime, the business community will continue to look to the government regarding the implementation of initiatives that it has espoused in Budget 2012.