2.8 Let me move on to the FY 2003 Budget, which is summarised in the last column of the table.

2.9 The operating revenue for FY 2003 is estimated at $29.6 billion. This includes $3.0 billion in NII contribution, and is $500 million more than the operating revenue for the previous year. Total expenditure is budgeted at $30.0 billion, comprising $20.4 billion in operating expenditure, and $9.6 billion in development expenditure. Taking into account the $600 million provision for ERS, the Government is, therefore, projecting a deficit of $900 million, before taking into account the fiscal changes in this Budget Speech.

2.10 The Government turned in a budget deficit in FY 2001, and is likely to be in deficit again in FY 2002 and FY 2003. This will be the third consecutive year that the Government is running a budget deficit. But this is the appropriate fiscal stance to adopt in an economic downturn. During recessions, revenues will fall, but expenditures need to be maintained to fund essential projects and services, thereby resulting in a budget deficit. This deficit serves as a stabiliser to steer the economy towards the path of recovery. The Government has done this previously, although not in recent years. After the deep recession in 1985, we ran a budget deficit for two consecutive years, in FY 1986 and FY 1987.

2.11 I assure the House that this Government has not changed its longstanding prudent fiscal policy. The Ministry of Finance continues to plan for a modest budget surplus over the business cycle. In difficult years, we can accept a deficit. But we intend to accumulate surpluses in good years, to cover these deficits and build up the reserves for rainy days. This prudent and disciplined approach has kept the Singapore dollar strong and inflation low. If we spend beyond our means, inflation would go up, the value of Singaporeans' savings would be eroded, especially our CPF savings, and confidence in our currency and economy would fall.

2.12 However, we must recognise that it will be more difficult to balance the budget in future, even after the economy has recovered. Revenues will be less buoyant, as we lower income tax rates further, and as our GDP grows less rapidly. On the other hand, we will come under persistent pressure to spend more, especially in healthcare and social services, as the population ages.

2.13 Government expenditure has already gone up over the years. A decade ago, it was only 15% of GDP. This year, it will be 19% of GDP. This is still low compared to the 40% or 50% share of GDP that the Government takes up in most developed countries. This is the result of our deliberate policy to focus spending on critical areas that yield lasting returns, but it also reflects our relatively young population.

2.14 In healthcare, for example, our national expenditure currently stands at 3.5% of GDP. 3.5% is much lower than any developed country, but this is not solely because of our efficient healthcare system. It is also because our population is much younger. If our population had the same age profile as, for example, the UK, then based on our present spending patterns alone, our national expenditure on healthcare would be 7.2% of GDP, higher than the UK's figure of 6.8%. Similarly, if we were to match the age profile of Japan, our health expenditure would be close to Japan's (6.6% versus 7.4%). As our population is ageing rapidly, we must expect our national health expenditure, including government's share, to go up too.

2.15 Higher government spending will mean higher taxes. To keep taxes as low as possible, we must target government social spending to reach those who need it most. One effective way to do so is through means-testing. The Ministry of Health already uses means-testing to decide on subsidies for step-down healthcare. As revenue pressures intensify in future, we will need to extend means-testing to other medical and social services. This will ensure that truly needy Singaporeans receive adequate support, despite our budget constraints.