Restoring Fiscal Balance

After running deficits in three of the last four years, we are on track to restore fiscal balance this year. We expect a small surplus of $210 million in FY 2005, after distributing more than $600 million in special transfers to Singaporeans. The economy has had a very good year, and this year it is expected to grow at its medium-term potential of 3-5%. Yet, some MPs have complained that fiscal policy has been overly conservative, that this Budget does not provide sufficient stimulus for the economy, and that the Government is withdrawing its help too quickly, particularly for businesses.

Dr Ahmad Magad and Dr John Chen both lamented that this Budget is contractionary. Mr Inderjit Singh felt that the Budget must continue to be expansionary until all sectors of the economy are doing well and, as he says, “firing on all cylinders”.

Let me set our fiscal stance in perspective.

Firstly, fiscal policy is a macro-economic tool. Whether to make it expansionary or contractionary has to depend on the state of the economy as a whole, ie, what is appropriate for the whole economy. It is not possible for fiscal policy to try to accommodate every single sector or industry, because there will almost never be a time when all sectors of the economy are “firing on all cylinders”. So, if we went by Mr Inderjit Singh’s suggestion, we would have to have fiscal policy which is expansionary almost all the time, which is not possible.

This year, we are projecting GDP growth at 3-5%. Last year, it was much higher, at 8.4%. But we cannot therefore conclude that we need more fiscal stimulus this year. It was 8.4% last year mainly because of a very low base, and in 2003 we had SARS. And if we take 2003 and 2004 together, the growth averages out to about 3.4%. So, 3-5% growth projected for this year is not low. It is, in fact, the economy’s sustainable medium-term growth rate. Our unemployment has come down and it is below 4%. There is not much slack or excess capacity in the economy. So, as Mr Iswaran points out, “there is no need for new fiscal stimulus”.

Secondly, even though this Budget may be less expansionary than last year’s, overall, the Government is still injecting demand into the economy, i.e. more demand is being injected than is being withdrawn. Why do I say that? Because our operating revenues are lower than our total expenditure, even before taking into account Special Transfers. So, as far as the domestic economy is concerned, we are putting in more than we are taking out in terms of taxes and fees. How do I balance the Budget? Through contribution from Net Investment Income. But if I look at the economy alone, net injection is still positive, even though it is smaller than last year’s.

Thirdly, we have to stay on track to restore fiscal sustainability over the medium term and the long term. I have distributed some charts. I refer Members to the first page, Charts 1 and 2. As Dr Koo Tsai Kee highlighted two days ago, operating revenue from taxes, fees and charges, as a percentage of GDP, has fallen over the past decade from about 22% to about 17%, while total expenditure has risen from about 14% to 17% of GDP today. So, as you can see in the top chart, operating revenue has come down, total expenditure has tended to go up, and operating revenue is now less than total expenditure. We are now able to balance the overall Budget only because of the contribution from Net Investment Income (NII) and, even then, we expect to have only a thin buffer – a surplus of 0.5% to 1% of GDP in the medium-term. And you can see from the bottom chart on the page how we had big surpluses in the 1990s but, since 2000, we have had deficits and, in the years when it has been positive, minimal surpluses.

Our fiscal objective is to achieve an overall Budget balance, or a modest surplus, on average over the business cycle. That means taking the up years and down years, from the boom to the recession, on average to balance our Budget, or maybe have a little bit of surplus. I think it is a prudent approach. You could make an argument to be even more conservative. In fact, Mr Chew Heng Ching argued and went so far as to say that we should try to balance the Budget without relying on Net Investment Income at all, which we used to be able to do. But, now, we find NII quite useful.

Therefore, it is important that we restore fiscal balance in FY 2005. As Mr Ong Kian Min pointed out, “The Government does not possess bottomless pockets that can dish out endless amounts of money and there is a need to balance the budget.” In fact, if we cannot balance our budget in a year when the economy is growing steadily at potential, how can we hope to balance the Budget over any business cycle?

Sir, I urge Members to bear in mind this larger fiscal reality even as they call for more Government help to meet all kinds of needs. It is critical that we do not compromise fiscal prudence and discipline. There was an opinion piece in the Business Times last week, written by Assoc. Prof. Tan Khee Giap from NTU. He had a very cogent analysis of the Budget and he warned: “the potential danger of a structural budget deficit is real for future Singapore governments” and, therefore, “unrealistically high expectations on future budgetary spending ought to be moderated as our economy meanders through a volatile era”. I would not say we are meandering. I think we are navigating. But it is a volatile era and, fundamentally, Prof. Tan is right. We cannot just look at one year of strong growth and budget surplus, and immediately commit to increase indiscriminate social spending because, as Professor Tan also points out, such expenditures “once incurred, are recurring and difficult to retract”.