Mr Speaker, Sir, I beg to move that this Parliament approve the financial policy of the Government for the Financial Year (FY) from 1 April 2009 to 31 March 2010.

Global crisis and recession

A.1. This Budget comes at a time of grave economic crisis. Growth in the global economy as well as in Singapore last year fell well below what was expected. We are now in the midst of a simultaneous recession in all major regions of the world. Prospects for 2009 remain highly uncertain.

A.2. Economic activity has taken a sharp turn downwards in the last six months in the advanced economies. GDP is estimated to have fallen by about 5% in the US in the fourth quarter of 2008. The Euro area fared as badly, while the contraction in Japan is estimated to have been even larger. Global manufacturing production fell by almost 20% in the same quarter (on an annualised basis), while global trade and cargo volumes have also slumped.

A.3. Asia has not been decoupled from the decline in the advanced economies. Across the region, industrial production and exports have fallen dramatically in recent months. In China, industrial production towards the end of 2008 is estimated to have been below half the levels seen at the start of the year. Taiwan’s exports contracted by 42% in December and Singapore’s by 21%¹ . Korea’s latest export data shows a decline of over 30%.

A.4. The result is that jobs are at risk everywhere. Job losses in the US in Dec 2008 were the worst in 60 years, and unemployment has risen to 7.2%. In the Euro area, it has risen to 7.8% and in Japan to 3.9%, and is expected to rise further. Even in China, despite positive economic growth overall, job losses have risen sharply in the coastal provinces.

A.5. Governments around the world are taking unprecedented steps to stimulate their economies and re-capitalise their banks. Central banks have cut interest rates aggressively. However, with little room left for interest rates to fall, most governments have turned to expansionary fiscal packages as their main policy response.

A.6. The new US Administration’s fiscal package is currently expected to be US$825 billion spread over two years, which will increase its government deficit by 2.8% of GDP each year. Including the government’s existing deficit programmes, this will lead to a total deficit of about 10% of GDP in 2009. In the UK, the government has proposed a package of £20b or 1.4% of GDP. Germany has just announced a fiscal stimulus plan of about 1% of GDP a year over the next two years. China has announced a 4 trillion yuan package of expenditures to be rolled out over the next two years. Taiwan government intends to spend 4% of GDP spread over four years.

A.7. These measures are widely regarded as mitigating the severity of the recession. But it is too early to say if they will help in bringing forward a recovery in the global economy.

Length of recession is uncertain

A.8. No one knows how prolonged or deep this recession is going to be. The current downturn is unlike past recessions, and recovery, when it happens, may be weaker than in most past cycles. There are a few reasons for this.

A.9. First, all major regions of the world are experiencing economic decline at the same time, which makes this the first truly global recession in the post-war period. No economy is able to rely on exports to pull it out of recession.

A.10. Second, domestic spending in the US and other advanced economies, is also unlikely to recover for some time to come. Consumers in the US are over-stretched, having over-borrowed during the years of the housing bubble. The housing bubble has burst, but home prices are still falling and have yet to reach bottom. US consumers, who account for one-fifth of global consumption, will have to gradually reduce their debts and are therefore unlikely to move back to old ways of spending for some years to come. Consumers elsewhere, including those in China and Europe, are also facing declining values of their homes and assets. They are not expected to spend more and pick up the slack left by the Americans.

A.11. The third reason why there is great uncertainty over how long this recession will last is the continued fragility of the global financial system. Banks, especially in the US and Europe, have made heavy losses. Once the full extent of impaired assets becomes apparent, it is estimated that the loan losses will reach two trillion dollars in the US alone. These banks are therefore focused on building up their capital rather than making new loans. Furthermore, the de-leveraging that is taking place in financial markets as a whole still has some way to go. Although we are past the psychological panic that followed the collapse of Lehman Brothers in September 2008, there remains a high degree of risk aversion in the credit markets². As a result, even good quality corporate borrowers are having difficulty obtaining credit.

A.12. We therefore cannot say when this recession will end. The key factor is the US economy. Although China’s major government spending initiatives will boost domestic infrastructural demand, it is unlikely to provide a stimulus for the rest of the world. If we are fortunate and the US Government’s fiscal stimulus spurs new demand, we may come out of the recession in late 2009. However, many careful observers believe it is equally likely that the recession will last into 2010, and that the recovery when it comes, will be weak.

Economic situation and prognosis for Singapore

A.13. Singapore’s economic growth in 2008 was far below what we had expected at the start of the year. We had known and had highlighted the downside risks of a US recession and a worsening global credit crunch. But like other governments and the vast majority of private forecasters, we did not anticipate the speed and scale of the deterioration in the global economy in the last six months.

A.14. On latest estimates, the Singapore economy grew by 1.2% in 2008. GDP in the fourth quarter declined by 3.7% compared to a year earlier, or by 17.0% on a quarter-on-quarter annualised basis.

A.15. Inflation averaged 6.5% last year – or by 5.4% if we exclude the increase in the Annual Values of homes which had no impact on household expenditures. Inflation was higher than expected because of the spike in food and fuel prices globally. It has however been declining since the middle of last year and is expected to be close to zero in 2009.

A.16. The key risks for us this year therefore have to do with the scale of the recession and loss of jobs, rather than inflation. All recent indicators point to a continuing downward momentum in the economy. We have been affected by the decline in the advanced economies which has reduced demand for our manufacturing exports. Our services industries are also being impacted by the sharp contraction in global and regional finance, and in intra-Asian trade and tourism.

A.17. The Government has updated its economic forecasts for 2009. We are projecting GDP to contract by between 2% and 5% this year.

A.18. We start from a position of low unemployment, the lowest in Asia last year. The resident unemployment rate was 3.3% in September. However, given the severe economic recession, we have to expect many more jobs to be at risk this year.

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