January 31, 2019 Singapore Economics Budget Preview: A Pre-Election “Merdeka” Boost Analysts Budget 2019: From Pioneer to Merdeka Generation Budget 2019 will likely be generous and expansionary, setting the stage for a Chua Hak Bin possible early general election. Focus will be on national security, social (65) 6231 5830 needs (esp. healthcare), and the on-going industry transformation program. A [email protected] centerpiece will be the “Merdeka Generation Package” – which we estimate Lee Ju Ye could cost S$8bn (slightly lower than S$9bn Pioneer Generation Package) and (65) 6231 5844 cover about 460K Singaporeans (more than the “Pioneers”). This could boost [email protected] consumer spending, as seen in the recovery of retail sales after the Pioneer Package was introduced in 2014. Accumulated overall fiscal surpluses over the last 3 years add up to over S$19bn (1.4% of GDP), by our estimates, which provides ample fiscal room to boost pre-election and social spending. ECONOMICS Small Primary Deficit for FY2018 We forecast the FY2018 fiscal primary deficit at 0.9% of GDP, better than government’s estimate of 1.6%. Operating revenue is growing strongly, based on the first 8 months, especially corporate (+8.7%) and personal income tax (+7.7%), and stamp duties (+8%). But the absence of an exceptionally high MAS contribution (+$4.5bn) seen last year will mean that the primary balance will not turn into a surplus. The MAS reported a net profit of S$6.4bn for FY2017/2018 and contributed a lower S$1.1bn. We forecast an overall fiscal Singapore surplus (incl. net investment income) of 0.5% of GDP, better than the budgeted 0.1% deficit. For Budget FY2019, we expect the government to register a primary and overall deficit of around 1.5% of GDP. Spending Falling Short of Budget Projections Government is under-spending what was budgeted, largely because of slower than projected development spending. For the first 6 months of FY2018 (Apr– Sep), development expenditure only rose +7.4% versus the budgeted +24.3%. Delays in some cross-border transport infra plans may be a reason. Spending on infocomm & media development (+46% in 6 months) is growing the strongest, likely boosted by Smart Nation initiatives and cyber-security measures. National Security, Social, Transport & Climate Change We expect more funding to be allocated to national security and defense, including on cyber-security. Delays in the KL-Singapore High Speed Rail may accelerate the construction of the Thomson-East Coast (costing $24bn), Jurong Region and Cross Island Line. Funds may be set aside for infra projects to prepare for rising sea levels and climate change. Taxes Deferred Until After Elections Finance Minister Heng already guided for a hike in GST from the current 7% to 9%, somewhere between 2021 and 2025, to fund rising healthcare and social spending. No other major tax increases are likely, given the stronger than expected tax revenue growth and prospects of early elections. We favour some targeted relaxation of foreign manpower policies, but this remains a sensitive issue. Foreign worker levies for offshore marine and processing will likely be raised by about $50-$100/month, after being deferred last year. Generous handouts for lower and middle-income segments, especially for the underprivileged, and some tax reliefs for SMEs may also be in the cards. THIS REPORT HAS BEEN PREPARED BY MAYBANK KIM ENG RESEARCH Co. Reg No: 198700034E MICA (P) : 099/03/2012 SEE PAGE 16 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Economics Research Preview: “Merdeka” Pre-Election Budget “Budget will focus on these very key areas - in security, on taking care of social needs, especially in education, healthcare and, of course, in transforming our economy. The needs are very large, whether it is building big-scale infrastructure projects, like our MRT lines or the airport, or especially our HDB flats, or whether it's taking care of our seniors, and in fact all Singaporeans.” Finance Minister Heng Swee Keat1, 20 January 2019. Budget 2019 will likely be generous and expansionary, setting the stage for a possible early general election. Focus will be on national security, social needs – with a generous “Merdeka Generation” healthcare package - and the on-going industry transformation program. Budget 2019 will be unveiled on 18th February. A similar fiscal formula might yet again echo in this electoral cycle. In the last general elections in September 2015, the government unveiled a generous S$9bn “Pioneer Generation Package” in the Feb 2014 Budget2. That package covered a large proportion of healthcare costs for those born on or before 1949, which “Pioneers” will enjoy for life. More than 400,000 Singaporeans benefited from the package. The PAP rode on the feel good factor and won with a strong mandate in the Sep 2015 general elections, with the popular vote surging to 69.9% (up from 60.1% in 2011 GE) (see Table 1). Table 1: Past General Election Results – Share of Popular Vote Won by PAP % change from previous General Election Popular Vote Won by PAP election Sep 2015 69.9% +9.7% May 2011 60.1% -6.5% May 2006 66.6% -8.7% Nov 2001 75.3% +10.3% Jan 1997 65.0% +4.0% Aug 1991 61.0% -2.2% Source: Compiled by Maybank Kim Eng A centrepiece of Budget 2019 will be the “Merdeka Generation Package”, which will benefit Singaporeans born in the 1950s. We think that the Merdeka Package could cost as much as S$8bn, covering as many as 460K Singaporeans (slightly higher than the number of people who qualified for the Pioneer Generation package, given their younger demographic profile). The healthcare coverage will not be as generous as the Pioneer package, but the duration of the coverage will be longer as the age profile is roughly a decade younger. We forecast the fiscal primary deficit for Budget FY2018 will come in at around 0.9% of GDP (or S$4.3bn), better than the government’s estimate of 1.6% of GDP (see Table 2). Our forecast nevertheless implies that the primary balance flips into a deficit from the surplus of 0.5% of GDP (S$2.3bn) in FY2017 (see Fig 1). This is largely because the FY2017 primary surplus was boosted by a one-time exceptional item: the MAS’ contribution of S$4.5bn because of a net profit surge to S$28.7bn due to strong currency translation effects (see Table 3). This strong contribution will not be repeated in the FY2018 budget. The MAS reported a net profit of S$6.4bn in FY2017 and will be contributing a lower S$1.09bn to the consolidated fund3. For Budget FY2019, we expect the government to register a primary and overall deficit of around 1.5% of GDP. 1 Business Times, “Singapore finance minister says Budget 2019 to focus on education, healthcare, security and defence”, 21 Jan 2019. 2 Budget 2014 set aside $8bn for the fund, with the remaining $1bn is to be funded with accumulated interest over time. 3 Contribution by MAS is based on 17% of its actual net profit for the previous fiscal year. January 31, 2019 2 Economics Research Based on our FY2018 estimates, accumulated overall fiscal surpluses over the last 3 years (first 3 years of the government’s term) add up to over S$19bn (1.4% of GDP), which provides ample fiscal room and flexibility to boost pre- election spending. Overall budget surplus came in at $6.1bn (1.4% of GDP) in FY2016, $10.6bn (2.4% of GDP) in FY2017 and an estimated $2.5bn (0.5% of GDP) in FY2018. Table 2: Fiscal Position in FY2017 and FY2018 (Budgeted vs. Maybank Estimates) FY2018 FY2018 FY2017 FY2018 FY2018 Apr to Nov (Maybank (Maybank (Actual) (Budgeted) (Budgeted) 2018 Estimates) Estimates) SGD mn SGD mn SGD mn %YoY %YoY %YoY OPERATING REVENUE 75,816 72,677 73,362 -4.1 -3.2 3.5 Corporate Income Tax 14,944 15,112 1.1 8.7 Personal Income Tax 10,724 11,425 6.5 7.7 Withholding Tax 1,532 1,351 -11.8 -0.6 Statutory Boards’ Contributions 4,866 458 1,200 -90.6 -75.3 NA Assets Taxes 4,440 4,445 0.1 2.6 Customs and Excise Taxes 3,133 3,372 7.6 -2.7 Goods and Services Tax 10,960 11,364 3.7 3.1 Motor Vehicle Taxes 2,153 2,808 30.4 23.9 Vehicle Quota Premiums 5,796 5,585 -3.6 -39.3 Betting Taxes 2,688 2,752 2.4 -0.9 Stamp Duty 4,905 3,763 -23.3 8.0 Other Taxes 6,019 6,432 6.9 21.7 Fees and Charges 3,267 3,448 5.5 4.5 Others 378 363 -3.9 17.7 Less: TOTAL EXPENDITURE 73,556 80,019 77,620 8.8 5.5 *2.8 Operating Expenditure 55,581 57,667 3.8 *1.3 Development Expenditure 17,975 22,351 24.3 *7.4 PRIMARY SURPLUS / DEFICIT 2,259 -7,342 -4,257 (% of GDP) (0.5%) (-1.6%) (-0.9%) Less: SPECIAL TRANSFERS 6,230 9,110 9,110 Special Transfers Excluding Top-ups to 2,220 1,810 1,810 Endowment and Trust Funds BASIC SURPLUS / DEFICIT 39 -9,152 -6,067 Top-ups to Endowment and Trust Funds 4,010 7,300 7,300 Rail Infrastructure Fund - 5,000 5,000 GST Voucher Fund 1,500 2,000 2,000 Add: NET INVESTMENT RETURNS CONTRIBUTION 14,610 15,850 15,850 OVERALL BUDGET SURPLUS / DEFICIT 10,639 -602 2,483 (% of GDP) (2.4%) (-0.1%) (0.5%) *Refers to Apr to Sep 2018 numbers.