The budget is the government’s economic blueprint for the country for the forthcoming financial year and its long-term economic strategy and policies. It takes stock of the country’s economic progress for the past financial year and sets out estimates of the government’s revenue and expenditure for the 2018 financial year. The main areas of expenditure are social development, infrastructure, healthcare, education, defence and economic transformation.
Budget 2018 was unveiled by the Finance Minister under the theme of “Together, A Better Future”, underlining its forward-looking direction for Singapore’s economy and society. 2017 was a good year for the economy as gross domestic product (GDP) increased by 3.6%, up from 2.4% in 2016. This exceeded official forecasts of 1% to 3% at the start of 2017. Growth in productivity was 4.5%, which was the highest figure since 2010. Wages were on an upward trend too, with real median income for citizens rising by 5.3% in 2017.
While the government’s plan to raise the Goods and Service Tax (GST) from 7% to 9% somewhere between 2021 and 2025 attracted public and political attention, there are other policies and programmes that impact businesses and workers for the forthcoming years that are important to look at. Also worth looking at is the larger context Budget 2018 was crafted in, and what more can be done to help businesses stay competitive.
The Budget in Context
One of the major trends highlighted in the budget speech is the shift in global economic weight towards Asia which sees this region playing a larger role in global trade and investment flows. To be sure, this is a trend experts have highlighted for many years through terms such as the ‘Asian Century”, where Asia could regain the dominant economic position it held some 300 years back, before the industrial revolution elevated the West to its current position. Singapore’s Budget strategy aims to help companies move from value-add to value-creation in order to become a competitive node in Asia’s economic landscape where China, India and other Southeast Asian countries are ascending.
The emergence of new technologies is a second major trend. New technologies such as robotics and artificial intelligence are reshaping the economy and jobs. The Budget aims to help businesses and workers adapt and thrive in the age of the 4th industrial revolution. This entails companies embracing an innovation culture, developing deep capabilities and establishing strong partnerships locally and abroad. Industry observers have highlighted one area of potential here. Singapore has been collecting data for many years and with the emergence of new digital platforms and data analytics, there is an opportunity to convert the data collected into useful information and analysis.
Policies and Programmes
Budget 2018’s economic strategy comprises developing a more vibrant and innovative economy that anchors Singapore as a Global-Asia node of technology, innovation and enterprise. This strategy is underpinned by measures that help businesses lower costs, promote innovation, encourage environmental sustainability and venture out into new markets.
To help businesses lower costs, rebates for corporate income tax will go up from 20% to 40% in 2018 and the cap will be raised from $10,000 to $15,000. These rebates will also apply in 2019, where firms will receive a 20% rebate capped at $10,000. These measures will help all tax-paying companies, particularly Small and Medium-sized Enterprises (SME), many of which turn to SME loans to ease tight cash flows.
Wages take up a large part of business costs. The Wage Credit Scheme, which subsidises wage increases for Singaporean employees earning up to $4,000 monthly, will see the government extend 20% co-funding for 2018, 15% for 2019 and 10% for 2020.
With regards to Singapore’s dependence on foreign labour, although there will be no changes to increases in foreign worker levies for most sectors announced before the Budget, they will be deferred for the marine shipyard and process sectors, which still face weakness. This reflects the government’s targeted approach towards helping the different economic sectors manage costs.
A major tax measure that would add to business costs but promote sustainability is the newly-announced Carbon Tax that all facilities which produce 25,000 tonnes or more in greenhouse gas emissions annually have to pay. The Carbon Tax is intended as a tool to control the amount of greenhouse gases released into the atmosphere by incentivising emitters to reduce their emissions and improve energy efficiency. About 67 countries and regions including China, the European Union and Japan have implemented or announced plans to implement such a scheme. Singapore’s carbon tax will be $5 per tonne of greenhouse gas emissions from 2019 to 2023, with plans to increase it thereafter.
The carbon tax will be levied on 30 to 40 large emitters that contribute 80% of Singapore’s greenhouse gas emissions mainly from the petroleum refining, chemicals and semiconductor sectors. It is unclear if other contributors to greenhouse gas emissions such as automotive firms in the commercial vehicle rental and private hire car sectors will be affected.
To promote innovation among businesses, a Productivity Solutions Grant (PSG) was announced to make it easier for companies to access technology and productivity solutions. An initial $110 million is to be allocated over the next three years. In its early stages, the PSG will cover sector-specific solutions in industries such as retail, food and logistics. This would be a boost for firms otherwise looking at options such as business loans to fund their productivity efforts. Also taking a holistic approach across industries, the PSG will support broad-based solutions such as digital customer relationship management and human resource management systems.
To help businesses find partners to co-create solutions, the government will initiate an Open Innovation Platform which is meant to be a virtual crowd-sourcing platform where companies with specific challenges that can be addressed by digital solutions will be matched with info-communications and technology firms and research institutes.
In a measure very pertinent to the knowledge economy, tax deductions on licensing payments for the commercial use of intellectual property (IP) will be increased to 200%, capped at $100,000 per year. According to the Finance Minister, the cap would ensure that smaller businesses benefit more.
To further encourage Singapore firms to expand overseas, the Double Tax Deduction for Internationalisation (DTDi) was enhanced. Since 2012, a 200% tax deduction was given without prior approval on qualifying expenditures of up to $100,000 incurred on selected activities such as participation in overseas business development trips and trade fairs. With effect from 2019, the amount of expenses that can qualify for the DTDi will be raised to $150,000 per year.
Like any major policy announcement, experts and other stakeholders have weighed in with their views on how Budget 2018 could have been better.
There have been calls for greater funding support in the face of companies having limited access to capital which is crucial for investing in innovation, automation or digital solutions. With the expiry of the Productivity and Innovation Credit (PIC) scheme, support for activities such as R&D can be given in the form of a partial cash grant that mitigates the need for corporate loans. This would be especially valuable as it may take a while for many R&D-intensive businesses to turn a profit. Experts have cited other countries such as Australia, Ireland and United Kingdom which support their businesses through refundable tax credits which can be paid out in cash.
Given the increasing digitalisation of the economy and business, experts were hoping to see some new broad-based measures to encourage digitalisation such as enhanced tax deductions and allowances for digital adoption and training. The Open Innovation Platform based on a crowd-sourcing concept may reward firms that take the initiative, but be insufficient for firms looking for financial support amid competitive cost structures.
On internationalisation initiatives, observers have called for more measures other than the DTDi. While the DTDi is useful to fund overseas marketing expenses, more policies encouraging overseas Merger and Acquisition (M&A) such as interest deductions on qualifying overseas acquisitions would give Singaporean firms greater backing to expand overseas.
Lastly, on the Carbon Tax, companies such as petrochemical giant ExxonMobil expressed reservations about the new tax, saying that “affordable energy” was important to support economic growth. A Carbon Tax may place upward price pressures on affected businesses. Oil major Shell voiced concerns that the flat tax rate would not provide companies the appropriate incentives to improve their energy efficiency and cut emission levels.
Budget 2018 has been passed in Parliament but the important work has just begun. The government has to implement it, businesses and workers ought to make full use of it, and all stakeholders involved must give their feedback so it can be fine-tuned along the way.