Singapore Likely To Stimulate Demand With Tax Cuts

by Mary Swire, Tax-News.com, Hong Kong

19 September 2001

Instead of the economic rebound that many Singaporeans were expecting this autumn, the city-state is now contemplating many further months of difficulty, and the government is almost certain to announce a further stimulus package focusing on tax cuts during the next few weeks.

Recent local economic news has been universally bad. July retail sales figures show consumer restraint with spending in the key segments - department stores, furniture & household equipment and even telecommunications and computers - all registering dips. And tourist arrivals are bound to be hit by worldwide travel restrictions as well as fear on the part of individuals, meaning a highly uncertain outlook Singapore's retail and hotel sectors.

The trade figures are even worse. Non-oil exports in August plunged 30% against last year's admittedly inflated base. But the continued plunge in electronic shipments last month - by 40-60% in almost all product categories, because of depressed global demand - is an unmistakable sign of trouble ahead.

Officially, the Ministry of Trade and Industry is holding to its 0.5-1.5% GDP growth forecast for 2001, but a sharp downgrade, probably to a negative figure, is now a foregone conclusion.

The government is in a good position to stimulate the economy, with tax revenues booming away. The taxman's collection in the first half of this year rose some 8% to some S$9.6 billion. The biggest jump was in property tax revenue, which rose almost 60% to over S$1 billion. Income tax collection was up 12% to S$6.2 billion, while betting duties brought in 21% more.

In July, Minister for Finance, Dr Richard Hu, said that Singapore's tax revenue has more than doubled over the last ten years. Dr Hu said: 'This growth in tax revenue has taken place even while the tax burdens of individuals and companies have been progressively lowered over the years.'

In August, the government announced a S$2.2bn stimulus package, and it will now probably feel it has to go further, but is more likely to do so by cutting taxes than by adding further spending. Local economists say that in Singapore's extremely open economy, the classical multiplier effect which amplifies boosts to spending does not work, since extra demand quickly leaches away into surrounding economies. Therefore the government is most likely to cut personal taxes, possibly by reducing social security contributions on a temporary basis.

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