SINGAPORE – With an economic recovery underway and its worst-ever recession receding, Singapore is pivoting away from pandemic-induced big spending to renew its focus on key structural changes to stay competitive in the years to come. That is at least how the city-state’s latest budget, unveiled on February 16, is being pitched. But as the small island-nation emerges from the crisis of a generation, forecasts point to an uneven recovery across various sectors of its bellwether economy. That unevenness, say economists, is bound to be reflected in regional growth performances, as neighboring countries continue to battle Covid-19 resurgences and move haltingly to vaccinate their populations. Deputy Prime Minister Heng Swee Keat introduced the S$107 billion (US$80.5 billion) budget this week, acknowledging that
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SINGAPORE – With an economic recovery underway and its worst-ever recession receding, Singapore is pivoting away from pandemic-induced big spending to renew its focus on key structural changes to stay competitive in the years to come. That is at least how the city-state’s latest budget, unveiled on February 16, is being pitched.

But as the small island-nation emerges from the crisis of a generation, forecasts point to an uneven recovery across various sectors of its bellwether economy. That unevenness, say economists, is bound to be reflected in regional growth performances, as neighboring countries continue to battle Covid-19 resurgences and move haltingly to vaccinate their populations.

Deputy Prime Minister Heng Swee Keat introduced the S$107 billion (US$80.5 billion) budget this week, acknowledging that while Singapore is heading towards a recovery fraught with uncertainties, the latest spending plan shifts the focus “from containment to restructuring” while retaining scaled-back support for the hardest-hit economic sectors.

“While last year’s budgets were tilted towards emergency support in a broad-based way, this year’s budget will focus on accelerating structural adaptations,” said the 59-year-old in reference to seismic socio-economic and political “mega-shifts” triggered by Covid-19, which he said were on a scale greater than the 1929 Great Depression.

To meet the moment, the government plans to allocate S$24 billion ($18 billion) over the next three years for economic transformation measures aimed at helping businesses innovate, digitalize and scale to better position themselves to capture future growth in line with disruption-accelerating trends and challenges like climate change.

“It is an almost back-to-normal budget, but not quite, in terms of focusing on longer-term issues of making sure Singapore stays relevant by continuing to create value-added businesses, value-added jobs,” said Song Seng Wun, an economist with CIMB Private Banking. “It sounds like a slogan, but it is real on the ground.”

Heng, finance minister and the nation’s presumptive prime ministerial successor once incumbent Lee Hsien Loong retires, emphasized the government’s hopes of avoiding another year of extraordinary stimulus after dispensing one of the biggest support packages in Asia in terms of gross domestic product (GDP).

Heng Swee Keat answers press questions after meeting residents seeking electoral support on July 1, 2020. Photo: Zakaria Zainal / Anadolu Agency via AFP

“My wish for this year is one budget,” quipped the minister, who delivered an unprecedented four budgets last year, along with two supplementary sets of stimulus measures that injected a total of S$92.9 billion ($69.9 billion) into the economy as the city-state emerged from a debilitating two-month lockdown.

An estimated S$52 billion ($39.1 billion) was drawn from Singapore’s financial reserves, the full size of which has never been revealed for strategic reasons, though they are estimated to be over S$1 trillion ($753 billion). The latest budget marks the first time the wealthy city-state has drawn on its reserves for a second consecutive financial year.

The government plans to commit S$11 billion ($8.2 billion) from its reserves to a Covid-19 Resilience Package, which will fund public health and safe re-opening measures, support for lower and middle-income earners, and extend targeted help for sectors like aviation, hospitality and tourism that were announced in 2020, though on a smaller scale.

That includes a six-month extension of one of the costliest initiatives rolled out last year to ward off retrenchments amid the pandemic, the Jobs Support Scheme (JSS), which saw S$26.9 billion ($20.2 billion) in wage subsidies paid out over the last financial year. The scheme will allow for sector-specific wage support of between 10% and 30%.

In a Facebook post, Heng said drawing further from the reserves was “a difficult decision” but described the expenditure as “necessary given the exceptional circumstances.” During his two-hour budget address, he emphasized the need for fiscal prudence, saying that the government must “return to running balanced budgets” beyond this crisis.

The government expects an overall budget deficit of S$11 billion, or 2.2% of GDP, for the financial year beginning on April 1, a considerable reduction from the record deficit of S$64.9 billion ($48.8 billion), or 13.9% of GDP, in 2020. Further deficit-widening withdrawals from the reserves have not been ruled out and could occur if the need arises, said Heng.  

“The experience of 2020 tells us that there may be a need for additional budgets should there be new challenges appearing on the horizon,” said National University of Singapore (NUS) sociologist and associate professor Tan Ern Ser, who added that the government is now better prepared to calibrate and facilitate any additional spending.

A pigeon is seen near tape to prevent people from gathering as a preventive measure against the spread of the Covid-19 novel coronavirus at Merlion Park in Singapore on May 27, 2020. Photo: AFP/Roslan Rahman

Selena Ling, chief economist and head of treasury research and strategy at OCBC Bank, said that while she did not expect a repeat of last year’s hefty budget deficit given the ongoing rollout of Covid-19 vaccines, the many uncertainties still present from the global viral resurgence meant that a premature withdrawal of fiscal support was unlikely.

“It is untenable for a fiscally prudent government to contemplate running persistent budget deficits outside of crisis periods,” said Ling. “At a deficit of $11 billion, Budget 2021 is still an expansionary one and shows the government is still ready to extend near-term financial support, albeit in a targeted and reduced manner.”

Singapore’s constitution compels the government to keep a balanced budget across each term of government. The 2021 fiscal year will be the first of the new government’s term following a general election last July, meaning that authorities will have a five-year window to get a handle on deficit spending as required by law.

In that direction, the government is planning to hike its goods and services tax (GST) from the current 7% to 9%, which was originally slated to be implemented between 2021 to 2025, but was delayed due to the pandemic. Authorities have long maintained that raising the GST is necessary to support future needs such as pre-school education and healthcare.

The tax increase, panned by opposition parties as regressive, is now expected to enter force sometime during 2022 to 2025, or as Heng stated, “sooner rather than later, subject to the economic outlook.” GST will also be extended to all imported goods from January 2023, even low-value ones below the current S$400 ($301) exemption threshold.

“It is a tough balancing act for the government,” said Tan. “On one hand having to deal with rising social needs, such as that relating to the rapidly aging population, while on the other hand having to be mindful of not imposing additional tax burden on citizens while Singapore is still in the midst of a pandemic, with the uncertainties that come along with it.”

Economists broadly agree that if Singapore’s economy regains its pre-Covid footing sometime in 2022, the long-mulled GST hike could occur between 2023 to 2024. “The government will want a full calendar year to, as we say here, double-confirm a broad-based recovery,” said CIMB economist Song.

Singapore’s economy contracted 5.4% in 2020, a smaller margin than the government’s earlier forecast of between -6% and -6.5% and its advance estimate of -5.8%. Assessments by the Ministry of Finance (MoF) concluded that full-year GDP could have fallen by 12.4% if not for the government’s generous support measures.

People flock to Singapore’s Marina Bay area to watch light shows to usher in the new year amid the Covid-19 pandemic in Singapore, January 1, 2021. Photo: Zakaria Zainal/Anadolu Agency via AFP

Growth forecasts for 2021 are far rosier with full-year GDP expected at between 4% and 6%, according to the Ministry of Trade and Industry (MTI). Though Singapore has moved past its worst recession since independence, persisting downside risks and an uneven recovery path mean it is not out of the economic woods yet.

“When we were emerging from past recessions, whether it is the Asian financial crisis of 1998 or the more recent one, the 2008 global financial crisis, growth took off quite steadily and all businesses get that lift from the rising tide. But not this time. That’s why it’s a very different start to a new growth cycle,” said Song.

“We are on a new growth cycle, definitely, but not all sectors, industries and households are being lifted. And that’s the challenge,” he added. Some economists are thus anticipating Singapore to embark on a so-called “K-shaped recovery” in which segments of the economy recover while other segments continue to suffer.

Manufacturing, insurance, finance and information and communications technology have benefited over the last two quarters from sustained demand. But tourism and aviation-related sectors are not expected to return to pre-Covid levels even by the end of this year owing to the slower-than-anticipated lifting of global travel restrictions.

The recovery picture is similarly varied across Southeast Asia, one of the world’s best-performing regions prior to the pandemic. For years, the region had achieved a cumulative annual average growth of 5%. Estimates by the Asian Development Bank (ADB) suggest that regional GDP will contract by 4.4% in 2020.

Vietnam was the only member of the Association of Southeast Asian Nations (ASEAN) grouping whose economy expanded last year – by 2.9% – and the country is similarly expected to be the region’s growth leader in 2021. Economic performance elsewhere will hinge on the success of vaccination campaigns and the efficacy of immunizations, analysts say.

While Singapore has brought Covid-19 under control and is now inoculating its population in phases, growth prospects for neighboring economies such as Malaysia and Indonesia have weakened due to recent viral resurgences. The democracy-suspending coup in Myanmar, meanwhile, is likely to hurt its economic recovery prospects.

Song said that while ASEAN economies could still achieve a mathematical rebound in 2021, “the quality of the recovery will be uneven across the region, just as the recovery within the city-state of Singapore is uneven. I think that will be reflected on the broader performance of economies not just around the region, but around the world.”