THE Singapore economy is probably headed for its deepest recession since Independence.
Our forecast is for Singapore's economy to contract by 2.8 per cent this year, exceeding even the Asian financial crisis and the 2000-2001 tech recession in severity. Despite the unprecedented policy response to the global financial crisis, much uncertainty remains, and a swift recovery is by no means assured.
We cannot rule out the possibility that the Singapore economy could face several years of below-trend growth. Structural challenges hidden during the years of strong growth between 2004 and 2007, such as structural unemployment and a widening income gap, could easily resurface.
Against this backdrop, the market is hoping for an expansionary Budget to fight the recession.
We believe the Budget should have a four-pronged emphasis: easing financial stress on businesses, improving cost-competitiveness and positioning Singapore for the recovery, providing support for affected households, and providing a modest demand stimulus to the economy.
The demand slump aside, financial stresses are probably the single biggest obstacle to businesses presently. Failure to arrest these problems could result in even viable firms going under.
Measures by Spring Singapore to support an additional $2.3 billion of loans to local firms are useful but insufficient and may need to be expanded. One proposal is to set up a temporary, government-led credit guarantee agency, so that companies are able to borrow or refinance existing debts.
The erosion of cost-competitiveness as a result of the recent period of high inflation could influence the production and investment decisions of companies here, exacerbating the unemployment problem.
The Budget should engineer an aggressive fall in business costs within the Government's control. While this may not, by itself, prevent a recession, it would cushion the blow and position Singapore more favourably for an eventual recovery.
There is a good case for cuts in corporate and/or personal income tax rates. While income tax rates in Singapore are already low, Hong Kong has managed to be a step ahead. In last year's Budget, Singapore kept tax rates unchanged, while Hong Kong cut its corporate and personal tax rates, widening the tax gap slightly.
An aggressive 2- or 3-percentage point cut in corporate income tax rates over, say, two to three years, would send a powerful signal of the Government's commitment to maintain Singapore's competitive position and encourage companies to make longer-term investments in the country.
There is also ample room to take other incremental steps to reduce business costs, including property tax rebates or exemptions, rental rebates and other income tax rebates.
An expansion of the existing social safety net is therefore also in order.
One suggestion is for Workfare to be expanded to provide temporary monetary relief - over three to six months - for workers who lose their jobs. A higher proportion of the enhanced Workfare payments could be paid out in cash rather than CPF, as this would be more effective in helping cash-strapped, low-income households.
An across-the-board cut in personal tax rates would provide significant relief for middle-income households that have been hit by an increase in the goods and services tax, as well as CPF reductions and restructuring over the past decade.
Past recession Budgets have typically focused on supply-side measures, but there is scope for the Government to provide a modest demand stimulus as well. In the construction sector, public sector demand is probably needed to pick up the slack as private sector demand cools over the next year.
Despite the strong case for an aggressive fiscal response, we fear that the market's inflated expectations may not be met, for two reasons.
First, the Government may choose to 'keep its powder dry' for an off-Budget package if the recession is prolonged - as was the case in previous recessions.
Second, the Government is required to run a balanced Budget over the electoral cycle. As such, it may wish to save its fiscal bullets for an election Budget next year or in 2011.
In theory, the Government can breach this rule with the President's permission and tap on the fiscal reserves to finance the deficit.
As the current recession probably qualifies as a national emergency, the Government may have to seriously consider taking this bold step.
Even if all expectations are not met in the Budget, a commitment to an off-Budget package, if the need arises, would go a long way in maintaining business and consumer confidence.
After all, the rationale behind the accumulation of fiscal reserves in good times is to build up ammunition for a rainy day. That rainy day could be now. The rhetorical question, which must then surely be asked: If not now, then when?
The writer is vice-president of Asia-Pacific Economics and Market Analysis at Citigroup. He was formerly a senior economist at the Monetary Authority of Singapore.
This article was first published in The Straits Times on January 17, 2009.
