Alternatives

What are the alternatives? One is to increase the government's risk sharing to 100 per cent for a temporary period, but with some government oversight on lending so that lending standards do not swing to the other extreme. Another is to establish a government agency that guarantees all kinds of credits, which works via other financial institutions. However, there would still be a question mark over whether those credits would be extended to companies in the first place.

A third alternative is to establish a new, government-funded lending institution that can lend with more confidence (and less paperwork) than banks currently do - and against a wider variety of collateral, including equity.

Singapore needs at least one of these three alternatives in the Budget. Or else another mechanism which ensures that funds continue to flow to SMEs during this crisis, and which is fool-proof. Otherwise, a mass of jobs could be needlessly lost. Measures to improve companies' cashflows - like extended loss carry-back provisions against taxable income of previous years - would also help.

On creating jobs, Singapore's options in a year like this are limited. Unlike larger economies, it cannot rely much on traditional fiscal stimulus measures. Out of every dollar the government spends, more than half leaks out in the form of imports. Nevertheless, it is worth capturing, and maximising, the positive impact of whatever remains at home. With total construction demand expected to fall by 36 per cent, one option would be bring forward as many public sector projects as possible.

The Building and Construction Authority announced that it will award a record $19 billion worth of projects this year, including several smaller projects ($50 million or less) which would help smaller local firms. This is a step in the right direction.

Jobs can also be created in the services sectors (where there are fewer 'import leakages') by expanding employment in health, education and other government services that add to the productivity of the economy; some ministries have already announced more hiring, but there is scope for more to do so.

An expansion of training and job-matching schemes, would also help reduce 'frictional unemployment' - that is, the number of people in between jobs, which, too, is likely to rise.

Finally, we need a Budget that protects people. For the mass of people, reliefs on housing-related payments would be most helpful in augmenting household cash flows. Effective measures here would include a restructuring of housing loans, through a shift to interest-only mortgages by the HDB (and by more private banks), allowing tax deductions on mortgage payments and cuts in property-related taxes. These changes would also help arrest the sharp decline in property prices, which discourage refinancing, erode household wealth and make banks even more loan-shy.

Measures to help vulnerable groups are also needed. Despite the best efforts, there will unavoidably be people who will be laid off or have their pay severely cut.

But the key is design. Whatever help is provided should put a floor under consumption, but without compromising incentives to work. The most direct and effective measure would be a means-tested cash transfer programme that is temporary (up to six months after retrenchment, and to be terminated when a worker finds a new job). This can be institutionalised so it that can serve as an automatic stabiliser for the economy.

CPF top-ups would not be appropriate, as they do not address immediate consumption needs - unless there is a mechanism to allow individuals to access part of their CPF balances as a 'loan' to be 'repaid' upon finding employment. The latter measure would minimise budgetary costs.

Tax rebates for individuals would be welcomed, although they would benefit a relatively small group (since most people pay no income tax) and would more likely be saved than spent. Such rebates would be more a nice-to-have than a must-have.

The 'must-haves' for this Budget are fast-acting measures, a focus on keeping companies alive, improving household cash-flows, protecting the vulnerable and creating jobs. If the Budget can thus 'hold the fort' for one year, it will have done its job.

This article was first published in The Business Times on January 17, 2009.