Singapore expects to achieve a Budget surplus of S$6.4b for fiscal year 2007.

Announcing this in Parliament on Friday, Finance Minister Tharman Shanmugaratnam however warned that inflation remains a major uncertainty for the economy.

He added: ""We seek to moderate imported inflation through our Singapore dollar exchange rate policy. There is a limit to how fast the Singapore dollar can appreciate without hurting our economic performance and growth, and eventually causing wages to fall. An overly strong Singapore dollar can bring inflation down, but at the cost of lower growth and higher unemployment."

"This is why, while we can mitigate imported inflation through MAS's exchange rate policy, we cannot insulate ourselves completely from the effects of global inflation."

The Finance Minister spent a good part of his speech addressing the inflation issue, examining the factors contributing to this and also spelled out what the government will do to help Singaporeans cope.

The headline Consumer Price Index - or CPI - hit 4.4 percent in December but averaged 2 percent last year.

However the CPI is forecast to hit 4.5 percent to 5.5 percent this year.

If the barometer of inflation, the CPI, hits 4.5 to 5.5 percent this year, it will be the country's highest full year inflation rate since 1981.

Mr Tharman said the inflationary pressures arose mainly from high prices for food and oil due to the strong demand worldwide.

He added that the government would step up efforts to help Singaporeans cope such as diversifying food sources.

He did admit though that there are local factors for the rise in the CPI, mainly the rise in the annual value of homes.

But he stressed this is one form of inflation that would not hit Singaporeans' pockets since most own their homes.

As for the GST, Mr Tharman noted that this only caused a one-off increase in prices, and does not result in continuing price increases.

Singapore will also adjust tax policies to remain competitive in the global marketplace.

"We will...adjust our tax policies so that we stay competitive, support the growth of our SMEs, encourage risk-taking as well as strengthen our role as a financial and business hub," said Mr Tharman.

Singapore's economy in 2007 grew by 7.7 percent, a slower pace compared to 2006 when the economy grew 8.2 percent.

With some economists saying the United States is in a recession, the government forecasts Singapore's trade-reliant economy to expand at a slower clip of 4.0 percent to 6.0 percent this year. - CNA/ch