Budget 2023: Singapore ‘unlikely’ to return funds drawn from reserves due to ‘tight fiscal position’, says Lawrence Wong
While the economy has recovered back to pre-pandemic levels, Singapore remains in “a tight fiscal position”, said Deputy Prime Minister and Finance Minister Lawrence Wong.
A view of Singapore's central business district and the Merlion on Nov 16, 2022. (File photo: CNA/Hanidah Amin)
SINGAPORE: Singapore will be “highly unlikely” able to return what was drawn from past reserves in the past three years for pandemic-related support measures, as it remains in a “tight fiscal position”, said Deputy Prime Minister and Finance Minister Lawrence Wong on Tuesday (Feb 14).
The last time the Government tapped on national reserves was in financial year (FY) 2009 when it drew down S$4 billion to support the economy through the global financial crisis. It was able to return what was drawn two years later due to a sharp recovery in the economy and in its fiscal position.
But this time, Singapore is “in a different position”, Mr Wong said in his Budget speech.
“Our economy has recovered back to pre-COVID levels but we continue to be in a tight fiscal position,” he said. “It is therefore highly unlikely that we will be able to put back what we have drawn from past reserves.”
The total draw on past reserves for COVID-19 response measures across FY2020 to FY2022 is expected to be S$40 billion, lower than the initial S$52 billion that the Government had sought approval from the President.
This reflects the Government’s prudent approach in the use of reserves, said Mr Wong, adding that the Government “will not waver” from its commitment to safeguard the reserves as a key strategic asset.
He added that the financial reserves have helped Singapore to weather major global shocks, prevent high unemployment rates and build up capabilities even amid economic downturns.
Other governments also spent more during the pandemic, although they “largely financed their additional spending by borrowing which will eventually have to be repaid by future generations”.
In contrast, Singapore's reserves have allowed the country to respond quickly without falling into debt or burdening either current or future generations of Singaporeans, Mr Wong told the House.
“So we will continue to uphold our practice of fiscal prudence and the principles that underpin the protection of our reserves,” he added, noting that is why it was necessary to raise the Goods and Services Tax (GST) to ensure sufficient resources to care for an ageing population while keeping a balanced budget over the medium term.
Draw downs on past reserves from 2020 to 2022
Singapore first tapped on its financial reserves in FY2020, with the Government saying that it would draw up to S$52 billion in a move to protect lives and livelihoods from the impact of the COVID-19 pandemic.
It ended up utilising a lower amount of S$31.9 billion.
Likewise in the following year, the Government had planned to tap up to S$11 billion from the reserves for the COVID-19 Resilience Package.
In the end, it needed to draw just S$5 billion, as announced at the last Budget statement. The remaining S$6.3 billion needed for the support package was funded from “sentiment-based” upsides in revenues and under-utilisation in ministry expenditure.
For FY2022, the Government had said it was planning to draw S$6 billion from past reserves for COVID-19 public health expenditure.
As the COVID-19 situation turned out to be “more benign than expected”, expenditure on this front and which will be drawn from the reserves is expected to be a lower amount of S$3.1 billion, said the Finance Ministry in documents released alongside the Budget statement.
Altogether, the expected draw on past reserves from FY2020 to FY2022 will be S$40 billion, lower than the initial S$52 billion that the Government had sought the President's approval for.
With the stabilisation of Singapore’s COVID-19 situation and the transition to endemic living with the virus, further pandemic-related expenditure will be funded through government revenues.
There will be no draw from the reserves in FY2023.
NO DRAW ON RESERVES IN FY2023
The Government will not be drawing from the reserves in FY2023, as “things return to normal” after three years of pandemic, said Mr Wong.
Laying out the fiscal position for the financial year ahead, the Government is expecting an overall slight deficit of about S$0.4 billion, or 0.1 per cent of gross domestic product (GDP).
Operating revenue is projected to be S$96.7 billion, which is S$6.4 billion or 7.1 per cent more than the previous year’s revised estimates.
This is largely due to higher collections expected from corporate and personal income taxes, as well as the GST.
At the same time, the Government’s expenditure is set to go down slightly to $104.2 billion – S$2.8 billion or 2.6 per cent lower than the revised 2022 figure.
The net investment returns contribution, which has been the biggest contributor to government coffers in recent years, is set to bring in about S$23.5 billion in FY2023. This will mark a 8.7 per cent increase over FY2022.
Mr Wong said the estimated fiscal position is “appropriate” for this year's projected economic conditions but stressed that “drawer plans” are in place for authorities to take swift action should downside economic scenarios materialise.
For FY2022, the Budget is expected to clock an overall deficit of S$2 billion, or 0.3 per cent of GDP.
Meanwhile, the Government had in 2020 raised the contingencies funds balance from S$3 billion to S$16 billion to ensure it could respond quickly to urgent and unforeseen cashflow needs arising from the fast-evolving pandemic.
With the return to normalcy, the balance of the contingencies funds will be reduced to S$6 billion to ensure adequate resources for unforeseen circumstances while retaining discipline over finances, Mr Wong said.
The Government will be tabling a Bill later this month to propose amending the Constitution for this move.
TOP-UP TAX FOR LARGE FIRMS
Mr Wong also announced that Singapore intends to implement a domestic top-up tax for large multinational enterprises (MNEs) from 2025.
The minister had mooted the possibility of a “top-up” tax last year, as Singapore mulls adjustments to its corporate tax system in response to changes in global tax rules as a result of the Base Erosion and Profit Shifting (BEPS 2.0) initiative.
BEPS 2.0, a plan led by the Organisation for Economic Co-operation and Development with the aim of curtailing profit shifting by multinational companies to lower-tax jurisdictions, has two pillars.
The first is to ensure firms pay taxes in countries where they earn their profits, regardless of whether they have a physical presence. The second involves setting a minimum corporate tax rate of 15 per cent for large MNEs with consolidated annual revenues of 750 million euros or more.
Currently, Singapore’s headline corporate tax rate is at 17 per cent but the effective tax rate of many businesses may be lower than that, or even the proposed global minimum, due to tax incentives awarded to those seen as beneficial to the country’s economic development, experts have said.
Mr Wong said BEPS 2.0 will affect Singapore’s corporate tax system.
He noted that some key parameters of pillar two under BEPS 2.0 have only been finalised this year, while others remain under discussion at the international level.
Many jurisdictions have not announced their implementation plans yet. Those that have include the European Union, which recently made known its plans to implement pillar two in phases starting effectively from 2024. Others like the United Kingdom and Switzerland have also announced their intention to do the same.
The full effects of these rules will “only be felt in 2025 or later”, Mr Wong said, citing the progressive implementation.
He added that Singapore intends to implement pillar two from 2025, as part of the broader international move to align minimum global corporate tax rates for large MNE groups.
When it does so, a domestic top-up tax – one that will top up the MNE groups’ effective tax rate in Singapore to 15 per cent - will be implemented.
At the same time, the Government will review and update its broader suite of industry development schemes to ensure that Singapore remains competitive in attracting and retaining investments, said Mr Wong.
He also said that as developments on BEPS 2.0 are “fluid”, authorities will continue to monitor international developments and adjust its implementation timeline if there are additional delays.
“We will continue to engage companies and give them sufficient notice, well ahead of any changes to our tax rules or schemes,” said Mr Wong.
