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FY2004 Budget Statement

By Maurice Williams,2014-12-13 10:38
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FY2004 Budget Statement

    BUDGET STATEMENT 2004

    BUILDING A FUTURE OF OPPORTUNITY

    CONTENTS

     PART I OUTLOOK AND CHALLENGES .......................................... 1

    2003 Ending on a Positive Note ......................................................... 1 2004 Gathering Momentum ................................................................ 2 Growing Manufacturing and Services ................................................... 2 Labour Market Reforms ........................................................................ 5 CPF Changes ..................................................................................... 5 Wage Flexibility ................................................................................ 5 Training and Upgrading ..................................................................... 6 Foreign Workers ................................................................................ 6 Encouraging Entrepreneurship .............................................................. 7 Enhancing Competition ......................................................................... 8 Building on Our Fundamentals ............................................................ 11 PART II EFFECTIVE GOVERNMENT ............................................ 12 Importance of Sound Public Finance ................................................... 12 Living Within Our Means ................................................................... 12 Revised FY 2003 Budget Estimates .................................................... 13 Projected FY 2004 Fiscal Position ....................................................... 14 Ensuring Value for Money in Public Spending.................................... 16 Best Sourcing ................................................................................... 16 Cut Waste Panel ............................................................................... 17 Economy Drive ................................................................................ 17 Excellence in Service Delivery ............................................................ 18 Divesting Non-core and Non-strategic Activities ................................ 19 Enabling Initiative and Enterprise ....................................................... 19 PART III STRONG SOCIETY ........................................................... 21 Building a Strong Society .................................................................... 21 Achieving Excellence in Higher Education ......................................... 21 Keeping Healthcare Affordable ........................................................... 23 Medisave for Self-Employed ........................................................... 24 Health Insurance and MediShield .................................................... 24 Means Testing.................................................................................. 24 Medisave and Medifund Top-ups ..................................................... 26 Building the Next Generation .............................................................. 26 Adequate Finances for Retirement ...................................................... 30 PART IV LAND OF OPPORTUNITY ............................................... 31 Making Singapore a Land of Opportunity ........................................... 31 A Competitive Tax Regime ................................................................. 31 Reducing Corporate Income Tax ..................................................... 31 Deferring the Reduction of Personal Income Tax............................. 31 MINISTRY OF FINANCE i

     Exempting Individuals‟ Foreign-sourced Income ............................. 32

    Exempting Individuals‟ Singapore-sourced Investment Income ....... 32

    Promoting Singapore as a Business Hub ............................................. 33

    Regional HQ incentive ..................................................................... 33

    Pioneer Incentive ............................................................................. 33

    Withholding Taxes on Royalty Payments ........................................ 33

    Encouraging Entrepreneurship ............................................................ 34

    Tax Exemption for New Companies ................................................ 34

    Financing for Start-Ups .................................................................... 34

    Promoting Financial Services .............................................................. 35

    Other Tax Changes .............................................................................. 35

    Approved International Shipping Enterprise Scheme ....................... 35

    Streamlining the Processing of Estate Duty ..................................... 36

    Motor-Vehicle Taxes ....................................................................... 36

    Liquor Duties ................................................................................... 36

    Tobacco Duties ................................................................................ 37

    Overall FY 2004 Fiscal Position .......................................................... 37

    PART V CONCLUSION .................................................................... 38

ANNEXES

    ANNEX A : Temasek Divestments in 2003 and 2004 (to date) ANNEX B : Tax Exemption of Foreign-sourced Income and

     Singapore-sourced Investment Income for Individuals ANNEX C : Tax Exemption Scheme for New Companies ANNEX D : Promoting Financial Services

    ANNEX E : Current and New Excise Duties for Liquor ANNEX F : Current and New Excise Duties for Tobacco Products

MINISTRY OF FINANCE ii

PART I OUTLOOK AND CHALLENGES

Mr Speaker, Sir

    2003 Ending on a Positive Note

    1.1 I beg to move that this Parliament approves the financial policy of stst April 2004 to 31 March 2005. the Government for the financial year 1

    1.2 In the last six years, the Singapore economy experienced more volatility and uncertainty than it had encountered over the previous 30 years. Beginning with the Asian Financial Crisis in 1997, a series of external shocks buffeted our economy and ended a decade of uninterrupted growth. We were all hoping for a quick turnaround last year, as our economy had bounced back quickly from previous downturns. But SARS and the war in Iraq dashed our hopes. We had a very difficult first half.

    1.3 But the economy showed clear signs of turning around towards the end of the year. In the fourth quarter, GDP expanded by 4.9% compared to the previous year. On an annualised quarter-on-quarter basis, GDP grew by 11%, with the manufacturing sector expanding by 17% and the services sector by 11%. This brought growth for the whole year to 1.1%. The recovery was reflected in increased exports, investments, and employment.

    1.4 Both manufacturing and services benefited from an increasingly favourable external environment. As the recoveries in the US, Europe and Japan gained momentum, their appetite for imports increased. Our non-oil domestic exports grew by 15% in 2003, driven by

    pharmaceuticals, chemicals and semiconductors. Strong external demand also caused the wholesale and retail sector to grow by 6.7%. 1.5 Foreign direct investments (FDI) began to return to the region as the fears and uncertainties from SARS and the Iraq war subsided. Last year, Singapore attracted $7.5 billion of fixed asset investments in the manufacturing sector and $1.9 billion of annual business spending in the services sector. These investments will generate $8.6 billion in value-added each year for the economy.

    1.6 Employment also improved. More jobs opened up as companies regained the confidence to start hiring again. About 12,000 jobs were created in the second half of 2003, partially making up for the 30,000 MINISTRY OF FINANCE 1

    jobs lost in the first half. The seasonally adjusted unemployment rate dropped from the peak of 5.5% in September to 4.5% in December 2003. 1.7 Macroeconomic policies helped support the economy. MAS

    maintained a neutral policy stance for the trade-weighted exchange rate of the Singapore dollar, after re-centering the policy band at a lower level. The Government introduced two off-budget fiscal packages to support the economy, and help households and businesses tide through a difficult period. We had a SARS relief package in May, and another package to accompany the CPF changes in September. These prompt measures helped to maintain confidence, buffer the shocks, and boost economic activity. In the absence of support from monetary and fiscal policies, GDP growth last year might have been flat instead of 1.1%.

    2004 Gathering Momentum

    1.8 Our recovery is picking up. There is a palpable optimism among Singaporeans and businesses. The December Straits Times Consumer Confidence Index surged 82 points to 294, bringing it close to its levels in 2000, when the economy was growing strongly. Retail sales in December rose by 21% month-on-month and 10% year-on-year.

    1.9 We have revised our growth forecast for this year upwards to 3.5-5.5%. But we have to look beyond the cyclical pickup in our growth rate, and achieve sustained long-term growth by transforming our economy. That will depend on our ability to carry through our economic restructuring, upgrade our industries, and create new and better jobs to replace the old jobs that are being phased out. Our commitment to restructuring is a key reason why analysts and investors are confident about Singapore‟s long-term prospects, and why MNCs still want to put

    their projects in Singapore.

    1.10 The Economic Review Committee‟s recommendations, the CPF

    changes, the cut in direct taxes, and wage reform lay the foundations for a globalised, diversified, and entrepreneurial economy. These fundamental changes reflect our resolve to stay relevant in an increasingly competitive world. Let me review our progress in restructuring, and what more needs to be done.

    Growing Manufacturing and Services

    1.11 First, we continue to grow the manufacturing and services sectors. We are strengthening our position as a global business hub and one of the most attractive places in Asia for investments and talent.

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    1.12 Singapore remains competitive as a manufacturing location, especially for high-tech, high value-added activities. In the past year, many MNCs have either committed to expand their existing activities, or to establish regional headquarters in Singapore. For example, Hewlett-Packard recently decided to invest another US$1 billion in the next five years to expand its operations. ST Microelectronics has announced $425 million of new investment commitments; Seagate Technologies announced a $200 million investment in recording media and $300 million in high-end hard disk drives; and Agilent Technologies has committed to another $156 million of investments.

    1.13 However, overall the manufacturing sector is not likely to generate many more jobs. MNCs are shifting to higher value-added, less labour-intensive activities, and will increase output per worker rather than hire more workers. So to create jobs for Singaporeans, we also need to put strong emphasis on the services sector. We are developing established services such as trading and logistics, info-communications technology, financial services and tourism; while fostering emerging services such as education, healthcare and the creative sector.

    1.14 More so than manufacturing, a vibrant services sector depends on people including foreign professionals, executives, businessmen, technicians, tourists and consumers being able to travel in and out of

    Singapore with minimum hassle. In particular, we must facilitate travel for visitors from ASEAN, as well as from China and India. 1.15 Singapore does not require entry visas for visitors from most countries. The Immigration and Checkpoints Authority (ICA) has reviewed our remaining visa requirements. As a result, we lifted visa requirements for visitors from Cambodia, Laos and Vietnam last year. We have also made it easier for businessmen to obtain long-term Multiple Journey Visas (MJVs), valid for up to five years. We will allow reputable Chinese and Indian companies to recommend their own staff for MJVs. Social visitors from the PRC are now granted visas valid for up to five weeks compared to three weeks before, while the period of stay granted is now up to 30 days, double the previous 14 days. Similar facilities are also granted for visitors from India, Myanmar and the Commonwealth of Independent States. Since the beginning of this year, we have proliferated the visa application points for PRC travellers, from 67 branch offices operated by 3 appointed travel agents, to 322 branch offices operated by 43 appointed travel agents across China. ICA is exploring other innovative measures, such as on-line visa applications, to facilitate the entry of bona fide visitors to Singapore.

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    1.16 The easier visa rules will attract more tourists here. Visitor arrivals have already recovered to pre-SARS levels. This year STB expects 7.6 million visitors, up from 6.1 million last year. STB is stepping up marketing efforts to regional countries such as China, India, and ASEAN. Last year saw the largest foreign direct investment in a visitor attraction in Singapore the $200 million “Singapore Flyer”. Sentosa

    Development Corp has also drawn up a ten-year, $8 billion plan to revamp and refresh Sentosa. It has been aggressively drawing in projects and has already attracted about $500 million of new investments, half of them from the private sector.

    1.17 We have also done well promoting other service industries. Globally, many MNCs are centralising and outsourcing their corporate functions. To save costs and ensure business continuity, banks are relocating many functions, traditionally performed in New York, London and Tokyo, elsewhere in the world. India is attracting many call centres and business process outsourcing (BPO) operations. Singapore is not a competitive location for call centres, but we are an attractive site for support centres hosting higher-end activities, particularly for financial institutions. Over the past year ten banks, including Credit Suisse First Boston and Barclays Capital, have centralised their regional and even global processing operations here.

    1.18 Outside the financial sector, we attracted over 30 shared services and BPO projects last year. For example, Europe‟s largest software

    company SAP chose Singapore as the launch market for its Shared Services Centre in the Asia Pacific. Polaris and IBM have set up disaster recovery operations here. Toyota Tsusho, ExxonMobil and DFS are all using Singapore as a centre for shared services and business continuity activities.

    1.19 In healthcare, EDB has launched the Singapore Medicine initiative

    to develop Singapore into a leading destination for healthcare services. Singapore Medicine will bring together the efforts of many public sector agencies, including MOH and STB. One pre-condition to make Singapore a regional medical hub is to have enough doctors, particularly specialists, who can practise in Singapore. To ensure this, MOH has expanded the list of recognised foreign universities and medical schools from 24 to 71. To alleviate the shortage of nurses, MOH will continue to recruit nurses from diverse sources, and streamline the recognition of nursing qualifications from the Philippines, Myanmar, China and Indonesia. In addition, MOH will relax many current restrictions on advertising by healthcare institutions so that they can promote themselves MINISTRY OF FINANCE 4

    in the region. A new set of Publicity Rules will be gazetted within the next few months.

    Labour Market Reforms

    1.20 The second strategy we are pursuing is to reform our labour market so that companies and workers can respond to fast-changing business conditions. The CPF changes and the ongoing push for wage reform are important parts of this effort. They will help to preserve existing jobs and create new ones for Singaporeans.

    CPF Changes

    1.21 We made major changes to our CPF scheme last year to maintain our cost competitiveness. Employer contribution rates were reduced, and the CPF salary ceiling will be brought down in steps. This has lightened the burden on employers and made Singapore workers more competitive. At the same time we are raising the CPF Minimum Sum and tightening withdrawal rules at age 55, so that Singaporeans will be better prepared for their retirement needs.

    Wage Flexibility

    1.22 The CPF changes are long term structural adjustments, not tactical responses to transient conditions. They will strengthen our competitiveness, but we still cannot be sure that our wage levels will never become too high again one day. Should this happen, we should not bank on another large cut in CPF rates to restore our competitiveness, as we did in 1985 and 1998. The CPF is a blunt tool for cost reduction. And now that we have reduced the rate to 33%, there is less room for further reduction. This makes it more important to have flexible wage structures, so that companies can respond quickly to changes in the business environment. This will help companies stay viable and preserve jobs in a severe downturn, while giving them the confidence to reward workers and increase employment in good times.

    1.23 I am happy that the tripartite Taskforce on Wage Restructuring has given strong backing to wage reform. Its report explains clearly how companies can implement wage restructuring for greater flexibility and competitiveness. Achieving wage flexibility will require strong commitment from employers, unions and workers. Employers must put in place schemes that link remuneration to individual and company performances. Unions must take a broad long-term view of workers‟

    interests, and persuade them of the benefits of these changes. Finally, workers must recognise that in a more volatile and competitive MINISTRY OF FINANCE 5

    environment, flexible wage structures offer the best chance of job security. We must make a concerted effort to achieve our wage reform targets.

    Training and Upgrading

    1.24 Even as the economy recovers, we must not let up on retraining and upgrading our workers. This will enable our workers to seize new opportunities and adapt to the changing needs of the economy. 1.25 The Singapore Workforce Development Agency (WDA) will strive to upgrade the skills of workers, especially those with secondary education or less, so that they can stay employable and take on new, higher-skilled jobs. WDA will launch new training programmes, and make it easier for workers to enrol in them. There will also be programmes for professionals, managers and executives, so that they can support the upgrading of their industries.

    1.26 These programmes are partly financed by the Skills Development Fund (SDF), which employers contribute to through the Skills Development Levy (SDL). The 1% levy applies to all workers with a gross monthly salary of $1,500 or less. The current levy rate and salary ceiling are not enough for the SDF to cover its annual commitments. Had the Government not injected $500 million into the SDF in 2001, the fund might have been exhausted by now.

    1.27 Over the next five years, WDA estimates that the SDF‟s annual

    commitment will rise from $120 million for 600,000 training places in FY03 to $176 million for 766,000 places in FY08. MOM will therefore raise the SDL salary ceiling from $1,500 to $1,800 with effect from 1 July 2004. The levy rate will stay at 1%. This will increase SDF‟s

    income by $22 million per year.

    Foreign Workers

    1.28 When the Asian Crisis struck, the Government reduced foreign worker levy rates temporarily, to save costs for employers. As the economy recovers, the Government needs to progressively adjust levy rates to reflect the prevailing market conditions.

    1.29 The levy for skilled Work Permit holders is currently $30, reduced from $100 previously. As part of the changes to the foreign worker scheme for the construction sector, MOM increased the construction skilled worker levy to $50 with effect from 1 July 2004. In line with this, MOM will also raise the skilled worker levy rate to $50 in all other MINISTRY OF FINANCE 6

    sectors, with effect from 1 July 2004. The levy rates for unskilled workers will remain unchanged.

    1.30 For our economy to grow, companies must be able to recruit skilled workers. The higher value and skill-based industries we are attracting all depend heavily on skilled workers, technicians and professionals. A particular concern is manpower at the diploma and post-secondary level. If we lack these middle-tier skilled workers whether

    local or foreign we will choke off the growth of these industries or drive them elsewhere. The shortfalls are already evident in healthcare where there is an acute shortage of nurses, in the IT industry where we lack computer programmers and IT technicians, and in aerospace and pharmaceuticals.

    1.31 MOM will modify the current work pass system to meet this demand for middle-level skilled manpower. We will introduce a new category of work passes, called „S‟ passes, to replace the current Q2

    passes.

    1.32 The main criteria for an „S‟ pass will be a minimum salary of

    $1,800 and an acceptable tertiary qualification. MOM will supplement these two criteria with a system of points, to take into account experience, skills and job type when assessing eligibility. The „S‟ pass will be subject

    to a quota, to begin with 5%, as well as a levy, initially set at $50. The scheme will be implemented from 1 July 2004.

    Encouraging Entrepreneurship

    1.33 A third major strategy is to boost entrepreneurship. This process takes time, because we are not just changing Government rules, but seeking to shift mindsets. The Government is doing its utmost to foster a conducive environment for entrepreneurship. The Action Community for Entrepreneurship (ACE), chaired by Minister of State Mr Raymond Lim, is nurturing entrepreneurship, pursuing entrepreneurship promotion programmes, and acting as the interface between the private sector and Government.

    1.34 A key hurdle facing start-ups is financing. The Government is helping start-ups gain access to financing. EDB‟s Start-up EnterprisE

    Development Scheme (SEEDS) helps early-stage start-ups with equity financing. Every dollar raised by a start-up from third-party investors will be matched by EDB up to a maximum of $300,000. In two years SEEDS has raised nearly $59 million $27.3 million from Government

    and $31.6 million from the private sector to support 103 innovative

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    start-ups. We also recently established Deal Flow Connection, an online portal that helps link up entrepreneurs with financial institutions, venture capitalists and angel investors.

    1.35 The Government is also helping our entrepreneurs to venture beyond our shores. We have negotiated many FTAs, including those with key economic partners like the US and Japan, to improve access to these markets. Our businessmen can now tender for projects contracted out by the governments of our FTA partners, on an equal footing with their local companies. IE Singapore actively promotes the development of Singapore‟s external wing. It helps local enterprises take advantage of

    government-to-government agreements such as air services agreements, investment guarantee agreements, and avoidance of double taxation agreements. IE Singapore also recently launched the iPartners Programme to encourage companies to band together when venturing overseas. Already, this programme has helped three consortia of Singapore companies to venture into East Asia, Africa and the Middle East.

    1.36 To bring in entrepreneurial talent, MOM launched the EntrePass Scheme. Entrepreneurs can set up operations in Singapore on the basis of their business plans, rather than academic qualifications or salary. 1.37 The Government is also reviewing its rules and licensing requirements to ensure that bureaucracy does not stifle enterprise in Singapore. To date, the Pro-Enterprise Panel has reviewed 1080 suggestions, of which it has accepted 57%. The Rules Review Panel is also making headway. In the past year, the Panel reviewed 2913 rules, 23% of the total. It removed 373 rules, updated 772, and re-affirmed the remaining 1818. By 2005, public agencies will have reviewed all their existing rules, to remove outdated ones and streamline the rest. It does not mean that the job is then done. Thereafter, it will be time to start reviewing all the rules again. Our plan is to review all rules regularly, on a rolling five-year cycle.

    1.38 However, the Government can only do so much to create a Best for Business environment. Ultimately, entrepreneurs need to take their own risks and develop their own ideas, in order to create and seize new opportunities in overseas markets. Entrepreneurship is, ultimately, a challenge for our whole society.

    Enhancing Competition

    1.39 A fourth major strategy is to promote competition and free markets in all sectors of the economy. Competition spurs firms to be more MINISTRY OF FINANCE 8

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