The Singapore budget confirms that fiscal pressures associated with the pandemic are easing, allowing the focus of policy to shift towards medium-term challenges to growth and public finances, said Fitch Ratings recently.
In presenting the budget on 18 February, the government estimated the fiscal deficit in the fiscal year ending March 2022 (FY21) at SGD5 billion (US$3.7 billion), or 0.9% of GDP, compared with an earlier target of about 2% of GDP. This followed the FY20 deficit of 10.8% of GDP.
The Singapore budget confirms that there was substantial progress towards fiscal consolidation in FY21, according to the credit rating firm.
“This is in line with our expectation when we affirmed Singapore’s rating at ‘AAA’ in August 2021, with a Stable Outlook,” Fitch said.
The rating reflects Singapore’s exceptionally strong external and fiscal balance sheets, high per capita income, favourable business environment and sound macroeconomic policy framework — factors that mitigate its vulnerability to external shocks, the firm added.
Revenues in FY21 were boosted by higher personal and corporate income tax receipts and stamp duties, but consolidation was primarily driven by the winding down of pandemic-related support, according to Fitch.
Aggregate special transfers, which encompass one-off transfers to businesses and households, declined to SGD7.9 billion from SGD50.8 billion in FY20, with allocations to the job support scheme falling significantly, Fitch noted.
“The pace of additional fiscal consolidation may be slower in FY22 than we had expected, with the government projecting a deficit of 0.5% of GDP against our previous forecast of a return to surplus,” Fitch said. “However, we believe the authorities are still on track to keep the average fiscal position balanced over a full government term.”
Fitch maintains its forecast of a surplus in FY23.
Singapore has drawn on its fiscal reserves to help finance pandemic relief, and this will continue in FY22, the company observed.
Nonetheless, the drawdown has been less than the SGD52 billion that the authorities had initially expected, the firm said, adding that the government now expects it to total SGD42.9 billion over FY20-FY22.
“We expect the fiscal reserve to remain substantial at around 200%-300% of GDP, even after the drawdown,” Fitch noted.
The company forecasts Singapore’s recovery to continue in 2022, with economic growth at 4.3%, in line with the government’s expectation of 3%-5%.
Inflationary risks will be higher than in recent years and the Monetary Authority of Singapore (MAS) pre-emptively tightened monetary policy in January, the company said.
Nonetheless, MAS still sees headline inflation at only 2.5%-3.5% in 2022, which is similar to our median forecast for ‘AAA’ rated economies of 2.3%.
In terms of the pademic, authorities in the island state have continued to remove restrictions on activity and public health systems appear to be coping with the associated stress despite the rising number of confirmed cases since the start of 2022.
The authorities have shifted attention to medium-term challenges as near-term risks have receded, Fitch pointed out.
The Singapore budget confirmed an increase in the Goods and Services Tax (GST), from 7% to 8% from January 2023 and again to 9% from 2024, as part of a longer-term effort to raise revenues in order to offset spending pressures associated with demographic ageing, the firm said.
The increase has been staggered to dampen associated inflationary pressure, the firm noted.
While there are significant increases to wealth taxes on property and cars, and a rise in the top marginal rate of personal income tax, to mitigate social inequality, carbon taxes may rise from the current SGD5 per tonne to SGD50-SGD80 per tonne by 2030 as the government looks to decarbonise the economy, Fitch said.