UPDATE 2-Singapore to spend heavily on elderly, have 1st budget deficit in years

Fri Feb 21, 2014 6:35am EST

Related Topics

* Billions to be spent helping the 'Pioneer Generation'

* Deficit of 0.3 pct of GDP seen in new budget year

* Comes amid growing unhappiness over inequality (Adds details on budget measures, reaction)

By Masayuki Kitano and Rachel Armstrong

SINGAPORE, Feb 21 (Reuters) - Singapore plans to allocate billions of dollars to support the elderly and low-income families in the coming fiscal year, during which the city-state expects its first budget deficit since 2010.

The government unveiled on Friday a budget for 2014/15 that includes steps to support citizens born by 1949 via subsidies to help cover health-care costs. It said it will set aside S$8 billion ($6.33 billion) in the year starting April 1 to help its "Pioneer Generation".

Singapore's electorate has become increasingly angry over the high cost of living and a gap between rich and poor, forcing the long-ruling People's Action Party (PAP) to re-set its goals and focus on providing more affordable healthcare and extra support measures to the less well-off.

While Singapore historically has eschewed Western-style 'welfare states', it has started to bring in a series of subsidies to help citizens struggling to cope with rising medical, education and other costs.

"We are strengthening social safety nets, and mitigating inequalities," Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam said in his budget speech.

In 2014/2015, government spending in Singapore is expected to rise 8.3 percent from the current year to S$56.7 billion.

After including the Pioneer Generation Fund and other measures, the overall balance in the 2014/15 budget should be a deficit of S$1.2 billion, or about 0.3 percent of gross domestic product, Tharman said.

That compares to an estimated surplus of S$3.9 billion, or around 1.1 percent of GDP, for the current fiscal year.

Most years, Singapore has produced a budget surplus. The last time there was a deficit was 2009/2010.

HIGHER SPENDING NEEDS

Tharman said the Pioneer Generation fund will ensure that future budgets can focus on addressing needs such as infrastructure investment and expected rises in government healthcare spending for the population as a whole.

"Our spending needs will grow significantly in the next 10 to 15 years," he said.

Even if there are more budget deficits ahead, Singapore's large current-account surpluses and hefty reserves give it financial strength and room to raise spending.

"The government has fairly deep pockets in terms of its reserves," said Song Seng Wun, director of Singapore research at CIMB bank.

Some economists had expected the government to make some changes in income-tax policies to get more revenue from Singapore's many wealthy residents, but no such steps were announced. Last year, some taxes on luxury cars were increased, as were stamp duties for purchases of multiple properties.

"We could see wealthier households being called up again - there are plenty of alternatives in terms of funding sources in the coming years if spending were to be higher," said CIMB's Song.

To help fund future health-care costs, the government said it will raise employers' contribution rate to the Central Provident Fund by 1 percentage point for all workers.

GETTING MORE PRODUCTIVE

The budget also included measures to help the government in its long-running mission to boost productivity and reduce reliance on foreign labour.

The construction sector in particular, will get incentives via higher levies on lower-skilled foreign workers to focus instead on automating processes and retaining more skilled employees.

Unhappiness about the presence of many foreign workers contributed to the ruling party's worsening performance in recent elections. In the 2011 general elections, 40 percent of votes went against the PAP, its poorest result since independence in 1965.

The government also announced an extension of a Productivity and Innovation Credit Scheme for three years that is aimed at helping businesses improve their automation processes.

Figures released by Singapore's Ministry of Trade and Industry on Thursday showed that the city-state saw zero productivity growth last year, following a contraction of 2 percent in 2012.

On the tax front, excise duties on tobacco, alcohol and lotteries were all raised.

There were no measures announced on the property market. Since 2009, the government has taken eight rounds of measures to prevent a property bubble, and Tharman said it was too early to unwind them.

The cooling effort looks to be paying off with prices of private properties falling 0.9 pct in the last quarter of 2013, the first drop in almost two years.

"We are not engineering a hard landing, but neither are we able to eliminate cycles in the property market," Tharman said.

($1 = 1.2648 Singapore dollars) (Additional Reporting by Brian Leonal, Jongwoo Cheon, Laura Philomin and Mohaini Ibrahim; Editing by Richard Borsuk)

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