This article first appeared in Forum, The Edge Malaysia Weekly on February 8, 2021 - February 14, 2021

As Deputy Prime Minister Heng Swee Keat prepares to announce Singapore’s budget for 2021 on Feb 16, he confronts a tumultuous world. Hope may be rising for an end to the pandemic as vaccines are rolled out, but much can still go wrong. In the meantime, the world we know is being up-ended by all manner of political, economic and financial changes.

This backdrop makes the forthcoming budget highly consequential. At one level, it will be good for the nation to know the taxation and spending intentions of the government so that it can assess the implications for economic growth. At another level, this budget statement will also give the government the platform to signal broader policy directions and a chance to introduce reforms to tackle the nation’s structural challenges. The country may not be in the depth of a crisis as it was the last time Heng presented the budget, but he still has an unenviable task of shaping an overall strategy to meet the profound challenges that Singapore faces.

The pandemic is not the only problem confounding policymakers. Singapore’s overall economic policy, including fiscal strategy, has to contend with multiple difficulties and uncertainties.

First, the growing contest between the US and China raises the possibility that developments in areas such as trade or technology could hurt Singapore. Moreover, it will almost certainly result in the countries of this region, where the US-China competition is most intense, stepping up defence spending. Singapore will have to factor that into its fiscal policy.

Second, protectionism is likely to continue to undermine the global trading regime that the city state relies on. While the US, under President Joe Biden, is likely to pursue a steadier and more predictable trade policy, it is unlikely to reverse the protectionist trend that former President Donald Trump brought in. One of Biden’s first acts was to issue a directive that tightens rules requiring US government procurement to favour domestic suppliers. Biden’s economic team has repeated noises about so-called currency manipulation, a charge the US has used in the past to impose restrictions on its trading partners. Trade-driven growth is unlikely to be as easily available as before and policy has to take that into account.

Third, competitiveness will be more of a challenge. The acceleration of technological transformation in multiple areas offers tremendous new opportunities for Singapore’s economy, but it also threatens dislocations. Many jobs could be eliminated by artificial intelligence, robotics and smart automation. Already-stressed local small and medium enterprises (SMEs) could face even more pressures on profitability and viability. Technological developments such as 3D printing are changing the structure of competitiveness, making production back in high-cost developed economies potentially viable again, which could lead to manufacturing activity being relocated from our region back to the US or Japan or Europe. The authorities will need to consider whether fiscal policy can be used to provide help to those parts of the local economy that will be affected by these potential disruptions.

Fourth, the extreme monetary policies of the past decade may have increased financial vulnerabilities. We have seen the recent wild gyrations in the prices of stocks such as GameStop as well as in commodities such as silver. Similar frenzies have been seen in areas such as bitcoin. Borrowing has soared on the assumption that inflation will remain low and so keep borrowing rates depressed. Some of this debt has gone into equity and bond purchases, causing their valuations to be stretched. We have seen too many instances in the past in which ultra-low interest rates and easy money have tended to make investors careless about risks, often in ways that are not apparent to regulators until it is too late. Singapore must therefore be prepared for another period of financial turbulence by building resilience.

Thus, the economic backdrop to the budget is complicated and that means it will not be easy for policymakers to get the balance exactly right.

First, how much support should the budget provide to the local economy — after a year of fiscal support packages of unprecedented scale amounting to about S$100 billion (RM303.9 billion)?

The local economy is only tentatively stepping up from its worst contraction in recent memory. The International Monetary Fund (IMF) now forecasts brightening prospects for the world economy, with virtually all the major regions of the world bouncing back from the severe pandemic-induced recession of 2020. Singapore’s major markets of the US and China are set for a powerful rebound, with the regional economies around it also seen recovering well. Global financial conditions also remain highly supportive, as interest rates remain low and central banks continue to pump liquidity into their economies — that should help Singapore’s financial centre activities.

IMF itself warned, however, about continuing downside risks. After all, new variants of the Covid-19 virus seem to be emerging, the vaccine roll-outs appear to be slow in many areas and doubts keep surfacing about the efficacy of vaccines or their potential side-effects, which may deter people from being inoculated. All this may prolong the economic damage caused by the pandemic. For Singapore itself, even a general global recovery will still leave key sectors such as aviation and hospitality well behind, since travel will probably take a long time to recover. Also, we suspect that the demand for jobs may not recover so fast, as businesses will remain cautious for a while.

The key takeaway is this: The government must not reduce fiscal support too quickly, as the economy remains fragile and hostage to downside risks. Yet, neither can it continue to provide the widespread support it offered to companies last year because that might allow zombie companies to survive for longer than is healthy for a market economy to thrive.

The solution seems to be for a gradual withdrawal of fiscal support, not an abrupt one. It also points to spending being directed in a more targeted fashion to only a few areas — industries that will take much longer to recover from the pandemic and initiatives to bolster Singapore’s readiness to adapt to technological and other changes. Since some large infrastructure projects such as Changi Terminal 5 have been delayed, other necessary infrastructure projects (such as for mitigating climate change) could be brought forward to maintain public investment at decent levels. Also, it will be prudent to plan for additional spending that can be implemented quickly in case the volatile global environment throws yet another shock, financial or otherwise, at the country.

The recent couple of years have been troubling ones for Singaporeans, especially the younger ones. People are eager to get a clear sense of the government’s strategy to deal with challenges, its vision for the nation’s position in a changed world. Singaporeans are also aware that some parts of the otherwise well-run domestic policy need to be shaken up. This is one of those times when the budget speech needs to be used to provide clarity of vision and direction for the citizenry and where such rhetoric is backed up by forthright measures. Heng could articulate some of the ideas from the Emerging Stronger Task Force, for instance.

There are a few other areas in which there is rising demand for greater clarity:

•    Will the government use its taxing and spending powers to improve income inequality?

    After 40 years in which much of the world pursued tax cuts relentlessly, change is in the air. In the US, tax rates are almost certain to increase for high-income earners as well as corporations. It would make sense for Singapore to judiciously raise these tax rates as well and restore a degree of redistribution to the tax system. But political concerns are not only around income inequality; they also revolve around inequality of wealth. Should some form of estate duty be reintroduced or would a form of wealth tax be considered? All this may not be popular with everyone, but judicious changes in that direction are better than risking a surge in social resentment down the road.

In the same vein of redistribution, government spending on social safety nets might also need to be more aggressively increased, especially in areas where there are pronounced gaps such as unemployment benefits and retirement adequacy. Social spending has already increased considerably, but growing economic insecurity and an ageing population suggest that more is needed;

•    Should the government revise its approach to funding the budget?

    Even if the government does not believe it is time to address the above questions on taxes and spending, the pressures for such changes will not go away. In time, the fiscal position will have to incorporate these changes. The government needs to offer a revised fiscal strategy of how to finance growing demands for change. This raises two key questions. One is to present a long-term map for revenues. Whether it is an increase in the Goods and Services Tax or in sin taxes, it might be better for the government to offer a predictable timeline for tax adjustments rather than leave these as ad hoc decisions. This will allow revenue growth to be more predictable and economic agents can adjust to that.

The other issue is to give effect to the idea floated sometime ago, for the government to fund infrastructure spending through borrowing. At a time when interest rates and true public debt levels in the country are so low, this makes eminent sense. Such a shift in strategy would also do wonders to stimulate the local bond market; and

•    Another push to improve productivity and innovation

    Given Singapore’s weak demographics and the social resistance to large-scale immigration, the only way it can secure dynamic economic growth of at least 3% is through a significant acceleration in productivity growth. And much of that will need to come from more innovation in SMEs, where productivity growth had been particularly disappointing. But the government should not rush into doing more of the same for the SME sector. Much effort is being put into nurturing this sector as well as nurturing innovation in Singapore, but the results may not have been commensurate with the efforts. It is time to examine why this is the case and what changes in strategy are needed.

On balance, Singapore has managed the pandemic crisis reasonably well. Substantial fiscal packages helped insulate the economy from the worst effects of the pandemic. Through bold budgetary measures implemented by the government in 2020, local companies have not collapsed and workers have retained their skills since relatively few lost their jobs. The budget speech will be a great opportunity for the government to set out its policies and vision for the post-Covid era so that Singapore can emerge even stronger from the crisis.

Manu Bhaskaran is CEO of Centennial Asia Advisors

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