Mr Speaker, Sir, I beg to move. "That Parliament approves the financial policy of the Government for the financial year 1st April, 1979 to 31st March, 1980." Sir, I would like to inform the House that I am delivering the Budget Statement on behalf of my Minister, the Minister for Finance. Sir, I have earlier distributed to Honourable Members of the House my Economic Survey of Singapore 1978 (cols. 347-554). Copies have also been given to the press, and the press has reported in two parts the salient features of the Economic Survey. Nevertheless before spelling out the financial policy for the coming year, I would like to highlight the more important features of our economic performance last year, and set out our economic objectives for the coming year. Singapore's Economy in 1978 World economic performance in 1978 may be described as lackadaisical. The industrialised countries grew at 3.5%, a quarter of a per cent lower than the previous year. The volume of world trade grew at 5%, marginally higher than the rate in 1977. The rate of inflation, however, eased slightly, and for the Organisation for Economic Cooperation and Development (OECD) countries, it was around 8%. Last year was the Year of the Horse and my confidence that Singapore would put on the extra gallop to challenge and beat the 1977 growth rate was not misplaced. The Singapore economy grew by 8.6%, better than our expectation of a 6-8% growth, and higher than the 7.8% achieved in 1977. At current prices, growth was 9.7%. Growth was achieved amidst price stability as the GDP deflator rose by only 1.0% compared to 1.5% in 1977. However, as a result of rising food prices, particularly of rice, the Consumer Price Index rose by 4.8% against an increase of 3.2% in 1977. While our growth can be considered satisfactory, our workhorse was no match for the swifter stallions in Hong Kong, Taiwan and South Korea. Their economies raced along at between 10-13% last year. The engine of growth in Singapore last year was the transport and communications sector. It grew by 16% and accounted for 30% of the increase in GDP. The manufacturing sector came second, growing by 12% and contributing 28% of the incremental GDP. Especially heartening was the invigorating recovery in private investments in capital equipment. After three years of continuous decline following the oil crisis in 1974, private investments in plant and machinery increased by 20% in 1978. This augurs well for the manufacturing sector and the economy in the next few years. In 1978, 41,000 jobs were created, mostly in the manufacturing sector (21,000). and the commerce sector (12,000). As a result, unemployment fell to a record low of 3.6%. Singapore's external trade rose by 15% to reach $52.6 billion in 1978. This was, however, lower than the rate of 18% achieved in 1977. Imports increased at a faster rate than exports thus widening the visible trade deficit by $1,183 million to $6.6 billion. This is a reversal of the trend since 1975. The main reason for this was the slower expansion of our exports, both domestic and re-exports. Notwithstanding this, Singapore's balance of payments continued to be in healthy surplus because of higher capital inflows. Visitor arrivals in the tourist sector exceeded two million during the year, registering a growth of 10%. Our financial and business services also continued to expand. Loans and advances of banks and ACUs increased by 20% and 21% respectively. Activity was much higher in the local stock market than the previous year's. All in all, 1978 was a satisfactory year for us. Problems and Prospects for 1979 I am not optimistic about the outlook for world economic growth in 1979. The present cautious growth policies of industrialised countries are not expected to generate growth of more than 3% in 1979. Many believe that the United States economy in the wake of recent stringent monetary policies will decelerate. It is hoped that there will be an off-setting expansion in Japan, West Germany and other smaller industrialised countries. Given our open economy, and our dependence on industrialised countries for export markets, any slowdown in the world economy will have an adverse effect on Singapore. An added depressant to the world economic outlook is the proposed 4-stage oil price increase totalling 14.5% in 1979 by OPEC. Even more sombre is the prospect of a world oil shortage following disruption of supply from Iran. The future supply and price of oil will determine the world economic performance. As for ourselves, we should step up efforts to economise on the consumption of oil and electricity. Last year, my Minister warned the House of the protectionist sentiments in the world. Protectionism has now been extended to the air. The new duopolistic end-to-end International Civil Aviation Policy initiated by Australia and apparently supported by other developed countries, will stifle the growth of airlines of intermediate developing countries and affect their tourist-related industries. Singapore stands to lose about 50% of the present number of Australian tourists, besides the loss of revenue for our national carrier. Singapore together with ASEAN and the Group of 77 developing countries must resist the protectionist tendencies of developed countries and help bring about an international economic order that will benefit the developing countries. In the light of the above problems, we must improve on our past efforts and performance if we wish to achieve the same growth rate in 1979 as in 1978. I would now like to examine in more detail the specific objectives that we will be pursuing in 1979. Industrial Development 1978 was the best year for the manufacturing investments since 1975. Investment commitments totalled $825 million, representing an increase of 100% over 1977. If a major petroleum project of $330 million was excluded, the increase was still a creditable 43%. Our major investors continued to be Japan and the United States. Expansions and diversifications of existing industries in 1978 as a percentage of total commitments rise to 56%. from 48% the previous year. This testimonial on our investment climate from those who are here is our best promotional tool for new investments. If the volume of commitments matters, the quality of such commitments matters even more. Over the years, the type of industries that we have attracted has become increasingly sophisticated, with higher value added per worker. The value added per worker in manufacturing has risen in real terms by 31% since 1970. In 1978 the value added per worker was $21,000. But we still have many more rungs to climb. The value added per worker in 1976 was $47,000 in Germany and $53,000 in the United States. Compare this with $21,000 for Singapore in 1978. We have therefore a long way to go before our industries can reach the standards of those of the developed countries. In our future investment promotion, we should recognise our strengths and weaknesses. We should promote industries that can take full advantage of our intrinsic strengths such as a good geographical location with developed infrastructure and a pool of increasingly skilled and semi-skilled labour available at competitive prices. We should recognise our limitations of a small domestic market, lack of energy and other natural resources, and a small land area. The industrial products we would favour in the future should be small, high value, readily transportable, non-pollutive, and which use relatively less natural resources such as land, water and energy. Thus the products that EDB will be promoting in the future will include precision instruments such as watches, cameras and measuring instruments, pharmaceuticals and other fine chemicals, aircraft servicing and parts production, automotive components and computer related products. In promoting specific products, we must also be aware of the need to have those which would be less sensitive to protectionist sentiments in the industrialised countries. Thus far our industrialisation drive has depended largely on foreign expertise and technology through the multinationals. This is inevitable if we wish to have access to modern technology. But it is also time that we complement this with indigenous research and development, if only to imbibe foreign technology and adapt them to local uses. The Product Development Assistance Scheme which was introduced last year has received a fair response. Some 10 applications are being considered. To further assist product development we will be prepared to extend to new manufacturing companies the existing provision which currently permits only existing companies to deduct expenditure incurred on research and development for income tax purposes. My Ministry is currently developing a long term research and development plan for Singapore in conjunction with interested bodies such as the Singapore Institute of Standards and Industrial Research (SISIR), the Science Council of Singapore, the Applied Research Corporation (ARC), and the Ministry of Science and Technology. Such a plan must provide for the development and training of sufficient scientists, researchers and designers to make our efforts successful. We do not intend to undertake the type of basic research that can best be done by large countries with ample resources. There are, however, areas where product related research can help us raise the technological sophistication of our industries. Trade Development The prospects for world trade expansion in 1979 are not bright. The much delayed Multilateral Trade Negotiations which will reduce or eliminate tariff and non-tariff barriers to trade appear ready for endorsement soon by participating countries. But its effects on trade liberalisation will be very gradual as the implementaion of the MTN Agreement will be spread over a number of years. To overcome this dim outlook, aggressive export promotion of competitively produced goods is our only answer. In 1978, Singapore participated in 11 international trade fairs and nine trade missions overseas. These efforts enabled 130 Singapore companies to secure $88 million worth of orders. Greater emphasis was given to the promotion of higher value products. Local firms were also encouraged to pool their resources in joint marketing efforts. A trade office was established in Los Angeles in 1978 whilst new offices in West Asia will be opened in 1979. During the year, 10 training programmes and export promotion were also organised to enhance the skills of local exporters. The double tax deduction scheme currently applicable to expenses incurred in the participation in trade fairs, trade missions and setting up of overseas offices has been found to be useful to exporters. Since its introduction, 503 companies have taken advantage of the scheme. To encourage more aggressive marketing overseas, the double tax deduction scheme will now also apply to expenses incurred in advertising and promotional campaigns overseas. the production of sales literature and brochures, and the undertaking of market surveys. A Trade Development Committee was set up in my Ministry in August 1978 to consider the feasibility of setting up a Trade Development Council, its organisational structure and financial requirements. The Committee has the participation of the various Chambers of Commerce and the Singapore Manufacturers' Association as well as the Trade Department and the Economic Development Board. The Committee is expected to make its recommendation very soon to Government. We are prepared to support the setting up of such a Council provided it serves the real needs of our exporters and have their active support and participation. Services Development Our services sector continued to be a major growth sector, led by air and sea transport and telecommunication services. In the development of financial services, two significant events took place last year. Firstly, exchange controls were completely removed in June last year. This should facilitate the growth of trade. Secondly, a gold exchange was established in November. It is the first gold exchange for the Asian Pacific region to be opened to international investors. Trading on the exchange so far has been encouraging. Meanwhile the Asian Dollar Market continued to grow, by 29% in 1978. For the coming year, we will see to it that our financial centre develops further. In the field of tourism, there was further growth in 1978. The average hotel room occupancy rose by 4% to 87%, indicating a tight hotel room supply situation even though 960 rooms were added during 1978. An additional 3,300 rooms which have been approved for construction will be available in mid-1981. If the protectionist policy in civil aviation of Australia succeeds, and worse, proliferates, the volume of tourist stopover traffic in Singapore will decrease. We must therefore increasingly develop Singapore as a destination point in the Pacific area. Tourists can only be attracted to Singapore if there are sufficient attractions and diversions here and in the neighbouring countries. One way to do this is to develop Singapore into a resort destination. Unfortunately there are currently no resort hotels of international class in Singapore. We are therefore prepared to consider giving incentives to a limited number of first class resort hotels which could be developed on Sentosa. We need also to further develop our convention business in Singapore. Some success has been achieved so far with 151 conventions held in Singapore in 1978 compared to 120 in 1977. To ensure the availability of convention services, the Raffles International Centre project will incorporate a convention centre. We have not been maximizing the export of our professional and technical expertise. I hope the reduction in company taxation for such overseas earnings to 20% on which legislation will be introduced in the immediate future, will stimulate more efforts by the private sector in this direction. It has been contended that a good track record in the home country is a sine qua non for penetration of an overseas market. In order to beef up the experience of our local contractors and builders we will be introducing a scheme to provide a preferential margin for local contractors of up to 5% with regard to Government tenders for building projects. ASEAN Economic Cooperation There was further progress made in ASEAN economic cooperation in 1978. ASEAN countries decided to accelerate the pace on trade liberalisation by increasing the number of items exchanged in each round of negotiations to 100 per country. At the end of 1978, 1,326 items were exchanged under the Preferential Trading Arrangements of which 836 items were already in force with the rest to be implemented in March this year. In the industrial sector, the industrial projects of three countries, namely, Indonesia, Malaysia and Thailand, have already been approved and are now ready for financing consideration by Japan. In the case of Singapore, we have decided to proceed with our diesel engine project as a normal national project. ASEAN's major achievement during the year was in the field of external dialogues with the industrialised countries. Through meetings with the EEC and the USA at ministerial level, ASEAN won international recognition at the highest political level, setting the stage for future closer economic relations with the industrialised countries. We shall do our part to foster closer economic cooperation within ASEAN and to build up its strength as a regional entity. Manpower Development Since the last Budget Statement, the unemployment rate has dropped further to 3.6%. the lowest on record. Inevitably, the tighter labour market has given rise to shortages in some sectors of the economy, particularly in labour intensive operations. This has been alleviated by a more liberal work permit policy which enabled the recruitment of more workers from neighbouring countries. At some future time when these workers return home, they could add to their supply of skilled and semi-skilled manpower for their industrial development. The tighter labour market, however, underlines the importance of our policy to upgrade all our operations, whether in servicing or in manufacturing. Every worker must increase his skills and contribute his maximum. Labour intensive operations should restrain their labour demands and switch to more capital intensive investments to achieve an increase in productivity. At the same time the Government will be increasing its institutional capability to produce more skilled workers. The EDB will be expanding its enrolment in the Government-industry training centres while the Industrial Training Board will also be building up its capacity for vocational training. A significant development during the year was the acceptance by the University of Singapore of graduates from the Singapore Polytechnic and Ngee Ann Technical College for admission into the undergraduate courses for engineering. This would help to increase our pool of higher level manpower. Wage Policy We will continue with our policy on orderly wage increases through the National Wages Council mechanism. It is only by rewarding workers commensurate with their productivity that our industries can remain competitive. Our objective must also be to narrow the wage differentials between blue collar and white collar jobs. Last year, it was gratifying to note that wage increases for production and related workers increased by 7%, higher than the national average of 6%. This in part reflects the intention of the 1978 NWC wage recommendation to narrow the differentials between industrial and service workers. Monetary Policy We shall continue to strive for monetary and exchange rate conditions which will help achieve our overall growth objectives. In our monetary policy we must ensure that there is adequate liquidity in our banking system to cater for economic growth. In our exchange rate policy, we aim to keep the Singapore dollar strong and stable. Concluding Remarks on Economic Policy In 1978, we trotted like the Horse, outpacing our performance in 1977 despite the sluggishness of the world economy. In 1979, the world looks like becoming a more difficult place to make a living in. Nevertheless, I am confident that Singaporeans will put on their mettle and will respond with that extra spun. In the Year of the Goat, we should not lack the resilience, adaptability and cooperative effort to make 1979 another good year. The FY 79 Budget Mr Speaker, Sir, I would now like to move on to the FY 79 Budget. Expenditure The total estimated expenditure for FY 79 is $5,934 million. Of this, $2,560 million or 43% is for development. principally for economic services and public housing, which together account for 75% of the proposed development expenditure. The allocation for economic services is $1,071 million, of which a sum of $562 million is to be spent on industrial and commercial development (largely as loans to the Jurong Town Corporation and Industrial and Commercial Enterprises) and $393 million on development of Changi Airport and roads. Expenditure on public housing takes up $836 million or 33% of the development budget. The total expenditure under the Main Estimates will be $3,374 million, excluding transfer to the Development Fund. This is 12% higher than for FY 78. It is required to maintain the present level of Government services. Staff increases have been provided only for new functions or the expansion of present activities. The net increase in the permanent establishment for FY 79 including those posts created by Establishment Warrants during FY 78 is 926 posts or 1% over the FY 78 establishment. Recruitment, to meet the shortages of officers in a number of Ministries, is progressing satisfactorily. Stringent criteria have been used in approving increases in Other Operating Expenditure. The increase in such Expenditure, excluding the Armed Forces Expenditure, of $31 million or 12% over the FY 78 figure is because of expenditure on the replacement of Marine Police boats and on RTS engineering and production equipment, on rentals for the CPF Building and World Trade Centre by Ministries and Departments, and on the new Residents' Committees in Constituencies. Grants, Subsidies and Other Transfers, comprising largely grants for the recurrent expenditure of Statutory Boards, tertiary education institutions and aided schools will increase by $45 million or 12% over the current provision. This increase is to cater for normal salary increments, increase in CPF contributions and provision for new posts. Revenue The total estimated revenue for FY 79 at existing tax rates is $3,885 million, representing an increase of 5.6% over the revised estimate for FY 78. This increase compares favourably with the expected revenue growth of 3.4% for FY 78 over FY 77. Income tax continues to account for the largest single source of revenue at 36% of total revenue receipts. For FY 79, income tax is expected to yield $1,400 million, an increase of 8% over the expected receipts in FY 78. The revenue estimate of $3,885 million covers the estimated recurrent expenditure of $3,374 million, leaving a surplus of $511 million available for transfer to the Development Fund. Despite this transfer, however, there is still a deficit of $1,186 million to finance the large development expenditure. This will be met by borrowings and a drawdown of the Development Fund. The question can be asked whether this deficit should not also be partially financed by additional taxes - which brings me to the bugbear of every Budget Session - tax changes. TAX CHANGES For FY 79, I intend to introduce no new taxes. [Applause] Mr Speaker, Sir, the applause is slightly premature, because I do intend to introduce the following surprises. It is our policy that effort, talent and skills at all levels should be equitably rewarded. Tax is a necessary evil of any good government but it must never be so high as to become a disincentive to work harder. Last year, the burden of personal income tax was lightened. The tax reduction varied from 7.7% to 20.7%. depending on the tax bracket. The average tax cut was 14.8%. The tax cut last year has checked the rising trend of personal income tax expressed as a percentage of total revenue. In 1970, personal income tax represented 7.3% of total government revenue. It rose steadily every year until 1977 when it reached 13.8%. With the substantial revision to personal income tax lost year, its proportion to total government revenue has been brought down to within 10%. I am satisfied that the general tax burden on individuals in Singapore is well within the international average. I shall therefore not make any changes to personal income tax rates this year but will periodically review them to ensure that both the marginal tax rates and the effective average tax rates of taxpayers in various income brackets will never be so high as to deter them from wanting to strive for more rewards through excellence in performance and diligence in application of time and effort. The first three surprises which I intend to introduce are, therefore, concessions aimed at rewarding hard work and encouraging saving for home ownership and old age security. First. Members will recall that after the general revision to personal income tax rates last year, the CPF contribution was raised from 15 1/2% to 16 1/2% in July 1978. The maximum allowable deduction for CPF contribution and life insurance premia remained at $4,000 per year. As a result, the benefits gained from the concession by the lower-middle income groups were eroded by their increased CPF contributions. Relatively most affected are those earning between $1,900 and $2,500 per month whose CPF contributions at the present rate of 161/2% exceed $4,000 per year and those whose income brackets are in the ranges which did not benefit from the reduced tax rates last year, i.e. those with chargeable income between $20,000 and $35,000. To rectify this, I have decided to increase the allowable deduction for statutory CPF contributions to $5,000 per year. This will also benefit all other taxpayers whose CPF contributions exceed $4,000 per year. This exemption applies equally to contributions to other approved pension and provident fund schemes in lieu of CPF. Where the statutory contributions exceed $4,000 a year, no tax relief will be given for life insurance premia and other voluntary contributions to superannuation schemes. However, where the statutory contributions do not exceed $4,000 a year, the difference is allowable for tax deduction on contributions made to other approved pension and provident fund schemes and premia on life insurance policies. This concession will take effect from Year of Assessment 1980. The revenue loss is estimated at $4.9 million per year. Second. At present, only half the pension received by resident pensioners is taxed. Out of the total number of 1,240 resident pensioners who paid income tax in 1977, 800, or 64.5% of them, ,had chargeable income, including pension income, of less than $7,500 per year. 412, or 33.2%. had chargeable income of $2,500 per year or less. For this group of pensioners, the pension income constitutes 82% of the chargeable income. For them, the pension is practically the only source of income and sustenance. Another 260 pensioners, or 21.0% of the total number of tax-paying pensioners, had chargeable income including pension of between $2,500 and $5,000 per year. Having considered this, and recognising both the past services rendered to the nation by pensioners and the ravages of inflation, I have decided to remove the tax burden on resident pensioners, even though, as I have told the House on another occasion, there was nothing immoral in taxing pension which is income for past services. We have to be a hard-headed Government, but we are not hard-hearted. Wherever we can afford to, we shall show in some tangible way that those who have served are not forgotten. With effect from Year of Assessment 1979, tax will be exempted on the whole of the pension income of resident pensioners. The largest group of pensioners who will benefit from this concession are those with chargeable income of less than $5,000 per year. The revenue loss as a result of this concession is estimated at $290,000 per annum. Third. Rising prices of properties have had the effect of increasing the value of estates. at all levels. The present exemption ceiling of $100,000 for estate duty does not provide sufficient relief in many cases if the deceased had a house. Therefore, to further encourage home ownership and to relieve the hardship of those most affected by the escalation in property prices, I have decided to exempt from estate duty any one house in a deceased's estate, subject to a maximum value of $200,000. This concession is in addition to the existing exemption limit of $100,000 which will still apply regardless of the composition of the estate, but excluding houses. The effect of this concession will be that the existing exemption limit of $100,000 is being raised by $200,000 only if the deceased's estate includes "one" house. For example, if the estate comprises a house assessed at $250,000 and other assets of $100,000,, estate duty will be payable on $50,000 only, i.e. on the value of the house above $200,000. If the $350,000 estate comprises entirely of assets other than a house, estate duty will be payable on $250,000, as at present. The exemption limit of $200,000 for the house will apply to the full share of any one house in a deceased's estate. This should cover most public and private flats, and terrace and semi-detached houses. If the deceased is a pan owner of a house, the exemption will depend on his proportionate share of that house. For example, if the deceased owned one-fourth of a house valued at $350,000; the maximum exemption granted to the estate for that house will be one-fourth of $200,000 or $50,000. A house which is given as an inter vivos gift will not qualify for the exemption, notwithstanding that the value of the house is included in the valuation of the estate if the gift is made within five years of the date of death. This concession will apply only to residential units. Houses which are registered in the names of companies will not be eligible for the concession, The concession, which will take effect from 1st April, 1979, will ensure that in almost all cases, families will not lose their family homes on account of estate duties. The revenue loss is estimated at $16-$17 million per year. My fourth and fifth surprises are for the business sector. These are the last two surprises. Fourth. In my Minister's 1977 Budget Statement he granted a 10% concessionary tax on income derived from offshore reinsurance business. To, further encourage offshore insurance business in Singapore, I have decided to extend the 10% concessionary tax rate to income derived from general inward direct insurance business covering offshore risks. This concession will take effect from Year of Assessment 1980. Fifth. Under the income tax legislation, the existing capital allowance allowed for company registered cars is restricted to a maximum of $15,000. With effect from 1st April, 1979, I have decided to raise the ceiling of capital allowance for company-owned cars to $25,000 to take into account the higher present day prices of company cars. Conclusion Mr Speaker, Sir, this year's Budget Statement does not match the excitement of last year's. This is as it should be, as we should take stock of the effects of the various tax changes made last year before we embark on further tax changes. It is a completely painless budget, and even mildly pleasurable. But there is a moral to this, and that is, to achieve nirvana you must first experience pain. We have all worked hard in the past. We have all made sacrifices. We have never flinched from the harsh realities of the world. We have had the perseverance and courage to overcome the many obstacles to our survival and gone on to achieve a higher standard of living. We have exercised prudence in our financial policy and we will continue to exercise careful restraint on government expenditure. Now we have a sound foundation for sustained growth. Provided we continue to be practical and realistic, adapting rapidly to changed circumstances and always prepared to work hard to earn and pay for our needs we can face the uncertain and wintry economic climate without the fears and anxieties which plagued us from 1965-1969, and again from 1973-1974. The outlook for the world, is sombre. Even before the cut-off of oil supplies in Iran, the U.S. was expected to have a downturn in its economy later this year. Now there are all the imponderables of when and at what levels oil will be exported by Iran. The problems of unemployment and protectionism in the industrial countries are persisting. And the world is nervous over the dangers of further escalation and involvement in the conflicts caused by Vietnamese troops in Kampuchea and Chinese troops in Vietnam. For Singapore in 1979 as it has been from time to time in 1965, 1968 and 1973, it means, prepare for the worst and work to achieve the best. This is the philosophy of this budget. Sir, I beg to move.