At the beginning of this year, we forecast a growth of between 5 and 6% for 1988 with the caveat that much will depend on how the major economies, particularly the US, react to the October stock market crash. As of now there are some indications of a possible slowdown in our economy. The US index of leading indicators, which has been shown to precede activity in our own manufacturing sector by six to nine months, has been on a downward trend. Similarly, the composite index of leading indicators developed by the Ministry of Trade and Industry has declined from September to November last year. Although the index improved slightly in December, the trend is downwards. The latest surveys of general business expectations in the manufacturing and service sectors of the economy showed an expected slowdown in growth in the next six months. Public Sector Rates and Charges The possibility of some slowdown in economic growth in the second half of the year cannot therefore be totally ruled out. Under such circumstances, we must monitor our cost competitiveness carefully. The Government is moving cautiously in adjusting the various concessionary rates and statutory charges granted in 1985 and 1986. These temporary concessions have, at some point, to be adjusted. They cannot become permanent by default. Some adjustments, for example, the removal of the JTC rental rebates, have already taken place. Other concessions, such athe property tax rebates, are still in place and will have to be adjusted in due course. Their impact on unit business costs is relatively small. Nevertheless, the Government will act circumspectly, and only withdraw them if the economic situation warrants it. The key to managing our economic growth is flexibility. This is the only way we can respond quickly and appropriately to changing circumstances. Flexibility is needed not just in Government policies and measures, but also in the other parts of the economy, especially the labour market. From the economic viewpoint, the task of managing our labour market centres around controlling the size of the labour force and introducing flexibility into our wage system. Foreign Workers Obviously little can be done in the short run to change the size of our local workforce. We have therefore been using a pool of foreign workers as a buffer to cope with business cycles and economic fluctuations. However, we must not lose sight of the social and economic costs of an increasing dependence on foreign workers. Faced with rapidly increasing demand over the short run, businessmen would naturally want to expand production quickly to seize the opportunity for growth. In such a situation, the demand for labour picks up rapidly. As the slack in unemployment has already been taken up since early 1987, there was a tremendous increase in the number of foreign workers. In 1986, we introduced the foreign workers levy as a market-related mechanism to regulate the demand for foreign labour. Such a levy is necessary in the light of differentials in the cost of employment between foreign and local labour. The rate of the levy has to be reviewed from time to time so that it reflects the social and economic costs of foreign labour. I will have more to say on this later in my speech. Wage Reform While the pool of foreign workers affords us some degree of flexibility in the short run over the size of our workforce, we also need flexibility in our wage system. This was amply demonstrated in our recovery from the last recession, which was due in no small measure to the sacrifice of our workers who took pay cuts and endured wage restraint to restore our competitiveness. This experience clearly underlines the need for a more flexible wage system which will make the process of adjusting wages both up and down more timely and effectively. I am therefore glad to note that progress has been made in wage reform. Among 891 companies being monitored, some 170 or 19% have already implemented flexible wage systems. To those who have yet to adopt a flexible wage system, I would urge them to do so quickly while the economic environment is favourable. Long-Term CPF Rates We made effective use of the CPF to recover from the last recession by reducing the rate of contributions. However, even if the CPF allows us some scope for adjustment of costs, we must not become over-reliant on it. The proper mechanism for adjustment should rightly be a flexible wage system. We view the CPF as a longer term savings scheme with its own specific objectives of providing for the basic needs of retirement income, home ownership and Medisave. In my Budget Speech last year, I addressed the issue of long-term CPF target rates. We have since worked out and announced the long-term rates for CPF contributions which are necessary to sustain the Fund's objectives. As the present rates are below the desired long-term rates, we have to make gradual adjustments over a period of time to move towards the target CPF rates. Such adjustments should be made in times when the GDP growth is good and when the economy can sustain the increase without eroding our competitiveness. The Government will decide on any adjustments after the first quarter economic results are known. Upgrading the Workforce While striving to maintain our competitive position against a backdrop of global economic uncertainty, we must not lose sight of our long-term objective which is to reach the sort of mature economy characteristic of the developed nations by the 1990s. Our future lies in being plugged into the global network of investment flows, trade and communications. To do so successfully, our goods and services must be technologically of the same standard and quality as those in the developed countries. We have encouraged foreign investments into Singapore partly for the technology and the markets they bring with them. On our part, it is crucial that we equip our workforce with the skills and education to cope with new technologies and processes. Our ability to join the ranks of the mature and developed economies therefore depends critically on how well we upgrade our workforce. Yet, ironically, only about 1% of our national payroll is spent on training of workers compared to the 2 to 4% of payroll which advanced countries and MNCs spend on training. This problem of underinvestment in training is a serious one. If left alone, it would widen rather than close the gap between the developed countries and us. We will then not be able to keep up with the rapidly changing skill requirements to meet technological changes. There already exists a mechanism in the Skills Development Fund (SDF), which can be used to address the problem of underinvestment in training. This can be done by liberalising SDF disbursements to support skills training of the workforce on a more extensive scale. We aim to increase training expenditure to 2% of payroll for training of all employees by 1989, and to 3% by 1992. To achieve this target, SDF disbursements will be increased substantially. For FY87, payments from SDF amounted to about $53 million. To support greater investments in training, this is expected to increase to $83 million by FY89 and $113 million by FY92. Over the next five years, the increased disbursements of the SDF will greatly exceed its annual collections of some $24 million and its interest income averaging some $10 million per annum. This will lead to a rapid rundown of the SDF's uncommitted reserves of about $300 million. Well before the SDF funds are depleted we will have to consider how best to increase the SDF levy in order to bridge the gap between collections and disbursements. International Trade The international trading environment has become increasingly protectionistic and will remain so during the year. As the US continues to be saddled with massive budget and trade deficits, the tide of protectionism is likely to swell. Recently, despite persistent protests, the US Government has announced its intention to remove Singapore from the GSP programme with effect from January 1989. Under such unfavourable circumstances, there is an urgent need to look for new markets, in Japan, in Europe and other countries. The Trade Development Board will continue to promote Singapore's exports by expanding existing markets and developing new ones. The Market Development Assistance Scheme (MDAS) has been an effective tool in encouraging our companies to export their products and services. So far, $6.13 million has been awarded to more than 500 companies under the MDAS. In 1987, a total of almost $4 million in Double Tax Deductions was granted to companies for their overseas promotion expenses. At the same time, in the electronics industry alone, there were 35 International Purchasing Offices (IPOs) in Singapore compared to only 22 in 1986. In addition to the promotion of exports of manufactured products, the TDB will also step up its drive to promote service exports. Many companies in construction and engineering services have so far benefited from TDB's promotional and assistance schemes in clinching contracts overseas. Besides these services, countertrade and other new forms of trading activities will also be actively promoted. As more international companies set up regional offices in Singapore, our position as a business and distribution centre will be further enhanced. Investments and Services As identified by the Economic Committee, we have to upgrade our industries to perform higher value-added activities if we are to maintain our industrial progress. It is encouraging to note that new investments committed during 1987 were moving increasingly beyond mere production into design, engineering, and research and development activities. An important sector that should not be overlooked as we restructure our economy is the conglomerate of small local businesses. We need a strong dynamic base of local industries led by entrepreneurs willing to undertake risks and explore new market opportunities. With this objective in view, the Small and Medium Enterprise Division (SMED) of the EDB is spearheading the mission of nurturing and upgrading local companies. Various programmes ranging from the provision of financial assistance to the promotion of technology upgrading and the improvement of management methods have been launched. In addition, the SMED is formulating a Master Plan aimed at raising the productivity of small and medium enterprises, promoting innovative and entrepreneurial start-ups and developing promising local businesses. For the larger local companies, an effective way to develop would be to invest in relevant businesses in developed countries. This would result in a transfer of new technologies and increased overseas marketing channels to sell Singapore-designed and manufactured products. To pursue this strategy, the Government is prepared to give incentives to encourage companies to explore and venture into overseas investment opportunities. The Government also recognises the importance of the service sector. Apart from efforts to promote investment in manufacturing, the EDB has embarked on a programme to promote and develop the service sector by establishing a Services Promotion Division in 1986. Our strategic location provides an ideal place for Operational Headquarters (OHQs) to service and manage their subsidiaries and related companies from abroad. So far, a total of 13 OHQs have been successfully established. The EDB has also promoted service projects that will generate an incremental $200 million in total business spending per year and $300 million in fixed asset investments in financial, information technology, distribution, medical, engineering and headquarters services. As the economy forges ahead, our comparative advantage in knowledge-based and skill-intensive service activities would be further exploited to evolve Singapore into a global city with a total business orientation. SECTION II - THE FY88 BUDGET Mr Deputy Speaker, Sir, I now turn to the FY88 Budget. The tax cuts and cost reduction measures introduced in 1985 and 1986 have enhanced our international competitiveness and stimulated economic growth. While the tax cuts have reduced Government revenue, a structural deficit has been avoided because of prudent expenditure policies. Recurrent expenditure increases have been kept to the minimum and development programmes which support economic recovery and longer-term economic growth implemented. Government's long-term budget policy objectives are three-fold: One, there must be an overall balanced budget. Over a 5-year planning period, recurrent and development outlays should not exceed the total revenue collection. Two, the share of national resources taken up by the public sector must be gradually reduced. This is necessary if the private sector is to spearhead future economic growth. Three, the effectiveness and efficiency of public services should be enhanced. Qualitative improvements in public services can be expected but these will come largely through higher productivity and better use of existing resources. As far as possible, programmes should be self-financing and subsidies kept to the minimum. In general, public services should be provided at least cost to the taxpayer. Expenditure in FY87 has been exceptionally high because of "one-off" debt servicing payments and the purchase by Government of the URA and JTC land banks. Both recurrent and development expenditures are projected to be significantly lower in FY88. Total spending in FY88 is projected to be $12.47 billion, about $2.80 billion or 18% lower than the revised FY87 expenditure. As a proportion of GDP, expenditure is projected to fall from 36% to 28%. Outlays per capita are expected to drop by 19%. Lower debt servicing costs and reduced development outlays consequential to the completion or near-completion of major development projects account for these drops. The authorised manpower complement of ministries and those statutory boards funded through the Budget will be reduced by nearly 2%. These broad trends are consistent with the long-term objectives of reducing Government's share of GDP and the workforce. Of the total expenditure allocation of $12.47 billion for FY88, $7.58 billion or about 60% is for recurrent expenditure and the balance of $4.89 billion or 40 per cent for development outlays. The projected recurrent expenditure of $7.58 billion is about $1.72 billion or 19% lower than the revised FY87 level. The drop is mainly due to lower debt servicing costs. Debt servicing will account for about 21% of recurrent spending in FY88, pensions payments for 3% and the balance of 76% is to meet operating costs of ministries. Pension payments are expected to rise by $51 million or 27% because of the larger number of retirees. Operating expenditure of ministries is projected to go up by nearly $480 million or 9%. Expenditure by MINDEF is expected to be about $250 million higher than in FY87. Expenditure by the other ministries will increase by almost $230 million or 8%. A provision of $3.28 billion is set aside for the operating expenditure of the non-Defence ministries. Of this, $1.69 billion or 51% is for Expenditure on Manpower (EOM), $0.74 billion or 23% cent for Other Operating Expenditure (OOE) and $0.85 billion or 26% for Grants-in-Aid (GIA). Expenditure on Manpower is projected to increase by $98 million or 6% because of normal salary increments and the filling of essential vacancies. The moderate increase is due to the wage restraint policy and a reduction of nearly 2,052 posts from the authorised staff establishment. The reductions are possible following deletions of long-standing unfilled vacancies, implementation of mechanisation, automation and computerisation schemes, organisational reviews and changes in work procedures. The reductions are in line with the objective of reducing the public sector's share of the workforce. In my 1986 Budget Statement I mentioned that the manpower complement for existing functions and services would be reduced by 10% over a 5-year period. However, no limit was set on the staff increases allowed for new functions and services. Through redeployment and retraining of existing staff and greater capital investment, it should be feasible for ministries as a whole to achieve and maintain zero growth', in their actual staffing level. To ensure zero growth, recruitment will be regulated to match attrition. Other Operating Expenditure is projected to increase by $117 million or 19%. A significant portion of the increase is due to a $42 million provision under the Ministry of Law for agency fees to the URA for managing the sales of State land at Marina Centre. Grants-in-aid to meet the operating deficits of the tertiary and training institutions and other Government-funded statutory boards will amount to $851 million in FY88, an increase of $12 million. The relatively small increase is because provision made in the current year for a $50 million revolving fund for tuition loans to NUS and NTI students need not be repeated. With the completion of major development projects and the reduced scale of the public housing programme, development expenditure is expected to fall from $5.98 billion to $4.89 billion. Of the projected development outlay, direct development expenditure by ministries accounts for $2.23 billion or 46% and capital grants for the balance of $2.66 billion or 54%. Direct development expenditure by ministries is expected to fall from $3.22 billion in FY87 to $2.23 billion in FY88, a drop of 31%. The FY87 expenditure includes a "one-off" payment arising from the purchase the purchase by Government of the URA and JTC land banks. Other factors contributing to the lower expenditure in FY88 are the rescheduling of the road and expressway construction programme, and the completion of major drainage, sewerage and building projects. The direct development allocation includes a new $100 million provision for research and development by public sector organisations. Capital grants to statutory boards will amount to $2.66 billion in FY88, a decrease of $97 million or 4%. Of the total provision, $1.07 billion or 40% is a capital grant to the HDB to cover losses arising from sales of flats at subsidised prices. The MRTC requires a provision of $914 million. Another $134 million is earmarked for the expansion of facilities of vocational, industrial, training and tertiary education institutions. Economic development assistance to industries by the EDB will be stepped up. Such assistance is expected to more than double to reach $230 million in FY88. Apart from provision for direct outlays by ministries and grants to statutory boards, the FY88 Budget includes an allocation of $885 million for net lending to statutory boards. The bulk of this is for HDB's building programme and EDB's industrial loan scheme. The objectives of ensuring a balanced budget, reducing Government's share of national resources, and improving the cost-effectiveness of programmes will be facilitated by modifications to the existing Government budget allocation and control system. A new block vote budget allocation and control system will be used for the FY89 Budget. Under the new system, targets will be set for total expenditure by Government as a whole and for each ministry as a percen- tage of GDP. The expenditure to GDP targets would be determined taking account of national priorities and the need to balance the budget. Within the target total allocation for each ministry, the amount to be set aside for recurrent expenditure would be determined by assuming that the ministry's recurrent expenditure per capita in real terms is maintained at current levels. Increases in recurrent allocation would have to be justified in terms of higher demand for public services and inflation. Ministries would, however, be given complete discretion in deciding on the distribution of their recurrent expenditure allocation among programmes, activities and line-items of expenditure. Of the total allocation for each ministry, the balance after meeting recurrent expenditure needs could be used for development expenditure. Up to 10% of the amount for development and subject to a maximum of $10 million each year could be committed by the Permanent Secretary in person without reference to the Ministry of Finance on projects each of which costs less than $500,000. All other development expenditure proposals would have to be submitted to the Ministry of Finance in the normal manner. With the implementation of the block vote allocation system, ministries will be delegated greater authority to manage their budget allocations. In particular, they will be granted authority to transfer funds and manpower between programmes. Changes to Government accounting procedures will also be implemented. A system of charges for inter-department services will be introduced. All ministries will be required to pay for services provided by central services departments such as the Public Works, Management Services and Central Supplies Departments. This will help ministries to be more cost-conscious and curb excessive demands on central services. Departments would be required to pay for state lands required for development projects and would be charged imputed rental for the use of Government buildings. This will ensure that the opportunity cost of using state lands and buildings is fully reflected. These changes represent a move from traditional Government cash accounting and towards a system that will better reflect the full cost of Government services and thus facilitate resource allocation decisions. To ensure that ministries put their allocated funds to best use and exercise their delegated authority properly, they will be subject to regular zero-base reviews and audits. Each ministry and statutory board will be subject to a zero-base review by the Management Services Department and also to a comprehensive financial systems audit by the Auditor-General's Office at least once every five years. In addition, the Budget Division of my Ministry will review annually the cost-effectiveness of selected policies and programmes. The current performance measurement system used for budgeting will be revamped to provide a mechanism for top management in ministries and the central agencies to regularly monitor activities and take corrective action where necessary. Effectiveness, efficiency and workload indicators for major programmes will be published in the annual budget document so that Parliament and the general public will be better informed of the performance of ministries. SECTION III - REVENUE AND TAX CHANGES Mr Deputy Speaker, Sir, I now move to revenue and tax changes. We are constantly reviewing our corporate and personal tax structures vis-a-vis other countries. Our corporate tax rates are still attractive. We have tax treaties with a large number of countries and there are generous fiscal incentives for both the manufacturing and service industries. Taken as a whole, our corporate tax package remains competitive with the Group of Five nations and the other Newly Industrialising Countries. Therefore, for the coming year, there is no need for major changes in our corporate tax structure. Similarly, I see no need to adjust our personal income tax rates. We have a graduated personal tax scale which is designed to achieve as wide a tax base as possible and to provide adequate incentives for the industrious and the entrepreneurial. Tax rates begin at 3.5% at the lower end, rising to a maximum of 33% of assessable income at the top. This tax structure, when combined with the tax allowance scheme, ensures that there is a fair distribution of the tax burden. Our personal tax rates are not onerous and are low compared to many other countries. By way of illustration, it is often not realised that a large number of taxpayers in Singapore with assessable incomes below S$150,000 per year, actually pay less personal income tax than their counterparts in Hongkong. There will be no need to introduce a broad-based consumption tax in the coming fiscal year. However, studies and preparatory work are continuing so that the administrative machinery will be available when a tax change becomes necessary. I shall now describe the Goverment's revenue position. The FY88 tax revenue is estimated at $5.7 billion, or about 6% higher than the revised FY87 collection of $5.4 billion. The expected increase is due to the good performance of the economy in 1987. The revised FY87 estimate for Consolidated Revenue stands at $9.8 billion. The projected Consolidated Revenue for FY88 is lower at $9.0 billion. This is because of a one-time transfer of $1.5 billion from the accumulated reserves of the statutory boards to the Consolidated Fund in FY87. The contributions from the statutory boards for FY88 are estimated at $120 million. The Government shall continue to pursue a policy of collecting adequate revenue to finance expenditure. On the expenditure side, Government programmes will be self-financing wherever possible. On the revenue side, we will constantly review and streamline our tax structure to ensure that we are internationally competitive and that our tax system does not discourage entrepreneurship. However, the private sector must not look upon tax incentives as the main source of Government support. Unless new taxes are introduced, tax incentives reduce the revenue available to finance public expenditure. In fact, tax incentives can be looked upon as tax expenditures. The effect of exempting or reducing tax for certain categories of taxpayers is the same as providing them with subsidies, except that these hidden subsidies circumvent the Government's budgeting process. Therefore, just as we are prudent in our expenditure, we are also careful and selective in giving tax incentives. With this note, I will now turn to the tax changes proposed for FY88.