In the Budget Statement in May this year, I announced tax changes to support our economic restructuring and secure economic growth. We must bring down direct taxes to stay internationally competitive, attract investments and create jobs. And to make up part of the loss in revenue, we have to raise indirect taxes, i.e. the GST.

We have cut corporate and top personal income tax rates to 22% for the Year of Assessment 2003, and will lower them further to 20% within 3 years. At the same time, we announced that we would raise the GST rate from 3 % to 5 % on 1 January 2003.

To help Singaporeans adjust to the higher GST, the Government implemented a comprehensive offset package. This includes the Economic Restructuring Shares (ERS), rebates on rental and service & conservancy charges (S&CC), plus full absorption by the Government of GST for subsidised healthcare and state education charges. A full listing of all the assistance measures is provided as an annex to this statement. I have circulated this list to all Members for their reference. The offset package costs $4.1 billion, and is enough to offset the additional tax that nearly all Singaporeans have to pay for at least five years.

At the time of the Budget Statement, expectations were that the US economy would pick up this year, and the Singapore economy would also complete its recovery from the sharp downturn in 2001. As events have turned out, both the US and the Singapore economies have done less well than expected. The US economic recovery has been weak and below expectations, even though the US has avoided entering a second recession. As Alan Greenspan recently said, the US economy was "going through a soft spot". Likewise the Singapore economy is now projected to grow only by 2 – 2.5 % for 2002 as a whole, at the low end of the 2 – 4 % that we had projected in May.

Going forward, prospects for 2003 are still uncertain. The risks are not only economic, but also security and political, e.g. the impact of another major terrorist attack, or of a war in Iraq. The EU and Japanese economies are slowing down. In the US most analysts expect a gradual recovery, supported by steady growth in consumer spending and a more substantial pick-up in corporate investment in the second half of 2003. In recent weeks US economic indicators have improved, and the mood has become more optimistic. However, some respected analysts still worry that the US could yet experience a second recession next year.

Singapore has been affected not only by the slow US recovery, but also by the problems in Southeast Asia, including the terrorist attack in Bali. Hence the downward revision of this year’s growth estimate to 2 – 2.5 %. However, early indications are that we will enjoy positive growth in the fourth quarter. Our exports to key markets are growing, albeit slowly. Non-oil domestic exports rose by 6 % in October, and improved further in November, according to preliminary estimates.

The manufacturing sector has also continued to grow. Output rose by 12 % in October, similar to the 11 % in September, driven by an increase in semi-conductors, petrochemicals and pharmaceuticals. On a month-on-month basis, manufacturing output increased by 1.3 %, the first increase since May 2002.

For 2003, MTI has forecast growth of 2 – 5 %, although we cannot yet be certain how things will turn out.

From a fiscal point of view, the tax changes announced in May remain appropriate despite the less vibrant economic conditions today. We should not hold back on our restructuring on account of the adverse climate; indeed this makes it even more important for us to press on and strengthen our competitiveness and resilience.

To individuals, because of the ERS and other rebates, the GST increase should not cause hardship to any Singaporean, or result in consumers cutting back on spending. To the Government, the combination of direct tax cuts to 22 %, a GST increase to 5 % and the first tranche of the ERS shares together result in a revenue loss of $1.2 billion in the first year (2003). Therefore the overall effect of the tax changes and offsets on the economy is expansionary rather than contractionary.

Some have suggested that the Government should defer the GST increase completely for 12 months or longer. But this approach risks leaving the Government with insufficient funds for urgent needs, especially in education, health care and defence. And if later we have to defer the increase again, the Government may wind up with a structural deficit, which would have serious consequences for the exchange rate, for inflation, and for the value of Singaporeans' CPF savings. I have therefore decided against deferring the GST increase.

However, I am also mindful of the current mood of apprehension and uncertainty among Singaporeans, because of the economic troubles this year and the security concerns in the region. MTI’s recent downgrading of this year’s growth estimate, and the NWC’s recommendation to extend the wage freeze for another 6 months, also contribute to the sense that things are not yet back to normal. We do not want to add to the burdens and worries of Singaporeans at a difficult time. The psychological impact of the GST increase could result in consumers cutting back on spending and business putting off investments.

The uncertainty over economic prospects for next year, as to whether and how soon the US and the Singapore economies will recover, reinforces the need for caution. Although on balance another downturn does not appear likely, the possibility of one occurring still cannot be ruled out and it would be prudent to be cautious.

I have therefore decided to phase in the increase of the GST rate, and implement it in two steps instead of one. The GST rate will go up from 3 % to 4 % from 1 January 2003, and then from 4 % to 5 % from 1 January 2004.

I believe that a phased introduction will have more impact than proceeding with the full tax increase to 5 % and enhancing the offset package. Many Singaporeans have not made the link between the benefits they will receive from the offsets, and the additional GST they will have to pay. Phasing in the tax increase is a more direct and easily understood signal.

Despite the phased introduction of the GST, I have decided to maintain unchanged the offset package announced in Budget 2002. I am happy to announce that Singaporeans will receive the original amount of Economic Restructuring Shares in January 2003, and the same schedule of rental and S&CC rebates as announced earlier. I have also decided that the increase in the Public Assistance rates and the Singapore Allowance paid to government pensioners will proceed in January 2003 by the full amounts originally planned. The details will be announced next week.

The lower GST increase will cost the Government $163 million in FY2002 and $488 million in FY2003. Effectively, the Government will be putting an additional $650 million into the hands of Singaporeans. As a result, the Government is not likely to have any budget surplus in FY2003. At best we will be able just to balance the budget. All ministries will have to economise on spending and trim back non-essential programmes.

I hope the phasing in of the GST will lessen the burden on Singaporeans, and help them cope with the uncertainties that we are now facing. This change is a fine tuning to the original tax restructuring plans. The Government is making a tactical course correction while still heading for the same destination. We remain committed to bringing down top direct tax rates to 20% within 3 years, and to offer a more attractive business environment to bring talent and investments to Singapore.

Mr Speaker, Sir, I am now submitting an amendment to the GST (Amendment) Bill, to provide for the GST rate to be raised in two steps, from 3 to 4 % from 1 January 2003 and from 4 to 5 % from 1 January 2004. I will ask the House to consider the amendment in the Committee Stage of the Bill later this afternoon.

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