ANNEX C : Tax Exemption Scheme for New Companies

ANNEX D : Promoting Financial Services

ANNEX E : Current and New Excise Duties for Liquor

ANNEX F : Current and New Excise Duties for Tobacco Products

Mr Speaker, Sir

1. I beg to move that this Parliament approves the financial policy of the Government for the financial year 1^st April 2004 to 31^st March 2005.
2. In the last six years, the Singapore economy experienced more volatility and uncertainty than it had encountered over the previous 30 years. Beginning with the Asian Financial Crisis in 1997, a series of external shocks buffeted our economy and ended a decade of uninterrupted growth. We were all hoping for a quick turnaround last year, as our economy had bounced back quickly from previous downturns. But SARS and the war in Iraq dashed our hopes. We had a very difficult first half.
3. But the economy showed clear signs of turning around towards the end of the year. In the fourth quarter, GDP expanded by 4.9% compared to the previous year. On an annualised quarter-on-quarter basis, GDP grew by 11%, with the manufacturing sector expanding by 17% and the services sector by 11%. This brought growth for the whole year to 1.1%. The recovery was reflected in increased exports, investments, and employment.
4. Both manufacturing and services benefited from an increasingly favourable external environment. As the recoveries in the US, Europe and Japan gained momentum, their appetite for imports increased. Our non-oil domestic exports grew by 15% in 2003, driven by pharmaceuticals, chemicals and semiconductors. Strong external demand also caused the wholesale and retail sector to grow by 6.7%.
5. Foreign direct investments (FDI) began to return to the region as the fears and uncertainties from SARS and the Iraq war subsided. Last year, Singapore attracted $7.5 billion of fixed asset investments in the manufacturing sector and $1.9 billion of annual business spending in the services sector. These investments will generate $8.6 billion in value-added each year for the economy.
6. Employment also improved. More jobs opened up as companies regained the confidence to start hiring again. About 12,000 jobs were created in the second half of 2003, partially making up for the 30,000 jobs lost in the first half. The seasonally adjusted unemployment rate dropped from the peak of 5.5% in September to 4.5% in December 2003.
7. Macroeconomic policies helped support the economy. MAS maintained a neutral policy stance for the trade-weighted exchange rate of the Singapore dollar, after re-centering the policy band at a lower level. The Government introduced two off-budget fiscal packages to support the economy, and help households and businesses tide through a difficult period. We had a SARS relief package in May, and another package to accompany the CPF changes in September. These prompt measures helped to maintain confidence, buffer the shocks, and boost economic activity. In the absence of support from monetary and fiscal policies, GDP growth last year might have been flat instead of 1.1%.

2004 – Gathering Momentum

8. Our recovery is picking up. There is a palpable optimism among Singaporeans and businesses. The December Straits Times Consumer Confidence Index surged 82 points to 294, bringing it close to its levels in 2000, when the economy was growing strongly. Retail sales in December rose by 21% month-on-month and 10% year-on-year.
9. We have revised our growth forecast for this year upwards to 3.5-5.5%. But we have to look beyond the cyclical pickup in our growth rate, and achieve sustained long-term growth by transforming our economy. That will depend on our ability to carry through our economic restructuring, upgrade our industries, and create new and better jobs to replace the old jobs that are being phased out. Our commitment to restructuring is a key reason why analysts and investors are confident about Singapore’s long-term prospects, and why MNCs still want to put their projects in Singapore.
10. The Economic Review Committee’s recommendations, the CPF changes, the cut in direct taxes, and wage reform lay the foundations for a globalised, diversified, and entrepreneurial economy. These fundamental changes reflect our resolve to stay relevant in an increasingly competitive world. Let me review our progress in restructuring, and what more needs to be done.

Growing Manufacturing and Services

11. First, we continue to grow the manufacturing and services sectors. We are strengthening our position as a global business hub and one of the most attractive places in Asia for investments and talent.
12. Singapore remains competitive as a manufacturing location, especially for high-tech, high value-added activities. In the past year, many MNCs have either committed to expand their existing activities, or to establish regional headquarters in Singapore. For example, Hewlett-Packard recently decided to invest another US$1 billion in the next five years to expand its operations. ST Microelectronics has announced $425 million of new investment commitments; Seagate Technologies announced a $200 million investment in recording media and $300 million in high-end hard disk drives; and Agilent Technologies has committed to another $156 million of investments.
13. However, overall the manufacturing sector is not likely to generate many more jobs. MNCs are shifting to higher value-added, less labour-intensive activities, and will increase output per worker rather than hire more workers. So to create jobs for Singaporeans, we also need to put strong emphasis on the services sector. We are developing established services such as trading and logistics, info-communications technology, financial services and tourism; while fostering emerging services such as education, healthcare and the creative sector.
14. More so than manufacturing, a vibrant services sector depends on people – including foreign professionals, executives, businessmen, technicians, tourists and consumers – being able to travel in and out of Singapore with minimum hassle. In particular, we must facilitate travel for visitors from ASEAN, as well as from China and India.
15. Singapore does not require entry visas for visitors from most countries. The Immigration and Checkpoints Authority (ICA) has reviewed our remaining visa requirements. As a result, we lifted visa requirements for visitors from Cambodia, Laos and Vietnam last year. We have also made it easier for businessmen to obtain long-term Multiple Journey Visas (MJVs), valid for up to five years. We will allow reputable Chinese and Indian companies to recommend their own staff for MJVs. Social visitors from the PRC are now granted visas valid for up to five weeks compared to three weeks before, while the period of stay granted is now up to 30 days, double the previous 14 days. Similar facilities are also granted for visitors from India, Myanmar and the Commonwealth of Independent States. Since the beginning of this year, we have proliferated the visa application points for PRC travellers, from 67 branch offices operated by 3 appointed travel agents, to 322 branch offices operated by 43 appointed travel agents across China. ICA is exploring other innovative measures, such as on-line visa applications, to facilitate the entry of bona fide visitors to Singapore.
16. The easier visa rules will attract more tourists here. Visitor arrivals have already recovered to pre-SARS levels. This year STB expects 7.6 million visitors, up from 6.1 million last year. STB is stepping up marketing efforts to regional countries such as China, India, and ASEAN. Last year saw the largest foreign direct investment in a visitor attraction in Singapore – the $200 million "Singapore Flyer". Sentosa Development Corp has also drawn up a ten-year, $8 billion plan to revamp and refresh Sentosa. It has been aggressively drawing in projects and has already attracted about $500 million of new investments, half of them from the private sector.
17. We have also done well promoting other service industries. Globally, many MNCs are centralising and outsourcing their corporate functions. To save costs and ensure business continuity, banks are relocating many functions, traditionally performed in New York, London and Tokyo, elsewhere in the world. India is attracting many call centres and business process outsourcing (BPO) operations. Singapore is not a competitive location for call centres, but we are an attractive site for support centres hosting higher-end activities, particularly for financial institutions. Over the past year ten banks, including Credit Suisse First Boston and Barclays Capital, have centralised their regional and even global processing operations here.
18. Outside the financial sector, we attracted over 30 shared services and BPO projects last year. For example, Europe’s largest software company SAP chose Singapore as the launch market for its Shared Services Centre in the Asia Pacific. Polaris and IBM have set up disaster recovery operations here. Toyota Tsusho, ExxonMobil and DFS are all using Singapore as a centre for shared services and business continuity activities.
19. In healthcare, EDB has launched the Singapore Medicine initiative to develop Singapore into a leading destination for healthcare services. Singapore Medicine will bring together the efforts of many public sector agencies, including MOH and STB. One pre-condition to make Singapore a regional medical hub is to have enough doctors, particularly specialists, who can practise in Singapore. To ensure this, MOH has expanded the list of recognised foreign universities and medical schools from 24 to 71. To alleviate the shortage of nurses, MOH will continue to recruit nurses from diverse sources, and streamline the recognition of nursing qualifications from the Philippines, Myanmar, China and Indonesia. In addition, MOH will relax many current restrictions on advertising by healthcare institutions so that they can promote themselves in the region. A new set of Publicity Rules will be gazetted within the next few months.

Labour Market Reforms

20. The second strategy we are pursuing is to reform our labour market so that companies and workers can respond to fast-changing business conditions. The CPF changes and the ongoing push for wage reform are important parts of this effort. They will help to preserve existing jobs and create new ones for Singaporeans.

CPF Changes

21. We made major changes to our CPF scheme last year to maintain our cost competitiveness. Employer contribution rates were reduced, and the CPF salary ceiling will be brought down in steps. This has lightened the burden on employers and made Singapore workers more competitive. At the same time we are raising the CPF Minimum Sum and tightening withdrawal rules at age 55, so that Singaporeans will be better prepared for their retirement needs.

Wage Flexibility

22. The CPF changes are long term structural adjustments, not tactical responses to transient conditions. They will strengthen our competitiveness, but we still cannot be sure that our wage levels will never become too high again one day. Should this happen, we should not bank on another large cut in CPF rates to restore our competitiveness, as we did in 1985 and 1998. The CPF is a blunt tool for cost reduction. And now that we have reduced the rate to 33%, there is less room for further reduction. This makes it more important to have flexible wage structures, so that companies can respond quickly to changes in the business environment. This will help companies stay viable and preserve jobs in a severe downturn, while giving them the confidence to reward workers and increase employment in good times.
23. I am happy that the tripartite Taskforce on Wage Restructuring has given strong backing to wage reform. Its report explains clearly how companies can implement wage restructuring for greater flexibility and competitiveness. Achieving wage flexibility will require strong commitment from employers, unions and workers. Employers must put in place schemes that link remuneration to individual and company performances. Unions must take a broad long-term view of workers’ interests, and persuade them of the benefits of these changes. Finally, workers must recognise that in a more volatile and competitive environment, flexible wage structures offer the best chance of job security. We must make a concerted effort to achieve our wage reform targets.

Training and Upgrading

24. Even as the economy recovers, we must not let up on retraining and upgrading our workers. This will enable our workers to seize new opportunities and adapt to the changing needs of the economy.
25. The Singapore Workforce Development Agency (WDA) will strive to upgrade the skills of workers, especially those with secondary education or less, so that they can stay employable and take on new, higher-skilled jobs. WDA will launch new training programmes, and make it easier for workers to enrol in them. There will also be programmes for professionals, managers and executives, so that they can support the upgrading of their industries.
26. These programmes are partly financed by the Skills Development Fund (SDF), which employers contribute to through the Skills Development Levy (SDL). The 1% levy applies to all workers with a gross monthly salary of $1,500 or less. The current levy rate and salary ceiling are not enough for the SDF to cover its annual commitments. Had the Government not injected $500 million into the SDF in 2001, the fund might have been exhausted by now.
27. Over the next five years, WDA estimates that the SDF’s annual commitment will rise from $120 million for 600,000 training places in FY03 to $176 million for 766,000 places in FY08. MOM will therefore raise the SDL salary ceiling from $1,500 to $1,800 with effect from 1 July 2004. The levy rate will stay at 1%. This will increase SDF’s income by $22 million per year.

Foreign Workers

28. When the Asian Crisis struck, the Government reduced foreign worker levy rates temporarily, to save costs for employers. As the economy recovers, the Government needs to progressively adjust levy rates to reflect the prevailing market conditions.
29. The levy for skilled Work Permit holders is currently $30, reduced from $100 previously. As part of the changes to the foreign worker scheme for the construction sector, MOM increased the construction skilled worker levy to $50 with effect from 1 July 2004. In line with this, MOM will also raise the skilled worker levy rate to $50 in all other sectors, with effect from 1 July 2004. The levy rates for unskilled workers will remain unchanged.
30. For our economy to grow, companies must be able to recruit skilled workers. The higher value and skill-based industries we are attracting all depend heavily on skilled workers, technicians and professionals. A particular concern is manpower at the diploma and post-secondary level. If we lack these middle-tier skilled workers – whether local or foreign – we will choke off the growth of these industries or drive them elsewhere. The shortfalls are already evident in healthcare where there is an acute shortage of nurses, in the IT industry where we lack computer programmers and IT technicians, and in aerospace and pharmaceuticals.
31. MOM will modify the current work pass system to meet this demand for middle-level skilled manpower. We will introduce a new category of work passes, called ‘S’ passes, to replace the current ‘Q2’ passes.
32. The main criteria for an ‘S’ pass will be a minimum salary of $1,800 and an acceptable tertiary qualification. MOM will supplement these two criteria with a system of points, to take into account experience, skills and job type when assessing eligibility. The ‘S’ pass will be subject to a quota, to begin with 5%, as well as a levy, initially set at $50. The scheme will be implemented from 1 July 2004.

Encouraging Entrepreneurship

33. A third major strategy is to boost entrepreneurship. This process takes time, because we are not just changing Government rules, but seeking to shift mindsets. The Government is doing its utmost to foster a conducive environment for entrepreneurship. The Action Community for Entrepreneurship (ACE), chaired by Minister of State Mr Raymond Lim, is nurturing entrepreneurship, pursuing entrepreneurship promotion programmes, and acting as the interface between the private sector and Government.
34. A key hurdle facing start-ups is financing. The Government is helping start-ups gain access to financing. EDB’s Start-up EnterprisE Development Scheme (SEEDS) helps early-stage start-ups with equity financing. Every dollar raised by a start-up from third-party investors will be matched by EDB up to a maximum of $300,000. In two years SEEDS has raised nearly $59 million – $27.3 million from Government and $31.6 million from the private sector – to support 103 innovative start-ups. We also recently established Deal Flow Connection, an online portal that helps link up entrepreneurs with financial institutions, venture capitalists and angel investors.
35. The Government is also helping our entrepreneurs to venture beyond our shores. We have negotiated many FTAs, including those with key economic partners like the US and Japan, to improve access to these markets. Our businessmen can now tender for projects contracted out by the governments of our FTA partners, on an equal footing with their local companies. IE Singapore actively promotes the development of Singapore’s external wing. It helps local enterprises take advantage of government-to-government agreements such as air services agreements, investment guarantee agreements, and avoidance of double taxation agreements. IE Singapore also recently launched the iPartners Programme to encourage companies to band together when venturing overseas. Already, this programme has helped three consortia of Singapore companies to venture into East Asia, Africa and the Middle East.
36. To bring in entrepreneurial talent, MOM launched the EntrePass Scheme. Entrepreneurs can set up operations in Singapore on the basis of their business plans, rather than academic qualifications or salary.
37. The Government is also reviewing its rules and licensing requirements to ensure that bureaucracy does not stifle enterprise in Singapore. To date, the Pro-Enterprise Panel has reviewed 1080 suggestions, of which it has accepted 57%. The Rules Review Panel is also making headway. In the past year, the Panel reviewed 2913 rules, 23% of the total. It removed 373 rules, updated 772, and re-affirmed the remaining 1818. By 2005, public agencies will have reviewed all their existing rules, to remove outdated ones and streamline the rest. Thereafter, it will be time to start reviewing all the rules again. Our plan is to review all rules regularly, on a rolling five-year cycle.
38. However, the Government can only do so much to create a Best for Business environment. Ultimately, entrepreneurs need to take their own risks and develop their own ideas, in order to create and seize new opportunities in overseas markets. Entrepreneurship is, ultimately, a challenge for our whole society.

Enhancing Competition

39. A fourth major strategy is to promote competition and free markets in all sectors of the economy. Competition spurs firms to be more efficient and innovative, and more responsive to customer needs. It prepares our firms to be internationally competitive and to hold their own in the region. Consumers enjoy wider choice and better products and services, and often lower prices. The economy as a whole gains from higher productivity and more efficient allocation of resources, and in the longer term also from more innovation and job creation.
40. This is why our basic economic stance is pro-competition. Right from the start, Singapore was a free port. For trade in goods, when we first began industrialising in the 1960s, we did impose entry barriers and import tariffs to protect domestic industries, but we soon abandoned this infant industry argument and shifted to an open competitive regime.
41. For services, we pursued the same policy of open competition in wholesale and retail trade, IT and business services. In other industries like telecommunications and power generation, we used to operate vertically integrated state-owned monopolies, like many other countries. But in the last 10 years we have moved a long way from that model. We privatised statutory boards, deregulated the industries and opened them up to competition. In the financial sector too, we have liberalised and freed up, causing a major transformation of the industry.
42. However, fostering competition is not always the same as taking a passive, hands-off approach. Sometimes we need to intervene to structure the industry to allow competition. Otherwise instead of healthy competition, we may end up with one or two players wielding monopoly power to the detriment of consumers.
43. Take the telecommunications industry as an example, which is now fully liberalised. Competition in that market has increased significantly, especially in mobile and wholesale international call services. But IDA still needs to act as a referee, because several segments of the telecommunications market are not or cannot be effectively competitive, as in the case of "last mile" access infrastructure. IDA’s role is to guard against abuses of market power, and to set rules which help smaller players connect to infrastructure provided by larger players. IDA’s regulations seek to keep the market contestable, and ensure that competition produces benefits for consumers over the long-run.
44. Or take the power industry. Singapore Power was an integrated monopoly operator, generating, distributing and selling electricity and gas to every home and factory. To introduce competition, we first had to split up Singapore Power into several different companies, create the right regulatory framework and set up the Energy Market Authority (EMA) to oversee the industry. We made each power plant a separate generating company (genco), competing against other plants. We created a sophisticated mechanism for the gencos to bid to sell electricity into the grid, called the pooling and settlement system. As for the power grid, which is a natural monopoly, we made it a separate, tightly regulated company. Only then were we ready to have different suppliers compete to sell electricity to consumers, starting with the large consumers. The process has taken eight years, and is still not quite complete.
45. Our small domestic market is an important practical constraint to promoting competition in industries where scale is important. So we have only three local banks, two media groups and two public transport operators. Our market simply cannot support more players. We cannot manage such industries in the same way as we would the retail trade with thousands of players. We have to accept that in these circumstances limited competition or even sometimes a single operator is the best arrangement, and find other ways to prevent the companies from exploiting their position or becoming inefficient and uncompetitive.
46. The container port business is such an industry. In this case, the relevant market extends beyond Singapore. Today transhipment is an international business. Within our neighbourhood alone, Tanjong Pelapas, Port Klang and Laem Chabang, are all vying to replace PSA as the hub port for Southeast Asia. Competition in the port industry is not really domestic but takes place on a regional or even global stage.
47. The Government is determined to consolidate Singapore’s status as a hub port. The Maritime and Port Authority (MPA) has approved PSA’s application for land to build five new berths at Pasir Panjang Terminal to support its growth in container traffic. This will allow PSA to strengthen its competitive position in the international arena.
48. Jurong Port will continue to operate at its existing facilities in Jurong, where it can handle one million containers a year. Given the intense regional competition, Jurong Port will not for now expand its container capacity by building additional berths at Pasir Panjang, but will review this decision when conditions change.
49. However, MPA has not granted PSA a monopoly on container operations in Singapore, nor will it do so. The port industry is dynamic. If and when industry conditions make greater local competition necessary, and new operators judge it viable to enter the business, the Government will not stand in the way.
50. This year, MTI will be proposing to Parliament a competition law covering most sectors of the economy. To complement the liberalisation and deregulation of our economy, we need a means to stop companies from engaging in anti-competitive behaviour and undoing the benefits of efficient and innovative markets. The competition law will adopt a pragmatic approach. It will take into account differences in the various sectors, in terms of their industry structure and stage of market development. It will not burden businesses with unnecessary regulatory costs. Such an important initiative will need inputs from businesses and the public. A draft version of the law will be released soon for public consultation.

Building on Our Fundamentals

51. We face formidable challenges in restructuring and upgrading our economy, and coping with shocks and uncertainties in our external environment. But our capacity to overcome these challenges is much greater than ever before. Our financial resources are larger. Our infrastructure and physical assets are better developed. Over the years, our workforce has become better educated and more highly skilled.
52. As we develop new capabilities and strategies, we must continue to build on and make the most of our strengths. Three fundamentals have been the pillars of Singapore’s success and will allow us to sustain our growth and prosperity. These pillarsare:

1. Effective Government. A Government that delivers sound public finances, responsive fiscal policies that help to stabilise the economy, and good financial practices that ensure value for money in public spending.
2. A Strong Society. A resilient and cohesive population, and a strong social compact between Government and the people that helps see us through good and bad times together.
3. A Land of Opportunity. A place where every individual has the chance to be the best he can be, a home where people want to raise their families, an economy which attracts talent and investments, and a centre for businesses to pursue new and exciting opportunities.

1. The Government’s financial and budget policies will bolster these three fundamentals.

1. Our education system has enabled a growing number of our citizens to benefit from higher education. 35% of our working adult population now have either a university degree or a polytechnic diploma, triple the 12% just 10 years ago. Today, 60% of each cohort graduate from a local polytechnic or university. As our schools improve, more students will qualify for university admission. The proportion of each cohort entering local universities will increase from 21% today to 25% by 2010.
2. However, good university education is not cheap. One-quarter (24%) of our education budget goes to the university sector. More students entering university, more good professors, and more overseas attachments for students can only mean more spending on university education. The Government’s total spending (operating and development expenditure) on universities has already grown from $1.11 billion in 1998 to $1.56 billion in 2002, a 41% increase in five years, mainly because of larger student enrolments. If this trend continues, we will be forced to squeeze resources from primary and secondary education in order to fund university education.
3. This is not desirable. From the economic point of view, universal primary and secondary education benefits society much more than it benefits individuals. Society as a whole is better off when everyone is literate, equipped with basic skills, and able to become a good citizen. Hence it is sound public policy to subsidise primary and secondary education heavily. In contrast, the benefit of a university education accrues mostly to the individual. A rigorous and relevant university degree will make the graduate more employable, and enable him to earn much more during his working life. Furthermore, only the top 25% of the cohort will make it to university, unlike schools, polytechnics or institutes of technical education. The argument for funding university education heavily from general taxation is therefore much weaker.
4. From the universities’ perspective, it is better for them to be less reliant on the Government for funding. The more universities raise their own funds from fees and donations, the more autonomous they will be, the more flexibly they can respond to student needs and market demands, and the better placed they are to achieve academic excellence. This has been the experience all over the world. In the UK and Europe, universities are funded mainly through government grants, and the result has been mediocrity and declining standards. In contrast, US universities have to compete actively for both state and private funding, on the basis of quality. American students pay higher fees, and take student loans to a much larger extent than European students. The US universities have produced peaks of excellence unmatched in any other country, and higher standards overall. The US is a large country and its multi-tiered model of state and private universities cannot be replicated here. But we should move in the direction of greater competition and self-reliance to allow our universities to achieve excellence.
5. It is therefore fair to ask undergraduates to pay for a larger part of their university education themselves. They do not necessarily have to pay while studying, but can do so later when they are working and earning stable incomes. With this approach, no student should miss a university education because he cannot afford it. We will make sure of this through generous scholarships to outstanding undergraduates, bursaries for those from low-income homes, and student loans readily available to all who need them.
6. Our current formula is for undergraduates to pay 25% of the operating costs of university education. The Government pays for the remaining 75%, and also bears in full the infrastructure costs of our universities. Going forward, we need to establish a more sustainable and equitable cost-sharing formula between the state and university students.
7. There will be no university fee increases this academic year. However, MOE and the universities are reviewing the basis for setting university fees in future, and expect to reach some conclusions this year.

Keeping Healthcare Affordable

8. Our publicly funded hospitals provide quality care to all Singaporeans, at an affordable cost. But advances in medical technology, while enhancing healthcare, continue to push up its cost. For example, in 1990, the standard treatment for blocked heart arteries was angioplasty. By 2000, it had progressed to angioplasty with stents. This has lowered the recurrence of blood vessel blockage but has tripled the cost of treatment from $1,300 to $3,500.
9. Our ageing population will put further pressure on the healthcare system and on our ability to finance good healthcare for all Singaporeans. MOH will do its best to contain medical inflation. This requires cooperation and understanding from all stakeholders in the healthcare system. Providers have to cut out inefficiencies and frills. Patients have to be realistic in their expectations. And all Singaporeans should adopt healthy lifestyles.
10. Ultimately, Singaporeans have to be responsible for themselves and not rely on the Government to provide for every need. Our healthcare financing framework, based on the 3Ms – Medisave, MediShield and Medifund – has fostered an ethic of self-reliance, kept healthcare spending down, and served us well.

Medisave for Self-Employed

11. Originally the self-employed did not fall within this 3M framework, because they did not contribute to Medisave. But in 1992 the Government amended the CPF Act to require self-employed individuals who earn above a certain salary – currently $6,000 a year – to make compulsory contributions to their Medisave accounts. We wanted to make sure that the self-employed regularly put aside savings for their health needs and not expose themselves to unnecessary financial risk when they or their families fall ill.
12. However, compliance has been patchy. Only 47% of self-employed CPF members have paid their full Medisave contributions. Another 36% have made partial payments, while 17% have not contributed at all, which means that about half of the self-employed are storing up bigger problems for themselves in future by not contributing fully to their Medisave.
13. Henceforth, the CPF Board will enforce Medisave contributions more strictly for self-employed Singaporeans, just as it does with other employers and employees, to ensure that self-employed Singaporeans set aside enough for their health needs.

Health Insurance and MediShield

14. With medical costs increasing, so will the risk that large healthcare expenses will exhaust one’s own savings. Health insurance schemes can help stretch our Medisave dollars through better pooling of risks. We should therefore supplement Medisave with health insurance schemes which are properly designed to avoid the "buffet-lunch abuses" so common in other countries. This will help us to realise portable employer-provided medical benefits. MOH is also examining how we can enhance the coverage of MediShield, to give Singaporeans better protection against large bills from catastrophic illnesses.

Means Testing

15. Besides relying more on medical insurance, we also need to target our healthcare subsidies more precisely, to reach those who need them most. Nationally, one-third of the total healthcare expenditure is financed by the Government. In hospitals, many services are subsidised even more. For example, all patients in Class C wards are subsidised 80% of the cost of their stay.
16. Currently, we link the level of subsidies to the class of ward. We do not take into account the patient’s ability to pay. A poor patient in a Class C ward enjoys the same 80% subsidy as a high-income patient, even though he needs the subsidy much more.
17. If we continue subsidising healthcare this way, one of two things will happen. Either the Government will have to spend a lot more on healthcare – which means raising taxes, or it must lower the quality of healthcare provided to all Singaporeans. Neither is desirable.
18. The Feedback Group has proposed pegging the amount of subsidy to the financial status of the patient rather than the class of ward, in other words, means testing. It will be more difficult to implement, as we will have to assess the financial means of each patient. But means testing is ultimately more efficient and equitable as it will enable us to focus subsidies on those who need them, and so make the most of our healthcare budget.
19. Means testing is not new. We already practise it in the step-down care sector. In community hospitals, nursing homes and home nursing, patients’ incomes are assessed to determine the subsidies they receive. Means testing is also used for primary care services for the elderly who seek treatment in private clinics, through the Primary Care Partnership Scheme. Eligible patients pay the same fees as they would if they had visited the polyclinics. These schemes have been well received.
20. MOH is studying how to extend means testing to general hospitals. MOH will proceed cautiously, so as to gain more experience with means testing and give patients time to adjust. It will need to determine where best to start, because hospital services span a wide range, from inpatient care to day surgery to specialist outpatient care.
21. Even with means testing, a high-income patient can opt for B2 or C class treatment, and pay less than for A or B1 class treatment. But when he does so, he will be subsidised less than a poorer patient getting B2 or C class treatment.

Medisave and Medifund Top-ups

22. Even with means testing and enhanced medical insurance, some older Singaporeans will face difficulties in coping with increased medical expenditure and paying their MediShield and Eldershield premiums. Older Singaporeans were midway through their working lives when the Medisave Scheme started in 1984. As a result, they have lower Medisave balances than younger workers. Furthermore, workers aged 50 to 55 will face deeper CPF employer contribution rate cuts in the next two years.
23. I have therefore decided to top up the Medisave accounts of Singaporeans aged 50 and above. The amount ranges from $50 to $200, and will vary based on age of the recipient and his existing Medisave balance, as shown on the screens. This will cost the Government $104 million.

Table 2: Medisave Top-ups to Singaporeans 50 years old and above

Age	Medisave Balance (as at 1 January 2004)
	< $5,000	$5,000 - < $10,000	≥ $10,000
50-59	$150	$100	$50
≥ 60	$200	$150	$100

 

24. I will also be injecting an additional $100 million into Medifund to help needy patients who cannot afford to pay their hospital bills even after subsidies. This injection will bring the total size of Medifund to its targeted size of $1 billion.

Building the Next Generation

25. Our children embody our hopes for the future. Singapore’s birth rate is way below replacement level and falling. This is a serious problem. A declining birth rate will sap the vitality and resilience of our country.
26. Over the years, we have introduced many measures to encourage and support parenthood. After our first package in 1987, the total fertility rate (TFR), which reflects the number of children a woman is expected to have during her lifetime,jumped up to 1.96, as seen in the chart. This was partly because 1988 was a "Dragon" year, but the impact of the package was felt through the first half of the 1990s. Unfortunately the effect seems to have worn off over time, and the underlying trend of a falling TFR has reasserted itself. By the next "Dragon" year in 2000, the TFR had declined to 1.60. The Baby Bonus scheme and further generous tax incentives introduced in 2000 have failed to reverse this trend. We give out over $200 million annually in tax reliefs and rebates, and more than $100 million has been disbursed under the Baby Bonus scheme. Yet the TFR for 2003 dropped to a historic low of 1.26. This is one of the lowest birth rates in the world. Only 36,000 babies were born last year, far fewer than the 50,000 babies we need to replace ourselves.

Chart 2: Total Fertility Rate



27. The accelerated decline in TFR since 1998 was partly caused by economic uncertainty – these were the years of the Asian financial crisis and the two recessions. But the underlying downtrend in birth rates is real and will continue unless we take decisive steps now.
28. Our existing measures are not enough. We must take a more comprehensive approach to solving this problem. We must encourage young people to marry and marry earlier, and make it easier for young couples to start and raise a family. And we have to take a long-term view. The impact of our policies on birth rates may not be felt immediately, because changing attitudes, mindsets and practices takes time and patience.
29. We need to shift social attitudes towards having children, even while we recognise that having children is a very personal decision which couples have to make for themselves. There is no single magic solution. The approach must be both holistic and coherent, addressing parents’ concerns from childbirth through the years of bringing up their children. As these are complex issues that require thorough discussion and deliberation, the Government will study them in depth over the next few months, before deciding on the most effective set of measures. Today I shall set out the principles that will guide our thinking.
30. Firstly, the aim of our measures must be not just to produce more children, but to produce the next generation of Singapore citizens. We want to grow the total population of Singapore, but equally important, we also have to reproduce and maintain the core group of citizens who will build and defend our country, and without whom we would not be a nation. Thus our measures must focus on encouraging more Singapore citizen babies.
31. Secondly, the problem is more serious for the mothers who are more educated and earn higher incomes. The higher the woman’s career attainment, the less likely she is to get married and the fewer children she is likely to have. This is true not just of graduates, but also of women with secondary education. It is understandable because the more a woman is able to earn a living, the heavier the opportunity cost to her of having children. Therefore while our measures must cover all families, we must especially make sure that the incentives are effective for the better qualified women.
32. Thirdly, while encouraging procreation is critical, realistically it will be very hard to raise our TFR back to the replacement level of 2.1. Even other countries which have managed to reverse falling birth rates have not achieved replacement fertility. We therefore need to boost our population through other ways. In particular, we need to open our doors to immigrants who can contribute to Singapore. After getting them here, we need to help them settle down and integrate into our society. We need the right policies to encourage them first to become permanent residents (PRs), and then to take up citizenship. This means treating PRs and citizens differently, so that PRs have incentives to take up the privileges and responsibilities of being Singaporeans.
33. As for specific measures to encourage procreation, a comprehensive approach should include adequate support facilities such as infant and child care arrangements, better balance between work and family life, and of course financial help measures.
34. To start with, we have to consider the issue of maternity leave. We have hitherto been reluctant to increase statutory maternity leave. But many working mothers feel that the current two months is too short. A major worry of working mothers is that they will have too little time with their children, particularly in the first few months after birth which are crucial to bonding mother and child. We may need to extend the period of maternity leave, but without overburdening employers with added costs.
35. Next, when the mother returns to work, she will often want to put her child in affordable and reliable child care facilities. The Government already subsidises child care, but infant care is more expensive. We will therefore look into providing more financial help for infant care.
36. Next, we need to strike a better balance between work and family life. Many couples cite the lack of family time and flexible working arrangements as an impediment to having more children. As an employer, the Government will review civil service work arrangements, without affecting essential public services. We will set a clear example to companies of how employers can create a work environment that is supportive of families.
37. Finally, while families should not have babies just because of financial incentives, tax reliefs and rebates for parents and working mothers appreciably lighten the financial burden of bringing up children. We need to simplify and enhance the existing tax incentives, to make them more accessible and attractive to couples.
38. Two civil service teams visited Europe recently to study how other countries are tackling their falling birth rates. One went to Italy, the Netherlands and France, and the other to Norway and Sweden. We will study the lessons drawn and come up with our own measures. As several ministries are involved, I have tasked Mr Lim Hng Kiang, Minister in the Prime Minister’s Office, to take charge and to make specific proposals. He will be assisted by an inter-ministry civil service Working Committee on Population chaired by Mr Eddie Teo, Permanent Secretary in the Prime Minister’s Office. I have asked the committee to complete its work before National Day.

Adequate Finances for Retirement

39. With the ageing of our population, we have to ensure that working people put aside enough resources to support themselves in their old age. Today, most of the elderly in Singapore receive some financial support from their children. But longer life spans, rising singlehood, and low fertility rates are making it harder for old people to rely on their children for support. There is a pressing need to make sure that Singaporeans are self-reliant and financially independent in their old age.
40. Under the CPF Minimum Sum Topping-Up Scheme, individuals are allowed to make top-ups to the CPF Retirement Accounts belonging to themselves, their spouses, parents and grandparents. They can make top-ups in cash or out of their CPF Ordinary Account, up to the Minimum Sum in the Retirement Account. Currently, individuals making such cash top-ups enjoy a tax relief of up to $6,000 per year.
41. With lower CPF contributions and the higher CPF Minimum Sum, we want to encourage more people to voluntarily top up their own or their family members’ Retirement Accounts. I am therefore raising the tax relief ceiling on cash top-ups from $6,000 to $7,000, with effect from YA 2005.
42. Non-working spouses, such as full-time housewives, may also be financially vulnerable in their later years. At present, individuals are not entitled to any tax relief when they make cash top-ups to the Retirement Accounts of their non-working spouses. We should encourage individuals who have the means to contribute to the financial security of their non-working spouses to do so. I will therefore be extending the tax relief to individuals making cash top-ups to non-working spouses who are 55 years old and older, and who earned not more than $2,000 in the preceding year.
43. I hope these steps will help bolster the financial resilience of Singaporean families.

1. The above income, as well as gains arising from the disposal of debt securities issued by supranational bodies and income arising from foreign exchange and derivatives transactions, will also be excluded from the statutory income of Designated Unit Trusts (DUTs).
2. The above changes will take effect from 27 February 2004. Details will be announced by MAS soon.

Asset Securitisation

3. The structured finance market has been an important component in MAS’ debt market development strategy since 1998. To provide greater regulatory certainty, MAS issued regulatory guidelines to financial institutions participating in asset-backed securitisation and credit derivative transactions in 2000. As a complement to these measures, a concessionary tax treatment will be conferred on Special Purpose Vehicles (SPVs) engaged in asset securitisation. This concessionary tax treatment will apply to SPVs set up for asset securitisation on or after the date of Budget announcement. It will address and mitigate tax disadvantages that an asset securitisation SPV may face as a result of mismatches in timing between the receipt of income and the payment of expenses.
4. Further details of this concession will be released by IRAS in May 2004.

Commodity Derivatives Trading

5. To encourage commodity derivatives trading in Singapore, an incentive that confers a 5% concessionary tax rate on qualifying income derived from trading in commodity derivatives will be introduced with effect from 27 February 2004. Interested parties can apply to MAS or IE Singapore for this incentive.
6. Details will be announced by MAS in March 2004.

Secondary Loans Trading

7. Secondary loans trading activity in Asia has increased significantly since the Asian Financial Crisis. This development has provided Singapore with an opportunity to develop into a leading loan hub in Asia. To encourage this activity, secondary loans trading will be included as a qualifying activity under the Financial Sector Incentive Scheme.

Withholding Tax Exemption on Payments on Over-the-Counter (OTC) Financial Derivatives

8. With increasing focus on risk management and hedging globally, derivatives have become increasingly important for both corporations and financial institutions. For Singapore to be a major regional treasury centre, it is essential to be a location of choice for these activities. To encourage more of such activities, payments on OTC financial derivative contracts made by financial institutions to non-residents, excluding permanent establishments in Singapore, will be exempted from tax. This exemption will apply to payments due and payable during the period 27 February 2004 to 19 May 2007.
9. Details will be announced by MAS soon.

Members of SGX

10. To encourage the development of indigenous financial products as well as to foster SGX trading activities, the current tax incentive scheme for SGX members will be enhanced. The current 5% and 10% concessionary tax rates will be extended to products denominated in Singapore dollars. This will take effect from 27 February 2004.
11. In addition, the 5% concessionary tax rate on new products will be extended to any company that is a member of the SGX as long as it qualifies as one of the Top 20 members, as determined by SGX in respect of the total volume of transactions in approved derivative products in the preceding year.
12. Details will be announced by MAS soon.