BUDGET STATEMENT 2007

Ready for the Future, Ready for the World

Mr Speaker, Sir

I beg to move that this Parliament approve the financial policy of the Government for the Financial Year 1 April 2007 to 31 March 2008.

(1) ECONOMIC PERFORMANCE AND OUTLOOK

Economic Performance and Fiscal Position in 2006

1.1 Our economy has done well. It grew by 7.9% in 2006. Both our manufacturing and services sectors did well. Asset management in financial services is booming. The construction sector is seeing a resurgence.

1.2 Singaporeans have benefited from this growth. An unprecedented 173,300 new jobs were created last year, with more than half of these taken up by our local workforce. The unemployment rate went down to 2.7%. Our workers enjoyed good wage increases and better bonuses, with average wages rising by 3.2%. Overall, it has been an exceptionally good year, following two previous good years.

1.3 The fiscal position for Financial Year (FY) 2006 improved on the back of these buoyant economic conditions. I expect a budget deficit of $1.3 billion for FY 2006, much smaller than the deficit of $2.9 billion we projected at the start of the year. Operating revenues and contributions from Net Investment Income have come in higher than projected.

(2) SECURING OUR FUTURE

Globalisation is Working to *Singapore’s Advantage***

2.1 We are looking ahead to the next five to 10 years for Singapore. Our prospects have never been better. The key reason is globalisation. Capital, enterprise and talent are flowing to countries where government can be trusted, where the workforce is well-educated and skilled, and where the quality of life is high. These are Singapore’s advantages. They explain why globalisation is working in Singapore’s favour.

2.2 We are also well-placed at the heart of a globalising Asia. China and India are the big stories, but opportunities are also opening up across Asia, from the Middle East to Northeast Asia. Competition from China and India has galvanised ASEAN to accelerate integration and forge a collaborative ASEAN Community by 2015.

2.3 Businesses large and small, home grown and foreign, are taking advantage of Singapore’s strengths, and using Singapore to ride the next wave of Asian growth.

The World is Coming to Singapore

2.4 We are not just getting more large investments, but more ‘first-of-its-kind’ investments. Take for instance, the chip used in the latest PlayStation3 and Xbox. A French semiconductor company, Soitec, is investing $700 million to set up in Singapore its first offshore facility to make the wafer for this chip. It is high precision, high technology. The wafers involve alternating layers of silicon and insulator, unlike conventional wafers which use silicon throughout. Soitec is coming here because its technology has to be well-protected, and we are the only country in Asia that they trust well enough to set up their first manufacturing campus outside of France.

2.5 Soitec is like many other global companies which have come here because they know their investments will be protected, and we have the pool of talent and skills for sophisticated manufacturing. Like Sumitomo, which expanded its $500 million complex in Singapore only last year to make the special kind of plastic used in LCD screens and dentures. These are big votes of confidence by global investors.

2.6 But it is not just MNCs that we are drawing here. We are also attracting a whole new category of small and mid-sized global players. Take Bob Chandran, for example, who came from the US. He had listened to PM talk on TV about Singapore being a place with ‘Asian values but Western conveniences’. He explored further, and eventually decided to move his family and his marine fuel company, Chem-oil, from the US to Singapore. In fact he has now taken up Singapore citizenship. Chem-oil is today listed on the SGX. Bob has just announced a major investment in a new fuel terminal on Jurong Island.

2.7 Johan M Karlstedt relocated from Finland to the US for several years, before deciding to set up home in Singapore — both for his company and his family. The company that he founded, QXSystems, creates virtual offices for businesses. As he puts it, with the Internet, it does not matter if you are in a small country. QXSystems now owns five companies around the world, and is headquartered in Singapore. Johan, himself, doesn’t work from an office; he is based at home. I asked him what that means, and he said that he actually sits and works daily, for hours, in many places around Singapore. Thanks to widespread WiFi, he can interact with anyone around the world from any spot in Singapore he chooses, for the cost of almost nothing.

2.8 Bob Chandran, Johan Karlstedt and the many others like them are here because we are a compelling home for enterprise and for families.

Singaporeans are Going Out to the World

2.9 Not only is the world coming to Singapore, Singaporeans are seizing opportunities abroad. Globalisation is working to the advantage of Singapore companies.

2.10 Food Empire, based in Geylang, owns MacCoffee, which has become immensely popular in Ukraine, Russia, Poland, Bahrain, Iran and Turkey. Its advertising slogan in Ukraine reads: “Every other Ukrainian drinks MacCoffee.” In fact, even the advertisement won the most prestigious prize in the Ukrainian advertising industry last year.

2.11 Rotary Engineering is another example. It was founded by Chia Kim Piow in the 1970s. He was like many others at the time who did not have an education beyond secondary four — no diploma, let alone a degree. Everything was learnt on the job. Rotary began handling electrical installations and sub-contracting for the big oil refineries. It now builds them. Today, Rotary is presently one of Asia’s leading engineering companies in oil and gas infrastructure. It is active in China and India, and is moving into the Middle Eastern market with Saudi Arabian partners.

2.12 It is not just the larger Singapore players that are going abroad. We have many individual Singaporeans taking their chances and making their presence felt in global markets. They are in demand all over Asia, as trusted managers and engineers, and increasingly, too, as creative professionals. Like our Singapore chefs. Justin Quek is amongst our best known, having won several awards while he was here, at Les Amis. He is now based in Taipei where he is running his own restaurant, which is already regarded as serving the finest French cuisine in the city.

2.13 Jek Tan, who trained at SHATEC, became Executive Chef at the Shangri-la in Dalian a year ago. I had met him there, and he mailed me last week to say that he had invited over three fellow Singaporean chefs to host a Singapore Food Festival over the last two months. The Chinese were wowed by the menu. Among the compliments he received, was one about the beef rendang. Unfortunately, in Chinese, ‘rendang’ translates into “people’s egg”. Some of his customers told him they were glad it tasted better than it sounded.

2.14 This is what globalisation is about, and why it is working for Singapore. Companies and enterprising individuals from around the world coming to Singapore, using Singapore to reach out to other parts of the world, and creating jobs for Singaporeans; and Singapore companies and talents going out to the world to compete and seize opportunities. It is why the outlook for Singapore is bright.

The Challenge of the Widening Income Gap

2.15 But globalisation brings with it challenges for Singapore. We face a worsening of our income distribution, and slow or no increases in wages at the lower end of the workforce. Not just over the last few years or for now, but in all likelihood for several years to come. It will be a key challenge for us, just as it is in other developed countries.

2.16 The reasons for the widening income spread are by now well known. China, India, Russia and Eastern Europe have doubled the global workforce, putting downward pressure on wages everywhere. Companies have more choices on where to invest, locating their plants where they can get the lowest cost or best workers or latest technology. At the same time, technology has continued to advance, relentlessly, in every sector and industry. It is increasing the demand for workers with high skills and knowledge. And technology is making many types of workers redundant, especially those with low skills — and also making it easy for their jobs to be exported abroad to where wages for the same skills are lower.

2.17 The result is widening income gaps between the skilled and the low-skilled, between young and old, between those who adapt quickly to the market and the rest. Incomes are stretching out in the developed world, with the top rising rapidly, the middle much slower, and the bottom stagnating or even declining.

2.18 In the US, the income gap has been widening for some time, especially in the last decade. In the last five years, despite strong economic growth, wages of non-management workers have grown by only 1.7% in real terms. The same is happening in Europe and Japan — incomes going up at the top, but stagnating or declining at the bottom. Even in China, with an economy growing at 9%, workers in the bottom 10% have seen a decline in real incomes.

2.19 Singapore is facing similar pressures. Because we are a much more open economy, we are in fact more exposed to these pressures of globalisation. Over the last five years, lower-income households have seen little growth in their incomes. In fact, in real terms, the lowest 20% of households has seen their incomes per capita decline from 2000 to 2005. However, the strong pick-up in employment within the lower-income group over the past year has more than reversed the decline. Nonetheless, household incomes at the top end are pulling away faster.

2.20 This is a key item on our agenda. Although our economy is growing well, incomes are increasing only slowly at the lower end, and income gaps are widening. This is a problem for those at the bottom, but it is also a problem for the rest of society if those at the bottom feel left out from growth.

2.21 The solution is not to grow more slowly, or to focus less on growth and more on redistribution — although some people think we should do this. If we do this, it will only hurt the people we are trying to help. Slow growth will make everybody worse off, but it will have greatest impact on those at the bottom. Jobs will be lost and incomes will fall through the floor for those at the lower end of the workforce, while at the top end, talented Singaporeans and those with the ability to seize opportunities elsewhere will up and go. Slow growth will not assure us of a more equal society, as long as we live in a globalised world.

Singapore’s Response – Growth with Opportunity *for All***

2.22 Our response must therefore be to focus on growth and embrace globalisation, but manage its downsides and make it work for everyone. We will do this by maximising opportunities for all Singaporeans — the opportunities to get a good education, to work or grow a business, to retrain yourself and upgrade, and to own your own home. We must maximise opportunities for all, but we must also accept that doing so does not result in equal rewards for all. We should never reduce the incentive for Singaporeans to work and to make the most of their skills and talents, so as to get higher reward for themselves. That has to be the basis for our society, for how we keep our economy growing, and for how living standards of Singaporeans can rise over time.

2.23 Our first priority therefore is to grow the economy. We must now build capabilities for the future. We must attract new investments, grow new businesses, and create new and better paying jobs to replace old ones. We must build on our strengths and compete — not just on efficiency and low cost, but on trust and value.

2.24 As we grow the economy, we must ensure that no one is left behind and that all Singaporeans have the opportunity to succeed. Over the years, the Government has been helping the lower-income groups through various assistance measures. Since 2001, the Government has distributed more than $7.5 billion through the Progress Package, U-Save and S&CC rebates, CPF top-ups and New Singapore Shares, to share budget surpluses with Singaporeans. In all these distributions, we have made deliberate efforts to ensure that the lower-income groups get the greatest benefits. But going forward, we have to do more to help needy Singaporeans, and to do it more systematically. This is why we are introducing Workfare. Workfare will give those at the lower end of the workforce a stronger incentive to get a job, stay employed, and save for their future.

2.25 We also have to prepare now for the challenges of an ageing population. Healthcare spending will rise over time, as our people grow older and medical science advances. Our living environment and physical infrastructure will have to be adapted to meet the needs of our growing ranks of senior citizens. This is the generation that has helped to bring Singapore up from Third World to First World. We must ensure their well-being.

2.26 Building capabilities for the future, strengthening our social security system and providing for the needs of older Singaporeans will require Government to spend more in future. This means we will need additional revenues. We cannot raise direct taxes. Countries the world over are reducing corporate and personal income taxes. To continue to attract talent and investments, and maintain strong incentives for our people to excel, we will in fact have to lower our direct taxes further over time.

2.27 We will therefore raise additional revenues by extracting more income from our reserves and increasing the GST. Because we are doing this now when the economy is doing well, we are able to provide a very comprehensive set of measures to help Singaporeans cope with the GST increase.

2.28 This Budget is therefore about preparing Singapore for the future and for the world. It ensures that we retain our dynamism as an economy while we take significant steps forward to preserve an inclusive society. It sets out the key changes we must make to:

(a) Build capabilities for the future;

(b) Strengthen our social security system;

(c) Reduce direct taxes and raise additional revenues, including GST;

(d) Provide Singaporeans with an offset package for the GST increase.

(3) BUILDING CAPABILITIES FOR THE FUTURE

3.1 To build new capabilities for the future,

(a) We will invest in our people to maximise their potential.

(b) We will invest in R&D to move our economy up the value curve.

(c) We will make Singapore the best place to start and grow a business.

(d) We will make Singapore a centre for “high trust” services.

(e) We will invest in economic infrastructure to meet the business needs of tomorrow.

(f) We will transform our city and living environment to build the best home for Singaporeans.

Making Singapore the Best Place to Start, Grow and Globalise Businesses

3.20 Next, we have to press ahead in our efforts to create a vibrant and supportive environment for enterprises, big and small. Our strength and reputation as a base for MNCs and leading global companies is well known around the world. We will make Singapore equally reputed for being the best place for SMEs, local and foreign, to locate, grow and globalise.

3.21 I mentioned Rotary and Food Empire earlier. Both found themselves having to extend their reach out of Singapore at an early stage, and depend on markets abroad for most of their growth. In fact, about one-quarter of all our SMEs in Singapore now derive at least 50% of their revenue from overseas.

3.22 Many of our younger local players are going out to markets abroad at an even earlier stage of their growth. Dextrans Worldwide Group, founded just four years ago by two young Singaporeans, already has a bustling logistics business, managing inventory for major electronics manufacturers in China. Heulab was started by two NUS graduates in 2002 to create educational software on tablet PCs. Over 140 schools in Singapore, Australia, Taiwan and Qatar use their products to introduce creative learning in the classroom. All this in just four years. And Heulab was selected earlier this week as a launch partner for Microsoft’s Windows Vista Programme.

3.23 Dextrans and Heulab are part of a new generation of local firms, fleet-footed, unafraid to venture out to the world early, and at the leading edge of technology.

3.24 We are also seeing the rise of a new breed of players in the form of global SMEs — much smaller than traditional multinationals, sometimes run by small groups of individuals, rooted in one place but taking advantage of globalisation to expand rapidly. Some of these are fast-growing small companies — or ‘gazelles’ as they are called in Silicon Valley.

3.25 More of these global SMEs are now coming to Singapore. They want to be here because we are a place where they can access markets, talent and global financial services, and operate within a legal and regulatory framework that they are comfortable with. They may not make huge investments like the MNCs, but they add vibrancy to the economy and demand for financial and business services, IT and logistics. Many are now listing on SGX, and are expanding rapidly.

3.26 We should attract and root this new breed of players in Singapore. I mentioned Bob Chandran and Chem-oil, an example of a global SME we have brought to Singapore’s shores. Another is LMA, a medical equipment firm that was based in UK, which decided to establish a headquarters operation in Singapore to manage its global regulatory affairs, quality assurance, and R&D. It has operations all over the world, and its products reach patients in over 100 countries.

3.27 OLAM, too, shifted from London to Singapore. It has a presence in 52 countries, managed from Singapore. Last week, OLAM announced that it is tying up with Chinatex, a leading Chinese state-owned enterprise. They will jointly invest in Brazil to source soybean. They will also invest together in China to process soybean and supply cotton to the domestic market.

3.28 That’s how globalisation is being played — globalisation out of Singapore. We want to grow more Food Empires and Dextrans, and attract more OLAMs and LMAs to Singapore. We can provide the best conditions for them to start up, grow, raise funds, and reach out to markets in Asia and the world. We are already recognised as one of the easiest places in the world to do business. Each year, the World Bank compiles assessments of experts around the world. In its latest report, it puts Singapore as the most business-friendly economy in the world, ahead of New Zealand, the US, Canada, Hong Kong and the UK. After the recess, I shall announce how we will strengthen this further through our tax regime.

Enhancing our Economic Infrastructure

3.46 We have to invest in our economic infrastructure to position Singapore for the next 15 years of our development. These are major investments which will help support the growth of our high-value manufacturing and services economy, and catch the next wave of emerging industries.

Creating a Living Environment of the Future

3.52 For Singapore to stand out as a global city, however, we cannot be just an economic marketplace. We must have a living environment that is the best in Asia — a city that exudes our own Singapore brand of vibrancy and diversity.

3.53 We will remake our city, to create a home that is distinctive and endearing to Singaporeans. It will be a place where every family feels they own not just their flat, but their neighbourhood; where our elderly lead active lives; and where the young can find a space for every interest and aspiration. We will transform our HDB heartlands, connect them to a more extensive and convenient transport network, and integrate them into a network of parks and waterways that will together represent a quantum leap in our quality of life.

3.54 We will make Singapore a city of gardens and waters, or as PM put it, a city of green and blue. The Gardens by the Bay will open in 2010, bringing further activity and vibrancy to the whole area. We will spend about $700 million on these gardens, the next phase of park connectors, and enhancements to existing parks in the coming years.

3.55 We will also make use of our extensive network of water bodies to enhance our living environment, be it in the city where we are converting the Marina Bay into a reservoir, or in the residential heartlands where we are bringing waterfront living to HDB neighbourhoods. In the next five years, the Active-Beautiful-Clean or ABC Waters Programme will cover 28 projects at a cost of about $200 million.

3.56 We will transform Marina Bay into a vibrant live-work-play destination with distinctive architecture, lush greenery, public spaces and a pedestrian promenade that will encircle the entire Bay. Our established city areas like Orchard Road, Bugis and Bras Basah will also be enhanced.

3.57 Next, our housing estates. As the Minister for National Development announced last week, we will undertake a systematic and total “urban regeneration” of our housing estates. We will start with the older housing estates in about five years’ time. This will cost us about $1 billion per year in the steady state.

3.58 The makeover of our public housing estates will be done together with the development of our public transport system so that residents can readily commute from home to workplaces and commercial nodes all over Singapore. The Circle Line which will open from 2010, plus the new Downtown Line which we will embark on next, will allow commuters to enjoy greater convenience and faster rides. For example, a trip from Bukit Panjang to the city centre that now takes 60 minutes will be shortened by one-third.

3.59 Over time, we will also have to cater for a larger population, by expanding our road network. We will have to widen all our existing highways to four lanes. New highways will also be needed. Plans are already being finalized for a Marina Coastal Expressway to serve the new business district and other developments in Marina Bay. In all, over the next 10 to 15 years, we expect to spend at least $20 billion on our land transport infrastructure.

3.60 This is the way we want to transform Singapore into a world class city and provide the highest quality of life for our citizens. Modern business centres, choice residences for all Singaporeans, and attractive leisure and recreational amenities at Marina Bay, Orchard Road, Bugis and other central areas. HDB homes nestled in lushly landscaped common areas, fully fitted with elderly-friendly facilities, connected to the rest of Singapore by an efficient road and rail system, and linked into green corridors and waterways. This will be the Singapore of 2020.

(4) STRENGTHENING OUR SOCIAL SECURITY SYSTEM

4.1 We are building an inclusive society where every citizen shares in the country’s success. Since independence, three pillars – all linked to the CPF – have underpinned our social security system. The first – the CPF Special or Retirement Account – has enabled every working Singaporean to build a nest-egg for his retirement needs. The second – subsidised public housing through the HDB and the CPF Ordinary Account – has made home ownership a reality for the vast majority of Singaporeans. The third – the 3Ms of Medisave, MediShield and Medifund – has provided Singaporeans with affordable, high-quality healthcare.

4.2 The CPF helps us achieve our social stability. We should continue to strengthen the CPF system, and include as many Singaporeans as possible in it. The three existing pillars of our social security system continue to serve the majority of Singaporeans well. Through the CPF schemes, most Singaporeans are able to save enough to provide for their own social security. However, low-income Singaporeans are finding it more difficult to save enough in their CPF. Their wages have stagnated because of globalisation, and will continue to be under pressure. For this group, we now need a fourth pillar — Workfare.

4.3 Like the existing three pillars, Workfare will also be linked to the CPF, to encourage more low-wage workers to save for their longer term needs. In doing all this, we must continue to preserve the key principles which underlie our social security system — namely self-reliance and mutual support within the family, supplemented by the Government only to the extent necessary.

Raising the Employer CPF Contribution Rate

4.4 First, we will raise the CPF contribution rate. It is currently 33% — 20% from employees and 13% from employers. We have set a long-term variable range of 30% to 36%. This range seeks to strike the right balance between achieving our social security objectives and economic competitiveness, while giving us the flexibility to respond to changing economic conditions. With the economy doing well, I believe we can sustain a modest rise in the employer CPF contribution rate.

4.5 Therefore, the Government has decided to increase the employer contribution rate by 1.5 percentage points to 14.5%, starting from 1 July 2007. One percentage point will go into the Ordinary Account. It will add to the savings of CPF members, and help many of them pay for their mortgages. The remaining 0.5 percentage point will go into the Medisave Account to better provide for healthcare needs. The Ministry of Health has made it easier for Singaporeans to draw from their Medisave Accounts, and will continue to liberalise the use of Medisave.

4.6 The increase in CPF will apply to all Singaporean workers, except for the group of workers who earn $1,500 or less and are also above 35 years old. For this group of workers, we will need a different approach.

Restructuring the CPF and Introducing Workfare for Low-Wage Workers

4.7 Older low-wage workers are the ones most affected by the changes in our economy. They find it harder to learn new skills and upgrade themselves, they find it harder to get re-employed if they lose their jobs, and their families find it more difficult to make ends meet. We will therefore introduce Workfare to supplement the wages and savings of older low-wage workers, and modify the CPF system to complement the Workfare scheme.

4.8 Many other developed countries have addressed the problems of low incomes, often through extensive social welfare programmes. But Welfare has drained fiscal resources and, more damagingly, eroded the work ethic and encouraged an entitlement mentality. The more successful model of assistance has been Workfare — which seeks to supplement the incomes of low-wage workers on the principle that the best way to help people is to help them find work and stay in work.

4.9 Wage supplements are new to Singapore, but the concept has been tried with some success in other countries. The US has the Earned Income Tax Credit. This acts like a negative income tax for low-wage workers, supplementing their earned income instead of taking away from it. The UK has a Working Tax Credit which is similar. These schemes have helped to reduce poverty and encourage work. But they are not without problems — they are not cheap, and they potentially weaken the incentive for workers to upgrade themselves. That is why we have to consider the design of the scheme very carefully and move cautiously. We introduced the Workfare Bonus as part of the Progress Package last year, to test out the concept with Singaporeans. We are now ready to take a step further by making Workfare income supplements a long-term feature of our social security system.

4.10 We will move in parallel on both the CPF and Workfare for low-wage workers. We will reduce the CPF contributions for these workers, while introducing Workfare income supplements for them. This will achieve three objectives. First, workers will contribute less CPF, so as to increase their take-home pay. Second, employers will also contribute less CPF, to make the workers more employable. Third, the Government will give workers Workfare income supplements, mainly into their CPF accounts, and so help them to build up their savings. Workfare provides more incentives for individuals to work, and for employers to hire them. With Workfare, low-wage workers will end up with more in their CPF. With Workfare, the state will step in to share the burden of social support with the individual and his employer.

4.11 The principal target group of Workfare will be older full-time workers aged above 45 years who earn $1,000 or less. This group will receive the highest Workfare benefits. However, Workfare benefits will extend to a wider group — those above 35 years who earn $1,500 or less, but at a lower rate. This is so that we do not miss any deserving cases, and also so that workers whose earnings increase beyond $1,000 do not suddenly lose all their Workfare benefits. I will go through each of the measures in turn.

Supplementing Wages and Savings

4.14 These two changes will reduce employer and employee CPF contributions for older low-wage workers. The new Workfare Income Supplement (WIS) scheme that we are introducing will more than make up for this.

4.15 The Workfare quantum will be based on age. For workers above 45 and earning $1,000 and below, the Workfare will supplement their wages by up to $1,200 per year, or between 10 to 20%[1]. Workers aged above 35 to 45 will receive three-quarters the amount that workers above 45 will receive.

4.16 Workfare will be given partly in cash, but mostly in CPF. The cash-to-CPF ratio will be 1 : 2.5. In other words, for every dollar of cash we give the worker, we will also put $2.50 into his CPF. We are putting a larger part into CPF, so as to help low-wage workers better provide for their future needs.

4.17 WIS will be conditional on regular work. It will be given to workers who have worked at least three months in any six month period in the calendar year, or at least six months in the calendar year. Eligible workers who have worked for at least three months in the first six months of 2007 can look forward to their first WIS on 1 January 2008.

4.18 Like the Workfare Bonus Scheme, the WIS scheme will be for those who live in properties with an annual value of $10,000 or less, who are mostly living in public housing.

4.19 Let me give two examples to summarise what WIS will do, coupled with the changes in CPF. First, let’s look at a 46-year old worker who earns $800. He used to take home $640 per month. He will now bring home $57 more. What he gets in his CPF, which used to be $264, will also be slightly higher now despite the cut in employer CPF. Overall, he has received $100 of WIS, in other words, a 12.5% supplement to his wage. The employer has also saved $27.

4.20 The second example is a 46-year old who earns $1,000 per month. Again, he gets more take-home pay — $49 more. And in his CPF — $38 more. He gets $100 of WIS, which is a 10% supplement to his wage. He is better off, overall, and his employer’s cost of hiring him is also reduced. This is the combined result of the CPF restructuring and Workfare — more cash-in-hand, and more CPF. Details can be found in Annex B.

WIS Scheme Rewards Work

4.28 The WIS scheme is expected to benefit 438,000 Singaporeans[3], and cost about $400 million a year over time. The numbers are likely to go up as more individuals are incentivised to join the workforce and contribute to CPF. While Workfare is a long-term government programme, the specific scheme that we have worked out is new and will need to be tested out. We will review this scheme after three years and adjust it to better achieve our aims.

4.29 The Workfare Income Supplement scheme is a major policy change. For the first time, the state will be supplementing the market wages that low-wage workers receive. But we have decided to make this change so as to help low-wage workers and encourage them to stay employed. This will strengthen social inclusion in Singapore.

Preparing for Future Healthcare Needs

4.30 Through Workfare and the various CPF changes that I have just mentioned, the CPF balances of all Singaporeans will rise to help them meet their long-term expenses, including their medical needs. However, many Singaporeans are understandably concerned about whether they will be able to afford their healthcare bills as they grow older.

4.31 Healthcare costs for the individual are rising because we are now living longer and becoming more prone to age-related diseases like stroke, diabetes and hypertension which are typically chronic and require long-term care. The elderly use more healthcare services and incur higher costs per episode of care. For example, hip fractures because of osteoporosis are common among the elderly and hip replacement surgeries are usually required to ease their condition.

4.32 The incidence of heart disease and cancer among Singaporeans is also growing, leading to very costly hospitalisation and treatment cycles. And the expectations of Singaporeans are rising; they are demanding more medical services, better medical technologies and more effective drugs.

4.33 To cater to these healthcare needs, the Government will be ramping up our healthcare expenditure over the next five to 15 years. Over the next five years alone, we expect to increase our spending to reach about $3 billion a year in 2012, compared to $2 billion today. Part of this will go towards growing the number of doctors, nurses and allied health professionals in our public hospitals. In particular, we aim to bring 4,500 more nurses into the public sector over the next five years, as they play an increasingly important role in supporting the elderly. We will also increase the number of acute hospital beds and improve clinical services.

4.34 We will create academic medical centres in our NUH and SGH campuses, which will allow us to better marry the strengths of academic and clinical practice. Both centres will have a stronger clinical research component, with funding focused on the major diseases afflicting Singaporeans. In addition, step-down care now provided by charities will be better integrated with hospital care. We also want to better integrate patient care between GPs and specialists so that GPs can play a larger role in looking after Singaporeans’ health.

4.35 Singaporeans will still have to foot their share of their medical bills, either in Medisave, insurance or cash. Some people, especially the elderly and low-income, have difficulty setting aside enough in their Medisave for their healthcare needs. They need our help. I will top up the Medifund by $200 million to $1.4 billion.

4.36 Mr Speaker Sir, I have outlined some of the major programmes that the Government will have to embark on over the next five years and beyond, to build our capabilities for the future and to strengthen our social security system.

(5) REVENUE STRUCTURE FOR THE FUTURE

5.1 Mr Speaker Sir, the plans I have laid out for CPF and Workfare represent the Government’s commitment to address the dislocations caused by globalisation and ensure a continued sense of cohesion and financial security among Singaporeans. We are also making major new investments in our social and economic infrastructures. At the same time, we want to be able to reduce direct taxes to enhance our competitiveness. To do all this, we must therefore raise additional revenues. I will now map out our plans on the revenue front.

(6) GST Offset Package

6.1 This brings me to the measures we will take to offset the GST increase. We will put in place a comprehensive set of measures for Singaporeans, with more for the lower-income. The majority of Singaporeans will get offsets that are equal to at least five years of the increase in their GST expenditures. Lower-income households will get much more than five years’ worth. This GST Offset Package will cost the Government $4 billion in total over five years.

Helping Singaporeans Cope with the GST Increase

GST Credits

6.2 Of this $4 billion, $1.8 billion will be given out as cash, in the form of GST Credits. All adult Singaporeans will receive GST Credits in annual instalments. The amount that a person receives depends on two factors — his assessable income (AI) and the annual value (AV) of his home, which is used as a proxy for his wealth.

6.3 I will give lower-income Singaporeans larger GST Credits. Those who live in one- to three-room flats[4] and have annual assessable incomes of $24,000 or less will qualify for the largest quantum of $1,000, to be paid out in instalments of $250 per year over four years. Nearly three-quarters of the population will receive GST Credits of $800, paid out in $200 per year. Next, if you live in a larger home with an AV of more than $10,000, but you earn less than $100,000 a year, you will get $400 in GST Credits. The top income group comprising those earning over $100,000 a year will get $100. It is a small gesture, but recognises that the GST increase affects everyone.

Table 1 – Structure of GST Credits

		Annual Value of Home
		$5,000 or less	More than $5,000 and up to $10,000	More than $10,000
Annual Assessable Income	$24,000 or less	$1,000 ($250 per year for 4 years)	$800 ($200 per year for 4 years)	$400 ($100 per year for 4 years)
	More than $24,000 and up to $100,000
	More than $100,000	$100 (for 1 year)

6.4 NSmen and NSFs, including those aged below 21, will also get an additional $100 of GST Credits, to recognise their contributions to national security. They will get their bonus GST Credits in the year that they qualify. So a person who becomes an NSF in 2008 or 2009 will also get the bonus GST Credits.

6.5 Singaporeans will have to sign up just once to qualify for all four years of GST Credits, though the amount they get will be assessed yearly based on their income and residence. The first instalment will be paid out on 1 July this year, at the same time as the GST increase.

Senior Citizens’ Bonus

6.6 I will give senior citizens more. Many of them will be concerned about the GST increase, because they have to meet living expenses out of their savings. We will therefore provide Singaporeans aged 55 and above with a Senior Citizens’ Bonus, as long as they have annual assessable incomes of $100,000 or less. Those aged 60 and above will get more, with amounts ranging from $1,000 for those in the lower-income group, to $400 for those who are better off. As with the GST Credits, the quantums will depend on their income and the annual value of their homes. Two-thirds of the Senior Citizens’ Bonus will be given in cash and one-third credited into their Medisave Accounts, on 1 July of each year. For example, a 65-year-old retiree living in a three-room flat will get $1,000 of Senior Citizens’ Bonus on top of the $1,000 he will get in GST Credits, making a total of $2,000 over four years. The Senior Citizens’ Bonus will cost the Government $400 million.

Table 2 –Structure of Senior Citizens’ Bonus

		Annual Value of Home
		$5,000 or less	More than $5,000 and up to $10,000	More than $10,000
Annual Assessable Income	$24,000 or less	Aged 55 – 59: $600 ($150 per year for 4 years) Aged 60 & above: $1,000 ($250 per year for 4 years)	Aged 55 – 59: $400 ($100 per year for 4 years) Aged 60 & above: $800 ($200 per year for 4 years)	Aged 55 -59: $200 ($50 per year for 4 years) Aged 60 & above: $400 ($100 per year for 4 years)
	More than $24,000 and up to $100,000

Top-ups to Post-Secondary Education Accounts

6.7 We must also help families with the costs of their children’s post-secondary education. As I mentioned earlier, we will open Post-Secondary Education Accounts (PSEA) for all Singapore citizen children aged from seven to 20 from next year. We will top up these accounts from time to time, when our surpluses allow, and give more to those who are less well-off. I will credit the accounts of those in secondary school or older with $400 in 2008, and another $400 in 2009. Those of primary school age will get less as they can get more PSEA top-ups in future years if we are able to share surpluses.

6.8 The PSEA top-ups will cost $400 million and benefit around 650,000 children.

Table 3 - Structure of PSEA Top-ups (each year)

Age of Child in Year of Payout	Annual Value of Home less or equal to $10,000	Annual Value of Home more than $10,000
7 to 12	$200	$100
13 to 20	$400	$200

Utilities-Save (U-Save), Service and Conservancy Charges (S&CC), and Rental Rebates

6.9 As part of the GST Offset Package, I will also extend the Utilities-Save, S&CC and Rental Rebates to eligible HDB households for five years, from 1 April 2007 to 31 March 2012. This will help low to middle-income households cope with increased household expenses due to the GST increase. The U-Save and S&CC rebates will also be extended to those living in HDB executive flats. These rebates will benefit 800,000 HDB households and cost a total of $800 million over five years.

Assistance for Low-Income Families with Young Children

6.11 To help lower-income families with young children, we will increase financial assistance for kindergarten and childcare. We will enhance the Kindergarten Financial Assistance Scheme (KiFAS) by increasing the level of subsidy from 75% of kindergarten fees to 90%, which means that low-income families will now be able to enjoy a subsidy of about $80 a month. Subsidies for the Centre-Based Financial Assistance Scheme for ChildCare (CFAC) will be increased by between $20 and $40 a month for each child. Other enhancements to the ComCare Fund programmes will be announced by MCYS later. These enhancements will cost a total of $6 million a year.

Assistance through Citizens’ Consultative Committees (CCCs), Self-Help Groups and VWOs

6.14 Although we have a comprehensive GST Offset Package, it is possible that some households may face additional difficulties. The best way to help them is through flexible assistance from their CCCs. I will therefore top up the CCC ComCare Fund by $5 million over five years. To help lower-income Singaporean families, the Government will also provide $2 million over five years to the Self-Help Groups, and $3 million over five years for Government-funded VWO programmes. More details will be announced by MCYS.

Additional Subsidies for Healthcare, Education and Service and Conservancy Charges

6.15 The Government will provide the restructured hospitals and polyclinics with more grants to fully absorb the additional GST on subsidised healthcare services. This will cost the Government an additional $12 million a year.

6.16 We will also absorb the GST payable on school and miscellaneous fees, as well as fees and tuition grants at ITEs, polytechnics and universities. This will cost an additional $40 million a year.

6.17 Town councils will also get an additional $10 million a year to absorb the additional GST payable on Service and Conservancy Charges.

Overall Impact of the GST Offset Package on Households

6.18 Let me summarise the overall impact of the GST Offset Package for Singaporean households. Most households will receive GST Credits, Senior Citizens’ Bonuses, PSEA top-ups, U-Save, S&CC and rental rebates, and property tax rebates. Taking these offsets alone, those living in four-room flats will receive benefits that are, on average, seven times the extra GST they will have to pay each year. In other words, seven years’ of offset. Even those in executive flats will receive four years’ worth of offset. The lowest-income households will receive the most — for instance, two-roomers will receive about 16 years’ worth. More details can be found in Annex E.

6.19 Take the example of an average Singaporean family living in a four-room flat. Husband, aged 42, earns $2,800 a month. His wife, aged 37, earns $1,000 a month. They spend most of their take-home pay, or about $3,000 a month. They will pay additional GST of $57 per month or $685 per year. The couple has two children, one in primary school and the other in secondary school. They will get a total of over $4,200 from the GST Offset Package — $1,700 in GST Credits[5], $790 of U-Save rebates, about $340 of S&CC rebates, $1,200 of PSEA top-ups, and $200 of property tax rebates. This will offset about six years of the GST increase. In addition, the couple will get about $340 more a year from increased CPF contributions. The wife will also qualify for $900 from the WIS scheme.

6.20 The GST Offset Package is therefore a substantial one that will help the majority of Singaporeans offset their increased GST costs for several years. Low-income households, in particular, will be well provided for through both the GST Offset Package and the WIS. Even after the GST offsets have been distributed, Workfare will provide significant support for low-income workers on a continuing basis. This is why the GST, which we are combining with Workfare, is not regressive. Lower-income workers will end up better off because of this — better off compared to before the GST increase and introduction of Workfare.

(7) CONCLUSION

Ready for the Future

7.2 Mr Speaker, Sir, this Budget is about our future. It will build on our strengths, enhance our capabilities, and provide opportunities for all Singaporeans to strive and succeed.

7.3 This Budget will sharpen Singapore’s competitive edge. We are reducing corporate tax, and providing an environment for enterprise to flourish. Singapore will become the best place to start and grow a business. We will invest in our people, enhance our infrastructure, and create a living environment that will inspire every Singaporean.

7.4 This Budget also strengthens our social security system. We are raising the employer CPF contribution rate to help our workers become more financially secure and to provide for their future medical, housing and retirement needs.

7.5 We are taking a bold new approach to help those at the lower end of our workforce. Their wages are being held down by globalisation. Our older workers, especially, find it difficult to secure jobs, and many lower-income households struggle to make ends meet. We will reduce their CPF contribution rates to help them stay employable and to increase their take-home pay. And we will supplement their incomes and savings through Workfare.

7.6 This Budget strengthens our revenues for the future. We are raising the GST to broaden our tax base. It will give us critical additional revenues that will enable us to improve our social security system, increase spending on health especially as our population ages, and ensure that our income taxes remain competitive.

7.7 To help Singaporeans adjust to the higher GST, we are providing a comprehensive offset package. Lower-income Singaporeans will receive much more than the extra GST they have to pay. The middle- and higher-income groups will also benefit from the offset package as well as from the higher employer contributions to their CPF. Most importantly, all Singaporeans will be better off because these decisive moves will grow our economy.

7.8 We are setting in place a strong and sustainable fiscal position. The GST increase will give us an additional $1.5 billion each year. Workfare will cost us about $400 million a year. Our increased health expenditures will amount to $300 million each year on average over the next five years, and more beyond that. Expanding continuing education opportunities for all Singaporeans will cost us at least $300 million extra each year in the long term. The corporate tax cut will cost us $800 million per year. The GST increase will help us to finance these initiatives. But we also need to use more of the investment income from our reserves. The additional income from our reserves, together with the increased GST revenues, will give us the resources to enhance our social security system, invest in new capabilities, further sharpen our competitiveness, and meet the challenges of the future from a position of strength.

7.9 Mr Speaker Sir, we have every reason to be confident about our future. Globalisation is playing to Singapore’s strengths — our openness to the world, our responsiveness to change, our reputation for trust. But what will ultimately determine our success is our people’s spirit of enterprise, resilience, and self-reliance. Even as we bolster our system of social support, we must keep these values strong in our society.

7.10 Many Singaporeans bear testimony to these values. Like Mabel Ong, now in her mid-fifties. She did not get beyond primary school, but she has always worked. First as a seamstress for many years in garment factories, until her mid-forties when her eyesight deteriorated and she found it harder to sew clothes. She then started working at hotels, as a valet, delivering laundry to hotel guests, and as a food server in restaurants. Two years ago, she took up a friend’s recommendation and started work at the Oriental Hotel, checking and issuing mini-bar items for rooms. She does every type of work she can; during lull periods, she volunteers to help out at the linen department. She has also been going for courses, so that she can take on new responsibilities. Recently, the hotel promoted her into a new position they created — ‘Mini-bar Supervisor’. As Mabel sums it up in her own words, “Whatever I can do, I will do. And whatever I do, I will try to do well.”

7.11 That is the Singapore spirit — can do, will do, do well. This is why we will succeed and this is why our future will be bright and prosperous.

Mr Speaker, Sir, I beg to move.

ANNEX A: Budget 2007 Tax Changes

General Tax Changes

Name of Tax Change	Current Treatment	New Treatment
Reduction in Corporate Tax Rate	Currently, the corporate tax rate is 20%.	The corporate tax rate will be reduced to 18% with effect from year of assessment (YA) 2008. In line with the reduction in corporate tax rate to 18%, the following tax rates which are presently pegged at 20% will also be correspondingly reduced to 18% with effect from YA 2008: (a) tax rate for non-resident persons [other than non-resident individuals and non-resident Hindu joint family, which will remain at 20%]; (b) rate at which tax is withheld for payments (other than those subject to the 10% or 15% final withholding tax) to non-resident persons other than non-resident individuals/ Hindu joint family; (c) tax rate for trustees (other than trustees of incapacitated persons) and executors; (d) rate of deduction of tax from Singapore franked dividend paid during the period from 1 January 2007 to 31 December 2007[6]; (see next item) (e) rate of tax to be used to compute the effective company tax rate for a body of persons.
One-tier Corporate Tax System/ Payment of Singapore Franked Dividends in 2007	A) The one-tier corporate tax system took effect on 1 January 2003. Companies were given five years from that date till 31 December 2007 to use up their unutilized section 44A tax credits to frank dividends. After 31 December 2007, the unutilized balances will be nullified. To mitigate the adverse effects of the one-tier corporate tax system, we also introduced concessions that effectively allowed the interest expense attributable to one-tier exempt dividends to be deducted while companies restructured their operations. These concessions are available up to 31 December 2007. B) Currently, the rate of deduction of tax from Singapore franked dividends is 20%.	A) In order to preserve what is seen as a consistent and fair regime and to reinforce our intention to move to the one-tier corporate tax system as soon as possible, there will not be further extension to the five-year transitional period for: i) utilization of section 44A tax credits; ii) transitional concessions; and iii) utilization of section 44 charges. B) With the reduction in corporate tax rate, the rate of deduction of tax from Singapore franked dividends for 2007 will be 18%. Despite the reduction of corporate tax rate, the tax rate for non-resident individuals/ Hindu joint family will remain at 20%. This is to align with the top marginal tax rate for resident individuals/ Hindu joint family. Hence, when a non-resident individual/ Hindu joint family receives a Singapore franked dividends for the year 2007 (which has tax deducted at source at the rate of 18%), the franked dividend received is to be subjected to tax at 20%. The company paying the franked dividends would be required to withhold and remit 2% of the gross dividends to the Comptroller of Income Tax. To alleviate the administrative burden of companies that remain on the imputation system for the purpose of paying franked dividends, the rate of tax on franked dividends received by non-resident individuals/ Hindu joint family will be reduced to 18% of the gross amount of such dividends. This reduced tax rate of 18% will be a final tax. However, in recognition that non-resident individuals/ Hindu joint family may claim expenses incurred to earn the income from Singapore, non-resident individuals/ Hindu joint family are allowed the option to be taxed at 20% of net dividends instead of 18% of gross dividends.
Tax Deduction for Borrowing Costs	Generally, deduction of an expense is allowed if the expense is revenue in nature and is incurred in the production of income. In the case of borrowings used to acquire a capital asset, and where the capital asset is used to acquire income, only the interest cost is currently deductible under section 14(1)(a) against the income generated from the capital asset. Other borrowing costs associated with such borrowings do not qualify for any tax deduction.	Specified borrowing costs, other than interest, which are incurred on a borrowing that is used to acquire a capital asset used to produce income will be deductible for tax purposes, provided these costs are paid as a substitute for interest or to reduce interest costs. The tax change will take effect from YA2008. IRAS will release more details by May 2007.
Increase in Partial Tax Exemption Threshold	Currently, 75% of the first $10,000 of normal chargeable income (excluding Singapore franked dividend), and 50% of the next $90,000 of a company is tax exempt. This Partial Tax Exemption (PTE) scheme is generally available to all companies.	The threshold for PTE will be increased to $300,000, as follows: · 75% exemption of up to the first $10,000 of normal chargeable income (excluding Singapore franked dividend); and · 50% exemption of up to the next $290,000 of normal chargeable income (excluding Singapore franked dividend). This tax change will take effect from YA2008.
Lifting the Sunset Clause for the Income Tax Exemption Scheme for New Companies	Full income tax exemption is granted on the normal chargeable income (excluding Singapore franked dividend) up to $100,000, for tax resident exempt private companies (EPCs) incorporated in Singapore. The tax exemption scheme is currently applicable to the new company’s first three consecutive YAs falling within YAs 2005 to 2009.	The sunset date of YA2009 is lifted. Tax resident EPCs incorporated in Singapore will hence be granted tax exemption on their normal chargeable income up to $100,000 for the full three consecutive YAs regardless of whether any of these first three YAs falls beyond YA 2009.
Extension of Section 15 Stamp Duty Relief	Section 15 Stamp Duty Relief is only available to intra-group transfers of assets involving companies with limited liability and registered business trusts.	Section 15 Stamp Duty Relief on intra-group transfers will be extended to unlimited companies, Limited Liability Partnerships (LLPs) where all the partners are companies and Statutory Boards. IRAS will be issuing a guide on the new treatment in February 2007.
Accelerated Depreciation Allowance for Replacement of Pre-Euro IV Diesel Goods Vehicles and Buses	Currently, capital expenditure incurred on new diesel driven goods vehicles and buses that replaced old ones that were registered before 1 January 1991 are allowed to be written-off in one year instead of over three or six years under section 19A(9) of the Income Tax Act (ITA). However, capital expenditure incurred on diesel driven goods vehicles and buses meeting the new Euro-IV emission standard that replace existing pre Euro IV vehicles registered on or after 1 January 1991 are allowed to be written-off over either three or six years.	New goods vehicles and buses acquired to replace the old ones that do not meet with the new Euro- IV emission standard and which were registered on or after 1 January 1991 will qualify for one-year write-off for income tax purposes. The incentive will be granted for five years and will take effect for new vehicles registered from 15 February 2007 to 14 February 2012.
Extension of Section 19B Writing Down Allowance	No writing down allowance will be given for any capital expenditure incurred to acquire intellectual property rights by any company after 31 Oct 2008.	The writing down allowance concession for acquired intellectual property rights will be extended by another five years, till 31 October 2013.
Enhancement to Investment Allowance Scheme	Currently, under the Investment Allowance (IA) scheme administered by SPRING and EDB, the maximum qualifying period (i.e. period within which the fixed capital expenditure must be incurred in order to qualify for the IA) is five years from the investment day specified in the certificate issued. For companies that purchase equipment on hire purchase, any capital expenditure incurred (i.e. hire purchase instalments made) beyond the qualifying period will not qualify for the IA.	The maximum qualifying period for companies that purchase equipment on hire purchase would be extended from five years to eight years. This change will take effect for equipment purchased on or after 15 February 2007.

Legal Services

Name of Tax Change

Current Treatment

New Treatment

International Arbitration Tax Incentive

N.A.

Approved law firms will be granted a 50% income tax exemption on qualifying incremental income derived from international arbitration work.

This scheme will be available from 1 July 2007 to 30 June 2012. The incentive duration will be up to five years.

The Ministry of Law will release further details by May 2007.

Financial Services

Name of Tax Change	Current Treatment	New Treatment
Enhancements to the Tax Exemption Schemes for Income from Funds Managed for Foreign Investors	Tax exemption is granted on specified income derived by a foreign investor from funds (both resident and non-resident) managed by any fund manager in Singapore in respect of designated investments.	With effect from 15 February 2007, the list of designated investments will be expanded to include the following: a) qualifying loans; b) commodity derivatives (both over-the-counter and exchange-traded) and physical commodities where: - the trade volume of physical commodities do not exceed 15% of the total trade volume of commodity derivatives and physical commodities for each year of assessment throughout the incentive period; and - the trading of physical commodities is in connection with and incidental to any related commodity derivatives trading. Specified income derived on or after 15 February 2007 by a foreign investor from the types of designated investments stated in paragraphs (a) and (b) will be tax exempt. In addition, the tax exemption schemes will also be expanded to cover Collaterised Debt/Loan Obligations. MAS will release details by May 2007.
Enhancement to Financial Sector Incentive (FSI)	Fees and commissions derived by a FSI-(fund management) company or FSI-(standard-tier) company from the following activities are taxed at a concessionary tax rate of 10%: a) managing the funds of foreign investors for the purpose of designated investments; b) providing investment advisory services to foreign investors in relation to designated investments; and c)arranging on behalf of foreign investors any loan of designated securities under a securities lending arrangement in writing to another FSI(fund management) company or FSI (standard-tier) company.	Fees and commissions derived on or after 15 February 2007 by a FSI (fund management) company or FSI (standard-tier) company from providing investment advisory services in relation to a foreign investor or to a foreign fund manager under a fund delegation arrangement will qualify for the concessionary rate of tax of 10%. MAS will release details by May 2007
Enhancements to the Finance and Treasury Centre (FTC) incentive	An approved FTC is granted a concessionary tax rate of 10% on its income derived from the provision of qualifying services to its approved offices and approved associated companies, and from qualifying activities carried out on its own account.	With effect from 15 February 2007, the list of FTC qualifying activities will be expanded to include transacting and investing in the units in any qualifying unit trust. For the purposes of the scheme, a qualifying unit trust is one which engages wholly in qualifying activities that an FTC can carry out on its own account under the FTC incentive. MAS will release details by May 2007.
Extension of the tax exemption on Over-The-Counter (OTC) Financial Derivative Payments made to a non-resident	Tax exemption is granted on payments related to financial derivatives in any currency that are traded over-the-counter, made to persons who are neither residents of nor permanent establishments in Singapore. The exemption applies to payments which – a) a financial institution ^{^[7]} (“FI”) in Singapore is liable to pay to non-residents from 27 February 2004 to 19 May 2007 (both dates inclusive); and b) an approved special purpose vehicle which engages in asset securitisation transaction is liable to pay to non-residents from 27 February 2004 to 19 May 2007 (both dates inclusive) .	Changes for - a) Financial Institutions The tax exemption will be extended by another five years to 19 May 2012. In addition, tax exemption will be applied to all payments made on contracts which are entered into from 15 February 2007 to 19 May 2012 (both dates inclusive). The tax exemption will apply to OTC financial derivative payments made by FIs to non-residents for the entire duration of such contracts. b) Approved Special Purpose Vehicle (“ASPV”) The tax exemption will be extended to 31 December 2008, to coincide with the expiration of the ASPV scheme. The tax exemption will be applied on a contract basis i.e. for contracts entered into during the period from 15 February 2007 to 31 Dec 2008 (both dates inclusive). The tax exemption will apply to OTC financial derivative payments made by an ASPV to non-residents for the entire duration of the contracts. MAS will release details by May 2007.
Enhancement to Qualifying Debt Securities Scheme	The Qualifying Debt Securities Scheme accords tax exemption or concessionary tax rates on interest and discount derived by investors from Qualifying Debt Securities, subject to conditions.	With effect from 15 February 2007, the Qualifying Debt Securities Scheme will accord tax exemption or concessionary tax rates on prepayment fee, redemption premium and break cost that are derived by investors from Qualifying Debt Securities, subject to conditions. This is applicable to all Qualifying Debt Securities issued on or after 15 February 2007. MAS will release details by May 2007.

Name of Tax Change

Current Treatment

New Treatment

Enhancements to the Tax Exemption Schemes for Income from Funds Managed for Foreign Investors

Tax exemption is granted on specified income derived by a foreign investor from funds (both resident and non-resident) managed by any fund manager in Singapore in respect of designated investments.

With effect from 15 February 2007, the list of designated investments will be expanded to include the following:

a) qualifying loans;

b) commodity derivatives (both over-the-counter and exchange-traded) and physical commodities where:

- the trade volume of physical commodities do not exceed 15% of the total trade volume of commodity derivatives and physical commodities for each year of assessment throughout the incentive period; and

- the trading of physical commodities is in connection with and incidental to any related commodity derivatives trading.

Specified income derived on or after 15 February 2007 by a foreign investor from the types of designated investments stated in paragraphs (a) and (b) will be tax exempt.

In addition, the tax exemption schemes will also be expanded to cover Collaterised Debt/Loan Obligations.

MAS will release details by May 2007.

Enhancement to Financial Sector Incentive (FSI)

Fees and commissions derived by a FSI-(fund management) company or FSI-(standard-tier) company from the following activities are taxed at a concessionary tax rate of 10%:

a) managing the funds of foreign investors for the purpose of designated investments;

b) providing investment advisory services to foreign investors in relation to designated investments; and

c)arranging on behalf of foreign investors any loan of designated securities under a securities lending arrangement in writing to another FSI(fund management) company or FSI (standard-tier) company.

Fees and commissions derived on or after 15 February 2007 by a FSI (fund management) company or FSI (standard-tier) company from providing investment advisory services in relation to a foreign investor or to a foreign fund manager under a fund delegation arrangement will qualify for the concessionary rate of tax of 10%.

MAS will release details by May 2007

Enhancements to the Finance and Treasury Centre (FTC) incentive

An approved FTC is granted a concessionary tax rate of 10% on its income derived from the provision of qualifying services to its approved offices and approved associated companies, and from qualifying activities carried out on its own account.

With effect from 15 February 2007, the list of FTC qualifying activities will be expanded to include transacting and investing in the units in any qualifying unit trust. For the purposes of the scheme, a qualifying unit trust is one which engages wholly in qualifying activities that an FTC can carry out on its own account under the FTC incentive.

MAS will release details by May 2007.

Extension of the tax exemption on Over-The-Counter (OTC) Financial Derivative Payments made to a non-resident

Tax exemption is granted on payments related to financial derivatives in any currency that are traded over-the-counter, made to persons who are neither residents of nor permanent establishments in Singapore. The exemption applies to payments which –

a) a financial institution ^{^[7]} (“FI”) in Singapore is liable to pay to non-residents from 27 February 2004 to 19 May 2007 (both dates inclusive); and

b) an approved special purpose vehicle which engages in asset securitisation transaction is liable to pay to non-residents from 27 February 2004 to 19 May 2007 (both dates inclusive) .

Changes for -

a) Financial Institutions

The tax exemption will be extended by another five years to 19 May 2012.

In addition, tax exemption will be applied to all payments made on contracts which are entered into from 15 February 2007 to 19 May 2012 (both dates inclusive). The tax exemption will apply to OTC financial derivative payments made by FIs to non-residents for the entire duration of such contracts.

b) Approved Special Purpose Vehicle (“ASPV”)

The tax exemption will be extended to 31 December 2008, to coincide with the expiration of the ASPV scheme.

The tax exemption will be applied on a contract basis i.e. for contracts entered into during the period from 15 February 2007 to 31 Dec 2008 (both dates inclusive). The tax exemption will apply to OTC financial derivative payments made by an ASPV to non-residents for the entire duration of the contracts.

MAS will release details by May 2007.

Enhancement to Qualifying Debt Securities Scheme

The Qualifying Debt Securities Scheme accords tax exemption or concessionary tax rates on interest and discount derived by investors from Qualifying Debt Securities, subject to conditions.

With effect from 15 February 2007, the Qualifying Debt Securities Scheme will accord tax exemption or concessionary tax rates on prepayment fee, redemption premium and break cost that are derived by investors from Qualifying Debt Securities, subject to conditions. This is applicable to all Qualifying Debt Securities issued on or after 15 February 2007.

MAS will release details by May 2007.

Growing Singapore as a Philanthropy Hub

Name of Tax Change

Current Treatment

New Treatment

1) Income Tax exemption for Registered Charities

2) Double tax deductions for donors to foundations and grantmakers

1) Charities are required to spend at least 80% of their annual receipts on charitable objects in Singapore within two years in order to be exempt from income tax.

2) Individuals and companies can obtain double tax deductions (DTD) for donations to organisations with Institutions of Public Character (IPC) status.

1) Registered charities will enjoy income tax exemption without having the need to meet the 80% spending rule.

2) Individuals and companies that donate to foundations and grantmakers will be eligible for double tax deductions, if the donations are channeled to Institutions of Public Character in Singapore within a specified timeframe.

Details will be announced by September 2007.

Tax Exemption Scheme for Not-for-Profit Organisations (NPOs)

N.A.

NPOs approved by Economic Development Board (EDB) will be granted income tax exemption for an initial period of not more than 10 years. The incentive may be renewed subject to approval by EDB.

Eligible NPOs will include those that promote the economic development of Singapore, such as standards organizations and research bodies.

The scheme takes effect from 15 February 2007.

Logistics, Maritime and Aviation Services

Name of Tax Change	Current Treatment	New Treatment
Enhancement to the Approved Shipping Logistics Enterprise Scheme (ASL)	Ship agencies, ship management companies and shipping logistics companies under the Approved Shipping Logistics Enterprise Scheme (ASL) are granted a 10% concessionary tax rate on qualifying income for a period of five years.	The incentive period for ASL companies will be extended from five years to ten years with effect from 15 February 2007. MPA will release details by May 2007.
Enhancement to the Approved Aircraft Leasing Scheme (ALS)	Aircraft leasing companies which are approved under the ALS enjoy a concessionary tax rate of 10% for a period of five years on income from offshore leasing of aircrafts. The 10% concessionary tax rate is also granted on income derived from the performance of ancillary activities such as: a) Management of aircraft leases. b) Advisory and agency services relating to the sale of leasing of aircraft.	With effect from 1 March 2007 to 29 February 2012, the ALS will be enhanced as follows: a) Grant a concessionary tax rate of 5% (in addition to existing 10% rate) on qualifying lease income for a period of five years; b) Extend the concessionary tax rates to registered business trust or an approved company under an aircraft or aircraft engine financing arrangements. c) Expand the scope of income qualifying for the concessionary tax rate to include: i) income from leasing of aircraft engines; and ii) income from leasing of aircraft or aircraft engines to any person in Singapore i.e. onshore leasing. Details will be released by EDB by May 2007.
Zero-rating of GST for servicing, sale and lease of containers. ['servicing' refers to repairs, maintenance and management services of containers]	The supply of servicing, sale and lease of air and sea containers can only be zero-rated if the customer is foreign-based and the containers will be shipped overseas to a specific destination. The problem is that the customer may not know where his container will be shipped at the point of billing. Furthermore, local customers have to pay GST even though the containers will eventually be used for international transportation of goods.	Given that sea or air containers are primarily used for the international transportation of goods, the supply of servicing, sale and lease of containers are recognised as international services and therefore qualify for zero-rating. Thus, both foreign and local customers will not pay any GST. The tax treatment will take effect from 1 April 2007. IRAS will be issuing a guide on the new treatment in March 2007.

[1] Workers above 45 years of age, earning between $500 and $1,000 inclusive, will receive $1,200 in total WIS, which translates to a 10%-20% increase in annual income.

[2] Those with a net trade income of below $6,000 are not currently required to contribute to Medisave. However they are encouraged to do so voluntarily.

[3] Estimated numbers by imposing the housing AV criterion.

[4] This refers to those living in flats with AV of $5,000 or less. It covers virtually all HDB residents in one- to three-room flats.

[5] This includes the $100 NS component for the husband.

[6] With the reduction in the corporate tax rate, the rate at which credit is granted for franked dividends under section 46(1)(a) of the Income Tax Act shall not exceed 18%. Where tax on franked dividends paid in 2007 has been deducted at 20%, the net dividends received by the shareholder is deemed to have been paid without deduction of tax and will be grossed-up at the rate of 18% to determine the gross dividends assessable to tax. The difference between the amount of tax deducted at 20% from such dividends and the tax deemed to be so deducted will be credited to the 44A balance of the company declaring the dividends and will be available for franking future dividends before 31 December 2007.

[7] A financial institution refers to any institution licensed or approved by the MAS, or exempted from such licensing or approval under any Act administered by the MAS, and includes an institution approved as a Finance and Treasury Centre under Section 43G of the Income Tax Act (Cap 134).

[8] Illustration for employees aged 50 and below.

[9] Illustration for employee aged above 35 to 50.

§ Surplus/(Deficit) before Special Transfers and Net Investment Income Contribution.
^@This includes grants to Citizens’ Consultative Committee (CCC), ComCare Fund, Self-Help Groups (SHGs) and Public Transport Fund.

	Current ($)	New ($)	Difference ($)
Employee CPF	160	132	-28
Employer CPF	104	77	-27
WIS Cash (monthly)	-	29	29
WIS CPF (monthly)	-	71	71
Take-home Pay	640	697	57
Total CPF Contributions	264	280	16
Total Income	904	977	73

Employer Savings ($)	27
Total WIS ($)	100

	Current ($)	New ($)	Difference ($)
Employee CPF	200	180	-20
Employer CPF	130	117	-13
WIS Cash (monthly)	-	29	29
WIS CPF (monthly)	-	71	71
Takehome Pay	800	849	49
Total CPF Contributions	330	368	38
Total Income	1,130	1,217	87

Employer Savings ($)	13
Total WIS ($)	100

	Current ($)	New ($)	Difference ($)
CPF Contributions	80	28	-52
WIS CPF (monthly)	-	67	67
Takehome Pay	920	972	52
Total CPF Contributions	80	95	15
Total Income	1,000	1,067	67

Total WIS ($)	67

HS code	Product Description	Current Duty Rates		New Duty Rates
HS code	Product Description	Customs Duty	Excise Duty	Customs Duty	Excise Duty
22030010	Stout & porter	$1.70 per litre	$3.70 per litre	$16 per litre of alcohol	$48 per litre of alcohol
22030090	Beer & ale	$0.80 per litre	$2.70 per litre	$16 per litre of alcohol	$48 per litre of alcohol

	HDB 1 Room	HDB 2 Room	HDB 3 Room	HDB 4 Room	HDB 5 Room	HDB Exec	Private Houses and Flats
Annual Household Income from work ($) ¹	7,630	13,220	32,770	48,840	71,160	90,510	140,200
Additional GST Payable Annually ($) ²	240	320	500	690	870	1,030	1,090
Total Benefits from GST Offset Package (over 5 years) ($) ³	3,880	4,110	3,940	4,030	3,750	3,550	1,590
Number of Years of Additional GST Payable that is offset by the GST Offset Package	19	16	10	7	5	4	2

	Revised FY2006	Estimated FY2007	Change over Revised FY2006
	$billion	$billion	$billion	%
OPERATING REVENUE	30.00	32.36	2.36	7.9
Corporate Income Tax	8.25	8.40	0.15	1.9
Personal Income Tax	4.68	5.16	0.48	10.2
Statutory Boards’ Contributions	0.96	1.36	0.41	42.6
Assets Tax	2.03	2.09	0.06	2.8
Customs and Excise Taxes	1.95	1.96	0.01	0.4
Goods and Services Tax	3.93	4.85	0.92	23.4
Motor Vehicle Related Taxes	1.65	1.74	0.09	5.7
Vehicle Quota Premiums	0.08	0.26	0.18	240.4
Betting Tax	1.57	1.62	0.05	3.0
Other Taxes	2.81	2.83	0.01	0.4
Other Fees and Charges	1.95	1.94	(0.01)	(0.7)
Others	0.14	0.16	0.01	10.5

Less:
TOTAL EXPENDITURE	30.55	33.00	2.45	8.0
Operating Expenditure	24.43	25.88	1.45	5.9
Development Expenditure	6.12	7.12	1.00	16.4

PRIMARY SURPLUS/(DEFICIT)§	(0.55)	(0.64)

Less:
SPECIAL TRANSFERS	3.58	2.07	(1.51)	(42.1)
GST Credits	-	0.53
National Research Fund	0.50	0.50
Workfare Income Supplement Scheme	-	0.20
Top-ups to Post-Secondary Education Account	-	0.20
U-Save Scheme	0.06	0.15
Senior Citizens’ Bonus	-	0.10
S&CC and Rental Rebates	0.04	0.08
Other GST offset measures^@	-	0.01
Growth Dividends	1.37	-
Top-ups to CPF Accounts	0.48	-
Workfare Bonus Scheme	0.40	-
40^th Anniversary NS Bonus	0.20	-
Economic Restructuring Shares	0.08	-
Top-up to Opportunity Fund	0.05	-
Top-up to ComCare Fund	0.10	-
Top-up to Medifund	0.10	0.20
Top-up to ElderCare Fund	0.10	-
Top-up to Lifelong Learning Fund	0.10	0.10

Add:
NET INVESTMENT INCOME CONTRIBUTION	2.84	2.02	(0.83)	(29.0)
OVERALL BUDGET SURPLUS/(DEFICIT)	(1.28)	(0.69)

1.1 Our economy has done well. It grew by 7.9% in 2006. Both our manufacturing and services sectors did well. Asset management in financial services is booming. The construction sector is seeing a resurgence.

1.8 Overall, I expect the Singapore economy to grow by a healthy 4.5% to 6.5% this year, riding on the momentum of strong growth in the last three years.

Globalisation is Working to Singapore’s Advantage

2.3 Businesses large and small, home grown and foreign, are taking advantage of Singapore’s strengths, and using Singapore to ride the next wave of Asian growth.

2.8 Bob Chandran, Johan Karlstedt and the many others like them are here because we are a compelling home for enterprise and for families.

2.9 Not only is the world coming to Singapore, Singaporeans are seizing opportunities abroad. Globalisation is working to the advantage of Singapore companies.

Singapore’s Response – Growth with Opportunity for All

2.27 We will therefore raise additional revenues by extracting more income from our reserves and increasing the GST. Because we are doing this now when the economy is doing well, we are able to provide a very comprehensive set of measures to help Singaporeans cope with the GST increase.

2.28 This Budget is therefore about preparing Singapore for the future and for the world. It ensures that we retain our dynamism as an economy while we take significant steps forward to preserve an inclusive society. It sets out the key changes we must make to:

(a) Build capabilities for the future;

(b) Strengthen our social security system;

(c) Reduce direct taxes and raise additional revenues, including GST;

(d) Provide Singaporeans with an offset package for the GST increase.

3.1 To build new capabilities for the future,

(a) We will invest in our people to maximise their potential.

(b) We will invest in R&D to move our economy up the value curve.

(c) We will make Singapore the best place to start and grow a business.

(d) We will make Singapore a centre for “high trust” services.

(e) We will invest in economic infrastructure to meet the business needs of tomorrow.

(f) We will transform our city and living environment to build the best home for Singaporeans.

3.2 Central to our strategy is our people. Every Singaporean plays a crucial role in an innovation-driven economy. Education and continuous learning will thus remain a top priority of the Government.

3.11 Next, we will implement more Place and Train programmes, to help workers renew their skills and secure new jobs. The training will cover all segments of the workforce, from the unemployed, to operations staff, to supervisors, craftsmen, professionals and managers.

3.15 Our second area of focus is to invest in R&D, to build up new capabilities that will help drive our economy over the long-term. We plan to invest 3% of our GDP on R&D annually by 2010 up from 2.4% in 2005.

Making Singapore the Best Place to Start, Grow and Globalise Businesses

3.23 Dextrans and Heulab are part of a new generation of local firms, fleet-footed, unafraid to venture out to the world early, and at the leading edge of technology.

3.35 I will also enhance our tax incentives relating to Finance and Treasury Centres, OTC financial derivatives, and Qualifying Debt Securities. Details are in Annex A.

3.41 Logistics, maritime and aviation services are key to Singapore’s connectivity and our role as a global business hub. We will develop these capabilities further.

3.42 To encourage shipping logistics companies to grow their activities in Singapore, we will enhance the Approved Shipping Logistics (ASL) Enterprise Scheme by extending the incentive period from five years to 10 years.

3.44 I will also expand the scope of GST zero-rating for international maritime and aviation services so that logistics companies here will pay zero GST when they incur expenses to service, buy or lease containers in Singapore.

3.45 Details of these tax changes are in Annex A.

3.46 We have to invest in our economic infrastructure to position Singapore for the next 15 years of our development. These are major investments which will help support the growth of our high-value manufacturing and services economy, and catch the next wave of emerging industries.

3.50 Alternative Energy is an emerging growth industry. The global Alternative Energy market is projected to grow by 10 times, to US$300 billion, by 2015. We will seek to participate in this emerging industry, in areas where Singapore can be competitive.

3.52 For Singapore to stand out as a global city, however, we cannot be just an economic marketplace. We must have a living environment that is the best in Asia — a city that exudes our own Singapore brand of vibrancy and diversity.

3.56 We will transform Marina Bay into a vibrant live-work-play destination with distinctive architecture, lush greenery, public spaces and a pedestrian promenade that will encircle the entire Bay. Our established city areas like Orchard Road, Bugis and Bras Basah will also be enhanced.

4.6 The increase in CPF will apply to all Singaporean workers, except for the group of workers who earn $1,500 or less and are also above 35 years old. For this group of workers, we will need a different approach.

Globalisation is Working to *Singapore’s Advantage***

Singapore’s Response – Growth with Opportunity *for All***