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Economists mixed on fiscal outlook for FY2023 Budget; UOB sees 0.8% deficit while RHB forecasts 1.0% surplus

Bryan Wu
Bryan Wu • 6 min read
Economists mixed on fiscal outlook for FY2023 Budget; UOB sees 0.8% deficit while RHB forecasts 1.0% surplus
Singapore budgeted a 0.5% deficit of GDP or $3.037 billion for FY2022.
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Economists are mixed on Singapore’s FY2023 Budget announcement on Feb 14, forecasting different surplus or deficit levels of gross domestic product (GDP) for Singapore’s FY2023 fiscal outlook.

For FY2022 ending March, economic growth slowed in 2H2022, with manufacturing the main drag. Despite this factor, Singapore’s overall GDP growth came in at 3.8% in 2022, down from 7.6% in 2021 — ahead of the official forecast of “around 3.5%”.

As such, UOB’s head of research Suan Teck Kin and senior economist Alvin Liew say Singapore’s overall budget position in FY2022 could turn out to be balanced instead of the budgeted small deficit of $3.037 billion or 0.5% deficit of GDP.

This will likely be due to materially higher operating revenue, estimated at $86.2 billion, up 5.4% from the $81.75 billion budget for FY2022, while assuming little change to total expenditure budgeted at $102.4 billion for FY2022. They note that there would likely be an increase in special transfers due to the $1.4 billion boost to the Assurance Package to $8 billion in November 2022.

Accounting for the three largest operating revenue components — corporate income tax, personal income tax and Goods and Services Tax (GST) — based on the operating revenue and expenditure data that is available up to first half of FY2022, the UOB team is expecting FY2022 to report a balanced fiscal position at 0% of GDP, with a marginal surplus of less than $4 million, instead of the budgeted 0.5% deficit.

However, RHB Group senior economist Barnabas Gan says he expects the government’s forecast of 0.5% deficit of GDP to materialise. He notes that as of 1HFY2022 ended September 2022, total revenue was 60.9% of the expected $81.8 billion cited in FY2022 Budget. This is compared to 64.0% in 1HFY2021, and significantly higher compared to 1HFY2019 and 1HFY2020’s levels.

See also: Budget 2023 offers near-term help but maintains fiscal discipline and active wealth distribution

“Total expenditure as of 1HFY2022 touched merely 30.6% of the expected spending of $102.4 billion. We believe that the government’s nominal GDP assumption of approximately $607.4 billion will be met, considering Singapore’s real GDP growth of 3.8% and inflation of 6.1% for the whole of 2022,” reasons Gan.

FY2023 forecast

For FY2023 beginning April, UOB’s Suan and Liew say the slower, more uncertain external environment is a key factor in our consideration as we anticipate economic growth to slow further this year, thus dragging down the potential for revenue collection while keeping up the pressure on government expenditure.

See also: A budget to secure Singapore's future

They are projecting that the government could budget for a 0.8% fiscal deficit in the upcoming Budget announcement, an expansionary budget in response to an uncertain global environment amid still elevated inflation.

“For the upcoming 2023 Budget, we think the government will be caught in a bit of a bind. To combat the high inflation, there was a sharp ramp up in global interest rates led by developed markets (DM) central banks for most of 2022. As a result of the series of synchronised DM rate hikes, global economic outlook is set to be weaker in 2023 with the main driving force being the aggressive pace of monetary policy tightening led by the US Federal Reserve (Fed) and major central banks to tame high inflation,” they say.

According to them, clear signs have emerged of a global growth slowdown, raising investors’ worries of a more protracted recessionary downdraft. Global manufacturing purchasing managers index (PMIs) across China, the US and the Eurozone have all started to contract. Similarly, Asian export growth, including Singapore’s, has also started to contract since late 2022.

“Singapore’s economy is closely linked to and heavily dependent on economic and market conditions in other countries. And bearing the brunt of the negative global outlook, will be Singapore’s manufacturing sector and trade-related industries,” they explain.

They maintain their forecast for Singapore’s manufacturing to contract by 5.4% in 2023 due to the faltering outlook for electronics and weaker external demand. “Our 2023 outlook is largely premised on broad moderation in external economies this year, and we project the US and European economies (which are key end markets for Singapore) to enter a recession this year amid aggressive monetary policy tightening stance among these advanced economies,” say Suan and Liew.

“This will directly impact the manufacturing and external-oriented services sectors, which is reflected by the continued slide in Singapore’s headline and electronics PMIs with more PMI weakness to be expected in the coming months,” they add.

They also expect cracks in the export outlook to become more visible now with consecutive and deeper y-o-y contractions, and that Singapore is likely to see “a few more months” of y-o-y declines in non-oil domestic exports (NODX) for 1H2023 before improving in the second half of the year. Full year NODX is expected to contract by 5.5% in 2023, they say.

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With the weaker 2023 manufacturing outlook and barring external events, such as escalating war in Europe and a deadlier variant of Covid-19, they have kept their conservative 2023 GDP growth forecast of 0.7% — closer to the lower end of the official forecast range of 0.5% to 2.5%.

The way RHB’s Gan sees it, however, market fears over a global recession are “overdone”. He maintains that US and Asia’s GDP growth will slow to around trend instead of entering a deep and prolonged recession in 2023. His peak Fed fund rate (FFR) forecast remains unchanged at 5.00% to 5.25% in 2023 with no cuts expected in 2023, compared to current market expectations of a peak of around 4.9% in 1H2023, followed by around a 50 basis points (bps) cut in 2H2023.

Gan is forecasting Singapore’s GDP growth at 3.0% in 2023. “In line with our proprietary leading GDP model, we expect Singapore’s growth momentum to decelerate into 1H2023 before stabilising in 2H2023,” he says.

He sees three key drivers for the slowdown: the decline in global trade demand, which is expected to persist over the next 3 to 6 months, that could subsequently be a drag on manufacturing activities, especially in electronics and chemicals, even as tighter US monetary policies dampen risk appetite.

“Beyond the external-facing industries, we think Singapore’s services sector will likely underpin GDP’s growth especially in 2H2023 — further recovery in air travel and international visitor arrivals will uplift transport and tourism-related sectors such as aviation, retail and F&B,” says Gan.

He notes that revenue for the fiscal year will likely be underpinned by the increase in GST rates of 1 percentage point to 8.0%, effective as of Jan 1, and estimates that the increase in GST rates will translate into additional revenue of $1.8 billion for FY2023 or around 0.7% of GDP. “We see that higher GST rates have little impact on consumer expenditure and overall growth, while the higher government revenue will go a long way to finance Singapore’s medium-to-long term goals. Given the slowdown expected in 1HFY2023, we think that some downside risks to corporate income tax may be seen over the same period, although this may prove to be temporary as growth momentum improves into 2HFY2023.”

Overall, Gan expects FY2023 government revenue to increase to $87.2 billion, a 6.6% y-o-y increase, from $81.8 billion in FY2022, led by the higher GST, stamp duty and personal income tax contributions.

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