Singapore unveils $13.7bn stimulus package

Singapore on Thursday unveiled a record S$20.5bn ($13.7bn) stimulus package to provide an economic safety net as the wealthy city-state enters its worst post-war recession, with growth expected to contract by up to 5 per cent this year.

”The resilience package will not get us of recession. But it will help avert an even sharper downturn and more lasting damage to the economy,” said Tharman Shanmugaratnam, the finance minister.

The main aim of the programme is to save jobs and prevent Singapore’s current unemployment rate of 2.2 per cent from doubling, according to economists. A sharp increase in the jobless rate could provoke a political backlash against the People’s Action party government, which celebrates its 50th anniversary in power this year.

The aggressive spending plan is rare for Singapore, which normally has a strict policy in limiting budget deficits.

This year’s budget deficit at S$8.7bn is expected to amount to 6 per cent of gross domestic product and will be financed for the first time by tapping into the government’s reserves, which are estimated at about $300bn.

The corporate tax will be cut by one percentage point to 17 per cent to encourage hiring. Companies also will receive financial support to retain workers. Infrastructure building will be accelerated to provide new jobs and tax rebates and other subsidies will be given to households.

The finance minister warned that the recession could last into 2010 and ”recovery, when it comes, will be weak”.

Chua Hak Bin, research head at Citigroup in Singapore, said the measures would have little impact on reviving the economy. ”Unfortunately, Singapore is the most open economy in Asia. Its fortunes are tied to global growth and trade. So the budget is not going to make that much of a difference.”

The city-state can not depend on domestic consumption to offset a sharp decline in exports, the main economic engine, due to the open nature of the economy and Singapore’s relatively small population of 4.8m people. Consumer spending also is curbed by the government requiring forced savings into a state-run pension funds.

Credit Suisse believes the biggest impact of the economic downturn will be on foreign workers, who will be forced to leave Singapore as their employment permits expire. It estimates that 200,000 foreigners could depart, which ”would have far-reaching implications for the economy” by depressing private consumption and property prices.

Credit Suisse said that the unemployment rate could climb to 5.6 per cent by 2010, the highest in more than 20 years, in spite of the budget measures.