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Budget may soothe fears over costs creeping up

Businesses worry over transport bills, economists expect some goodies

(SINGAPORE) Amid concerns that the costs of living and doing business could go up, economists expect the upcoming Budget to provide some form of relief.

These could come in the shape of more cash handouts, particularly targeted at the low to middle-income groups, as well as a cut in top personal income taxes from the current 20 per cent.

‘I think something similar to last year’s GST offset package will be introduced. My guess is that it will be quite targeted to the lower-income group,’ Citi economist Kit Wei Zheng said.

‘There is a chance that it will come more in the form of cash,’ he added. The $4 billion Goods and Services Tax (GST) offset package over a five-year period that was announced last year comprised of $1.8 billion in GST credits while the balance was in the form of rebates.

Standard Chartered economist Alvin Liew noted that the strong economic performance last year has placed the government in a good position to offer more cash handouts.

‘But we are not looking at any increase in CPF contribution on the employer side or the employee side because that will increase business cost,’ he said.

Economists predicted a potential cut in top personal income tax from 20 per cent, after the government shaved two percentage points off the corporate tax rate to 18 per cent last year in what was seen as a pro-business Budget.

Now there are fears that costs are creeping up. Last year, the consumer price index (CPI) rose 2.1 per cent year on year, a significant jump from the one per cent seen in 2006, partly due to the two percentage-point hike in GST in July last year. The CPI jumped 4.4 per cent in December from a year ago to hit a 25-year high fuelled by higher transportation, food and healthcare costs. ‘Perhaps, of greater concern is the risk that if inflation stays persistently high, inflation expectations could become more entrenched, pushing up wages and leading to a second-round impact on the CPI numbers,’ Mr Kit said.

Sharing this sentiment was CIMB-GK economist Song Seng Wun. ‘Barring a sharp downturn in the global economy, domestic price pressures are likely to persist, due to short-term supply constraints,’ he said.

The recently announced changes in ERP charges and the uncertainty of whether means testing in public hospitals would lead to higher insurance premiums have also raised concerns over higher living and business costs.

To curb congestion on the roads, the government is raising the ERP base charge from the current $1 to $2 and the incremental charges from $0.50 to $1 from July. The increase in ERP revenue is more than offset by a 15 per cent cut in road tax and a reduction of additional registration fee (ARF) for vehicles from 110 per cent to 100 per cent of the Open Market Value (OMV).

These ERP changes take effect from July onward, when the effect of a two percentage-point GST hike last July would have waned.

For now, economists and businessmen alike are circumspect about how the impact of higher ERP charges and the offsetting measures of lower road tax and ARF on inflation will eventually play out.

‘While the usage costs may go up, I believe it should be offset by lower car ownership costs,’ said Wee Piew, CEO of steel stockist HG metal. ‘As I understand this is not a revenue-generating measure by the government but a car population containment measure, so I believe incremental costs for businesses should be negligible.’

Stanchart’s Mr Liew believe that the costs of being stuck in traffic jams and losing man hours could be just as detrimental to businesses as an increase in transport costs, if not more.

But Mr Kit of Citi wondered what it would take for motorists to change their daily routine.

‘The ERP by itself might not have a huge impact, but it’s the cumulative effect – all these price increases coming together,’ Mr Kit said, citing higher food prices and electricity tariffs, an upward revision of HDB annual values

and higher taxi flag-down rate.

Some businesses will likely feel the heat of higher ERP costs on their operations, whether they are couriers, manufacturers that deliver goods on a regular basis or companies whose employees take taxis to make sales trips and workers who may soon demand higher transport allowances or wages.

Kim Ann Engineering believes that the group’s delivery and logistic cost will increase eventually when more gantries are added as it delivers goods to many light industry estates.

‘We have eight delivery trucks/vehicles to various directions. Other than Express Highways, we will soon have to pass Alexandra and Toa Payoh gantries when they’re in operation,’ Lau Tai San, chairman and managing director of the group, said.

Predeep Menon, executive director of the Singapore Indian Chamber of Commerce & Industry, said most of the association members are bracing themselves for a significantly higher cost structure.

‘What’s happening now is that most businesses are being hit by the costs first. Then, they will need breathing time to see how to adjust to it and how best to avoid certain expenses,’ Mr Menon said.

Many economists expect CPI for the first half of this year to hover around 5 per cent year on year.

Inflationary pressures would then taper off in the third quarter where the GST effect would have dissipated and further moderation in the fourth quarter due to a high base of comparison in a year-ago period, they said.

Stanchart and DBS are expecting the full-year CPI to come in at 4 per cent year on year, CIMB-GK is predicting 4-4.5 per cent, while Citi raised its inflation forecast for 2008 to 5 per cent from 3.8 per cent previously.


Source: Business Times 5 Feb 08


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