Singapore: Selected Issues

This Selected Issues paper analyzes quality upgrading and low-wage competition for Singapore. The analysis concludes that quality upgrading is indeed taking place in some products where low-wage competitors are entering. More generally, Singapore’s exports are of a higher quality than its regional competitors, and the quality gap has widened over time. This paper also assesses the factors behind the mixed results of Singapore banks’ outward expansion by examining the region’s industry structure and competitive conditions.


This Selected Issues paper analyzes quality upgrading and low-wage competition for Singapore. The analysis concludes that quality upgrading is indeed taking place in some products where low-wage competitors are entering. More generally, Singapore’s exports are of a higher quality than its regional competitors, and the quality gap has widened over time. This paper also assesses the factors behind the mixed results of Singapore banks’ outward expansion by examining the region’s industry structure and competitive conditions.

III. Some Issues in Medium-Term Fiscal Policy1

A. Introduction

1. Singapore’s fiscal performance has been impressive, with the public finances in surplus for many years. The overall fiscal balance recorded a deficit only one year over the past two decades, and this has resulted in a substantial government net asset position, estimated at over 120 percent of GDP in March 2004.

2. Until recently, the authorities had eschewed countercyclical policies in favor of a medium-term focus. However, in the face of a series of external shocks, the authorities judiciously responded with sizable fiscal stimulus packages. At the same time, the tax and pension systems were reformed to reduce business costs as competitive pressures from low-cost regional economies intensified. This chapter reviews these developments and assess some of the policy options over the medium term, given Singapore’s development stage and the challenges of an ageing population and continued competitive pressures from regional economies.


Overall Fiscal Balance

(in percent of GDP)

Citation: IMF Staff Country Reports 2005, 140; 10.5089/9781451923254.002.A003

Government Assets and Liabilities

(As of March 2004)

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B. The Current State of Public Finances

3. The structure of Singapore’s budget revenue has the following broad features:

  • Singapore’s total revenue in percent of GDP is comparable to OECD countries, and is much higher than that in most other Asian countries.2 However, this masks marked differences in the composition of revenue. Two components of revenue—nontax revenue and capital revenue—are particularly large for Singapore, reflecting the government’s substantial financial assets and ownership of land.3 Singapore’s tax revenue to GDP ratio is only around half of OECD countries, and is similar to regional economies.

  • Since the Asian crisis, revenue has declined as a ratio of GDP.4 This reflects a sharp reduction in revenue from land lease. Capital revenue reached nearly 14 percent of GDP in 1997 before declining to just 1½ percent of GDP in 2003.

  • The structure of the tax system has remained broadly stable. About half of revenue comes from corporate and personal income tax, and the remainder from indirect taxes on a narrow range of goods.5 Tariffs are minimal, given the virtual absence of import duties. There is no capital gains or social security tax.

  • Income tax rates have declined. Most recently, corporate and top personal income tax rates were lowered from 24.5 percent and 26 percent respectively to 22 percent in 2003. Corporate income tax rate will be further lowered to 20 percent from 2005. To compensate the decline in direct taxes, the goods and services tax rate was raised from 3 percent to 4 percent in 2003, and to 5 percent in 2004. However, a wide range of tax incentives remains in use to attract investment in key strategic sectors.

Comparative Central Government Revenue and Expenditure, 1990-2001

(In percent of GDP; period average)

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Source: IMF, Government Finance Statistics.

For general government. The data are from country desk. For Japan, GFS data are not available.

Data for 1990-1997.

Data for 2002.

Data for 1990-99.


Revenue Structure

(in percent of GDP)

Citation: IMF Staff Country Reports 2005, 140; 10.5089/9781451923254.002.A003


Tax Revenue Structure

(in percent of GDP)

Citation: IMF Staff Country Reports 2005, 140; 10.5089/9781451923254.002.A003


Asia - Pacific Corporate Tax Rates in 2003

(in percent of GDP)

Citation: IMF Staff Country Reports 2005, 140; 10.5089/9781451923254.002.A003

Source: PriceWaterhouseCooper

4. The main features of the structure of expenditures are:

  • Total expenditure in percent of GDP is only about 60 percent of OECD economies. Within the region, Singapore’s expenditure is lower (by 2–10 percentage points of GDP) than in Japan and Malaysia, but is higher by 4–5 percentage points of GDP compared to that in Indonesia, Korea, Thailand, and the Philippines.

  • Unlike OECD countries, Singapore has focused its public spending largely on capital expenditure and net lending. Reflecting Singapore’s emphasis on infrastructure development and public housing, these items are about 7 percentage points of GDP higher than the OECD countries’ median. Much of net lending goes to finance one statutory board, the Housing and Development Board (HDB); there are nearly 70 statutory boards.6 However, net lending has declined in recent years, reflecting lower new loans and higher repayments.

  • Relative to its level of development, social spending is strikingly low. Total social spending in Singapore is just about one third of the OECD countries’ median. High levels of expenditure on education and housing reflect the government’s priorities, which aim at providing high levels of accessibility and affordability in education and public housing.


Expenditure Structure

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 140; 10.5089/9781451923254.002.A003

Comparative Central Government Social Spending, 1990-2001

(In percent of GDP; average)

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Source: IMF, Government Finance Statistics; and OECD, OECD in Figures.

Data for 1990-97.

Public expenditure data for 2000 for OECD, Japan and Korea.

Public expenditure data for OECD (2002), Japan (2001) and Korea (2001).

Data for 2002.

5. Prudence has been the hallmark of Singapore’s fiscal policy. Except once, the overall fiscal balance has been in surplus throughout the last two decades. The overall surplus averaged 10½ percent of GDP during 1990–2001, compared with a deficit of 3½ percent of GDP in the OECD countries. However, the government’s definition of the budget balance underestimates the strength of Singapore’s fiscal position as operating revenue excludes substantial portion of investment income and earnings from land leases.


Fiscal Position of Ceneral Government

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 140; 10.5089/9781451923254.002.A003

6. With a large net asset position, government securities have been issued mainly to develop Singapore’s capital market. Government securities have provided a liquid and risk-free instrument that has served as a benchmark for the corporate debt securities market. The bulk of domestic debt represents Central Provident Fund (CPF) members’ balances, which are invested overseas by the GIC.


Government Domestic Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 140; 10.5089/9781451923254.002.A003

7. In the absence of any defined-benefit social security program, for most Singaporeans, balances held with the CPF form the mainstay of retirement savings. The CPF was established in 1955 as a mandatory, fully funded, defined contribution, individual account system to provide financial security for workers in their old age.7 Over time, the CPF has evolved into a scheme that has come to be used for various public policy objectives, including macroeconomic management through changes in employer contribution rates as a means of reducing business costs (Box 1).


Contribution Rates

(In percent of wages)

Citation: IMF Staff Country Reports 2005, 140; 10.5089/9781451923254.002.A003

Source: CPF Board

8. Net contribution to the CPF is relatively low. Gross contributions to the CPF in Singapore averaged 10½ percent of GDP during 1993-2003, well above the median of the OECD countries’ social security contribution and those in Asian countries. However, net CPF contributions in Singapore amounted to only 3¼ percent of GDP a year during the same period, well below 8½ percent of GDP, the median of the OECD countries. The high level of withdrawals reflects the use of CPF to further various government objectives, including universal home ownership, and the enhancement of members’ retirement savings through the liberalization of the CPF investment schemes. Indeed, the withdrawal for housing amounted to almost half of the gross CPF contribution, resulting in Singapore’s high home ownership rate (94 percent).

Recent Changes to the Central Provident Fund

  • CPF contribution rates: From October 2003, the contribution rate was cut from 36 percent to 33 percent, reflecting a 3 percentage point reduction in the employer contribution rate (from 16 to 13 percent). This cut would save employers about 0.8 percent of GDP a year. For 50–55 year old workers, the contribution rate will be further reduced to 30 percent in 2005, and to 27 percent from 2006. Despite the cut in the total CPF contribution rates, the special account contribution rates were increased by one percentage point.

  • CPF salary ceiling: The ceiling of salary subject to CPF contributions was reduced from S$6,000 to S$5,500 on January 1, 2004. It will be further lowered to S$5,000 in 2005 and S$4,500 from 2006. In total, these reductions will save employers about S$400 million in wage costs in 2006.

  • CPF and Medisave minimum sums: From July 2004, the CPF minimum sum (the minimum combined balances in the Ordinary and Special Accounts) will be raised gradually from S$80,000 to S$120,000 (in 2003 dollars) by 2013; it is currently set at S$84,500. Moreover, the Medisave minimum sum of S$25,000 will be adjusted annually for inflation of healthcare costs.

  • Withdrawal rule at age 55: Starting 2009, the current 50 percent rule for withdrawals from the Ordinary and Special Accounts will be phased out gradually by 2013. Currently, at age 55, CPF members may withdraw 50 percent of their combined Ordinary and Special Account balances. From 2013, CPF members must meet the CPF and Medisave minimum sums first before they can withdraw their remaining Ordinary and Special Accounts balances at age 55.

Owing to the measures taken to increase the minimum sums and changes to housing-related withdrawals, the income replacement rate is not expected to be adversely affected by the above CPF changes and is projected to remain at about 20-40 percent, according to the authorities’ estimates. Currently about 40 percent of active CPF members turning age 55 meet the minimum sum, and by 2013 about half of CPF members are projected to be able to meet the minimum sum owing to the above changes to the CPF scheme.

C. Medium-Term Outlook

9. Singapore’s medium-term fiscal policy making is guided by maintaining a balanced budget over the election cycle.8 Over the medium term, the government currently aims to maintain operating revenue at the current level of about 18 percent of GDP. The only pending tax measure is to cut the top personal income tax rate from 22 percent to 20 percent, which will cost about ¼ percent of GDP; the government has already implemented all other key tax measures recommended by the Economic Review Committee (ERC). Net investment income for the budgetary purpose is expected to grow in line with nominal GDP.

10. Expenditure, however, is likely to increase. Additional spending on education, health, and social security over the medium term are likely given Singapore’s development stage, aging population, and ongoing structural changes:

  • The need for Singapore to upgrade human capital will generate new demands on educational spending. Faced with increasing competitive pressures from low-cost economies, long-term unemployment among the unskilled has emerged. Ongoing corporate restructuring toward higher-value-added industries will require more skilled labor. Using average years of schooling as a measure of human capital, Singapore ranks below the G7 countries; while the level in the United States is about 12 years, that in Singapore is about 8 years. Further investment in human capital can thus enhance growth prospects. According to staff’s growth accounting exercise, given the high labor force participation rate in Singapore and the relatively high capital-output ratio, returns from education are likely to be high.9 However, since the size of the school age population is projected to decline, pressures on the budget for additional spending on education could be limited.

  • An aging population will raise demands on the healthcare system. Total health expenditure in Singapore is estimated at around 3 percent of GDP, which is low compared to that in the OECD countries. Moreover, the share of public health expenditure is only around 25 percent (Lim, 2004). Healthcare costs have also risen by 3–4 percent a year, faster than CPI inflation. It is anticipated that over the next two decades the share of the public sector in healthcare expenditure will need to be increased significantly to provide adequate healthcare service to the aging population. Thus if government’s share of public health is increased to 50 percent, still lower than the current OECD country average, budgetary expenditure could increase to around 2.4 percent of GDP, which would be only one-third of public health spending in OECD countries.10

  • Singapore’s social security system is almost entirely based on a mandatory savings scheme (CPF), which is unusual among advanced economies. As compared to a multi-pillar social security framework, reliance on a single pillar is quite risky (Asher, 2004). Given experiences of OECD countries, it is likely that a multi-pillar framework that incorporates some form of social insurance may be needed to address the needs of the poor. Heller (1999) estimates that it would cost about 1¼ percent of GDP by 2010 for the government to provide pensions to the elderly population not covered by the CPF.11 Singapore government’s spending on social security is just 6 percent (or 15 percent, including CPF withdrawals) of the median OECD country. Given increasing structural unemployment among the less skilled, provision of additional social safety to the unemployed is worth considering, in addition to job training programs.

Average Years of Education of Population 15 years and Older

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Source: Barro and Lee (2000)

Tertiary school enrollment rate

(in percent)

Citation: IMF Staff Country Reports 2005, 140; 10.5089/9781451923254.002.A003

Source: World Bank, World Development Indicators.

Public Expenditure on Education in 2000

(In percent of GDP)

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Source: OECD in Figures (2004)

Singapore: The aging population

(In percent of working age (15-64) population)

Citation: IMF Staff Country Reports 2005, 140; 10.5089/9781451923254.002.A003

Source: World Bank, World Development Indicators.

Health Expenditure and Resources in 2002

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Source: OECD in Figures (2004)

Data for 2001

11. Looking forward, Singapore’s fiscal position is likely to remain strong. There are good reasons—primarily the need to prepare for the ageing of the population and the desire to build up a sizable “rainy day” reserve given the lack of natural resources in Singapore—underlying the government’s cautious approach to fiscal policy. Given that Singapore has already joined the ranks of advanced economies in light of rapid growth since its independence in 1965, the government could consider expanding its social safety net as the country faces the challenges of an aging population and rising structural unemployment, as well as to enhance medium-term growth prospects through higher human capital. Although information on government’s net asset position is limited, it appears that the government could afford additional social spending by 2–3 percent of GDP over the medium term without impairing the strength of its reserves position.12

12. The authorities are fully cognizant of these challenges and have taken several measures in response. Among these measures is targeted assistance to low-income earners for health care and retirement. On unemployment, the authorities have strengthened a number of retraining and job-matching schemes. At present, they consider such programs better suited to provide social insurance by enhancing employment opportunities rather than introducing any entitlement program.


  • Asher, Mukul G. (2003), “Fiscal Policy Challenges Facing a Mature Asian Economy: The Case of Singapore,” in Sustaining Competitiveness in the New Global Economy: The Experience of Singapore, ed. by Ramkishen S. Rajan.

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  • Asher, Mukul G. (2004), “Retirement Financing Dilemmas: Experience of Singapore,Economic and Political Weekly, Vol XXXIX, No. 21, pp. 211420.

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  • Barro, Robert and Jong-Wha Lee (2000), “International Data on Educational Attainment, Updates and Implications,NBER Working Paper 7911. Cambridge, Massachussets.

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  • Bercuson, K. ed, (1995), Singapore: A Case Study in Rapid Development, Occasional Paper No. 119, International Monetary Fund.

  • Carling, Robert and Geoffrey Oestreicher (1995), “Singapore’s Central Provident Fund,IMF Paper on Policy Analysis and Assessment, 95/11, International Monetary Fund.

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  • Central Provident Fund Board, CPF Handbooks, available on

  • Heller, Peter S. (1999), “Aging in Asia: Challenges for Fiscal Policy,Journal of Asian Economies, Vol. 10, No. 1, pp. 3763.

  • Heller, Peter S. (2003), Who Will Pay?, International Monetary Fund.

  • International Monetary Fund (2004), World Economic Outlook (September).

  • International Monetary Fund, Government Finance Statistics Yearbook, various issues.

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  • OECD (2004), OECD in Figures.

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Prepared by Byung K. Jang (ext. 37916) and Shinichi Nakabayashi (ext. 38918).


Most of the data used in this analysis is from the IMF’s Government Finance Statistics. For Singapore, the fiscal data relates largely to the central government, and information on consolidated public sector accounts is unavailable. There is also no comprehensive information on the market value of the government’s assets, including those of the Government of Singapore Investment Corporation (GIC). The conclusions of this chapter are thus limited by these data weaknesses.


Capital revenue in Singapore is mostly revenue from land lease as the government owns more than 80 percent of total land. About 65 percent of nontax revenue reflects the return on the large accumulated stock of government assets and interest earnings on development loans.


Singapore is currently operating a preceding year basis of tax assessment; income tax payable in a year is based on income earned in the previous year.


The breakdown of income tax into corporate and individual income tax is estimated to be 70 percent and 30 percent, respectively.


The HDB, which is financed directly by the Ministry of Finance and through bond issuances, was established in 1960 as a statutory board of the Ministry of National Development to develop public housing. About 85 percent of Singaporeans currently live in HDB housing, compared with 9 percent in 1960. The HDB also provides housing loans at a concessionary interest rate (currently 2.6 percent), which is set at 0.1 percentage point above the rate on CPF ordinary account balances.


Each member has four accounts: (i) Ordinary Account—savings in this account are available for pre-retirement withdrawals for home purchases, education, and investment; (ii) Special Account, which is reserved for old age, contingency purposes, and investment in retirement-related financial products and can only be withdrawn at age 55; (iii) Medisave Account, which can be used for hospitalization expenses and to pay premiums for approved medical insurance schemes such as MediShield (designed to help meet the cost of catastrophic illnesses); and (iv) Retirement Account—at age 55, a member can withdraw the remaining balance in the Ordinary Account and the balance in the Special Account as a tax exempt lump sum after setting aside a minimum sum in this account.


By law a government cannot run down the reserves accumulated by previous governments without the consent of the President. Moreover, each year the government can use only up to 50 percent of the investment income from government assets. Two main concepts of the fiscal position are used for Singapore: the overall balance, which is measured on a GFS basis, and the budget balance, which excludes capital revenue, net lending, part of investment income, and land-related development expenditure, and is the authorities’ preferred fiscal concept. The government’s use of the budget balance clearly underestimates the strength of Singapore’s fiscal position; while the budget surplus averaged 1½ percent of GDP during FY1995/96-FY2003/04, the overall fiscal surplus amounted to 6½ percent of GDP a year during the same period. Moreover, only a portion of government investment income accrues to the budget and the remainder is credited to various extra-budgetary accounts (mostly to the Government Securities Fund, which manages payment of interest on public debt and income earned from government assets).


For details see Chapter II, Singapore: Selected Issues, IMF Country Report No. 04/103, April 2004.


The government has increased spending on public health on an ad hoc basis. For example, in 2004 the government topped up the Medisave Accounts of individuals aged 50 and above by about 0.06 percent of GDP. Moreover, an additional 0.06 percent of GDP was provided to the government’s medical fund to help needy patients. The authorities are currently considering revamping CPF’s medical insurance scheme to provide better coverage.


The analysis assumed that about one third of the labor force is not covered by the CPF, with a replacement rate of 30 percent of per-capita income. The coverage of the CPF is currently estimated to have increased to about three fourths of the labor force.


In the FY2003 budget the government used about one third (1¼ percent of GDP) of the net investment income included in the fiscal data, and plans to do the same in the FY2004 budget.

Singapore: Selected Issues
Author: International Monetary Fund