Budget 2016 will try to revive the economy, but bullets are limited: UOB

It has to grapple with four key challenges.

The government will try to inject life into the flagging economy with Budget 2016, but a report by UOB warned that policymakers will have limited bullets at their disposal with which to counter several tough economic challenges.

UOB said that policymakers will have to be particularly prudent with Budget 2016 as it is the new government's first budget.

Among the key challenges that the upcoming has to counter is slowing economic growth, particularly the recession in the manufacturing sector.

The second challenge is slowing revenue growth, which will put a lid on government spending plans.

"The slower growth in tax collections will place a tighter budget constraint on the upcoming government expenditure plans (compared to past Budgets) if the new term of government intends to maintain a balanced budget. Being the first year of a new term of government, we think that it will run a balanced budget, possibly with a small surplus, unless any unforeseen economic development warrant additional expenditure," said UOB.

Policymakers will also have to deal with the sudden decline in net employment gains, as the resident labour force participation rate is near its limit.

"This will probably mean that the labour market may get even tighter in 2016. However, the outcome in the labout market may be uncertain because slow economic growth from last year may result in a reduction in labour demand by firms," UOB noted.

Low labour productivity is also another challenge, as wage growth has far outstripped productivity gains.

"If this continues, Singapore will lose out in terms of cost competitiveness in the medium term," UOB warned.

Last but not least, Singapore will need to raise its earning power before the population ages further.

“Singapore does not have much time left for the business sector to restructure. We have to do it before the labour market starts contracting due the lower labour force participation rate as there may not be enough young people to replace older workers who leave the workforce,” the report said.