Taxation: Singapore cuts taxes in stimulus package

To understand Singapore's economy, it is necessary to understand three things:

- it is a very small, densely populated city state. Although it has a population of two thirds the size of Hong Kong, it has a land mass of less than one sixth the size. And it's already mostly built up.This means that the per capita cost of infrastructure is a fraction of a physically larger territory. There are no long distance roads needed (it's less than 40km from one side to the other and even less from north to south), telecoms do not have to run through miles of open countryside, public transport is all urban.

- compared to its South East Asian neighbours, Indonesia and Malaysia, it has a high per capita income.

- the government coffers are supported by taxation but more so by the activities of government-owned companies and government owned investment companies.

Less fundamental to the economy but still important is the policy that cars are ludicrously expensive - although relative to income, they are cheaper in real terms than in neighbouring Malaysia. But fuel and parking are major expenses - and most parking is, directly or indirectly, government owned. These prices are part of the social engineering of Singapore: when you have very little land, cars are a nuisance. But even so, the taxes, duties and fees all add up to a nice little earner.

Singaporeans went into shock during the recent financial crisis when the company dipped (albeit for a short time) into recession, an inevitable consequence of the recent focus on financial services and tourism.

But of even greater shock is the inflation that ordinary Singaporeans - and visitors - are feeling.

For sure, it's still remarkably cheap to eat in the food courts in the social housing schemes known as Housing Development Board or HDB blocks. A typical breakfast of a couple of slices of toast with kaya (a kind of coconut version of lemon curd), two boiled eggs and a cup of coffee still costs SGD2 - that's about GBP75p.

It's often cheaper to eat in the food court than to buy food at supermarkets.

That has led to Fair Price, a chain of supermarkets owned by a trade union, to declare that it is reducing the price of 500 own-label brands by 5%. Some of Fair Price own label products are so good that they are foods of choice even for quite serious foodies.

Although headline figures suggest that Singapore is no longer in threat of recession, the word amongst consumers is simple: in a country where there is little for locals to do except eat out and shop, the prices that don't feature in the official inflation statistics are pumping up rapidly. A beer in the city centre cost the equivalent of GBP8, one of our correspondents reported recently. Those living in Singapore say that, outside the food courts, it's difficult for two people to eat out for less than the equivalent of GBP75.

Retailers are being forced into non-stop sales and special offers: in Singapore, a Cuisinart grill costs only 40% of its price in the same chain in Kuala Lumpur, Malaysia's capital. While some of that difference is due to duty, a similar difference in prices is seen across clothing and other consumer goods, too. But some brands are holding their prices: they are seeing business drift away.

Painfully aware that the real world cost of living has far outstripped the official inflation figures (which are calculated on a similar basis to other countries - there's no special manipulation going on) the Government has taken some drastic steps in the 2011 budget.

First, what might seem a small action but is actually socially significant, it is to abolish the radio and TV licence and with it the fee. In part, this represents the fact that many families have TV sets but do not watch television on them (games, videos, etc.) and that there are now so many distribution channels that fall outside the scope of the licence (internet, mobile, etc. for TV and even mobile phones with built-in radio) that the scheme had become unmanageable. A surprise to everyone in our Malaysian office (several of whom drive into Singapore on a regular basis) was that car radios are required to have a licence which costs SGD27 per year. The TV licence cost SGD110 per household - a fee that UK licence payers would be envious of. From now, the whole licensing scheme will be scrapped costing SGD132.5 million (2009 figures).

It's income tax that grabs the headlines: the government says that it collected more tax than it expected in 2010. So all resident taxpayers will get a 2011 tax rebate of 20% up to a maximum of SGD2,000. Often, such schemes are restricted to Singaporeans so those with work permits and permanent residence will be waiting to see the fine print.

But for almost everyone, tax rates will fall: those earning up to SGD60,000 will see their payable tax rate reduced by 25%. Higher income earners will see a lower reduction; those earning SGD350,000 or more will see a reduction of only 1% - but given Singapore's low tax rates, they will remain far better off than those with a similar salary in, say, London. The government has a target of lifting personal income by 30% over the next ten years.

Companies will also receive a 20% tax rebate

All adult Singaporeans will get a SGD800 cash grant.

Those at the bottom of the economic pile will be entitled to subsidised loans and - materially - a SGD40,000 grant to help them buy their first non-HDB flat.

But it's not all cuts: the levy for employing foreign labour is to be increased and the CPF (a compulsory insurance scheme) is to increase.

And there's a lot of spending: SGD10,000 to improve some of the older HDB developments, topping up of medical expenses funds for the elderly (of which Singapore has a significant number, which explains its frantic efforts to increase the birthrate - although Singaporeans surveyed regularly say they want less children and want them later) and a boost for the Workfare budget and the Child Development Credit. There will be increased spending on defence - Singapore has compulsory national service and a surprisingly powerful navy and air force which patrol the Melacca Straits, a favourite haunt of pirates.

Incredibly (from the standpoint of our UK writers who are facing ever higher taxes and cuts in public services, Singaporeans are complaining that the government is not doing enough.

Really.