1.2 The economy grew by 6.4% in 2005, much better than expected. Growth was broad based, with strong performances in both manufacturing and services. EDB attracted $8.5 billion of fixed asset investments in manufacturing, up 3% from 2004, and $2.5 billion in annual total business spending from services, up 11% from 2004. A record number of tourists visited Singapore – around 9 million, boosting the retail industry.

1.3 Most importantly, economic growth has translated into jobs. 110,800 new jobs were created last year, the largest number created in any year since 2000. We have reduced unemployment significantly, to just 2.5% by the end of 2005.

1.4 Our fiscal position is good. I expect a budget surplus of $430 million or 0.2% of GDP for FY2005, slightly larger than I had projected in last year’s Budget Statement. This is the result of healthy investment income as well as efforts to contain expenditures.

1.5 The outlook for 2006 is favourable. The US economy continues to grow, underpinned by strong consumption and investment expenditure. The EU economy is expected to improve in 2006 as domestic demand strengthens. China is still growing robustly, having successfully managed the risk of overheating. India is set to continue growing, especially if it deepens its economic reforms. Japan is emerging from deflation, with confidence restored, company balance sheets de-leveraged and the banking system strengthened.

1.6 The Southeast Asian economies are expected to sustain their momentum. Investor confidence is up, as reflected in the regional stock market rallies. In Indonesia, the government has taken major steps to slash fuel subsidies and raise interest rates, and to strengthen its economic team. Domestic demand should remain firm in Malaysia and Thailand, bolstered by consumption and government spending.

1.7 While the overall outlook is good, some downside risks remain. The key risks are posed by the tightness in the oil market and global macroeconomic imbalances. Disruptions in world oil supply could cause prices to spike sharply, while a disorderly unwinding of the US current account deficit could have knock-on effects on financial stability, exchange rates, and trade liberalisation. The frothy housing markets in some of the major economies and the threat of Avian Influenza are also sources of concern.

1.8 Overall, if these risks are contained and the major economies sustain their growth momentum, I expect the Singapore economy to grow by 4-6% in 2006, with inflation in check at 0.5-1.5%. This will support further job creation.

1.9 Our strong performance results not only from a favourable external environment, but also, more importantly, from our efforts to upgrade and restructure the economy. We must press on to adapt to changing economic demands and secure our long-term competitiveness.

1.10 The pace of change worldwide is accelerating, not slowing down. Other countries are also reinventing themselves, and gearing up to compete globally. In the Middle East, for example, the Gulf States are on the move. They are investing in education and infrastructure, attracting foreign investment, building international companies like Dubai Ports and Emirates Airlines, and using their oil and gas revenues to create a sustainable long term basis for growth and development.

1.11 In Singapore, we have embarked on a challenging enterprise – to build a vibrant global city that is a centre for knowledge, talent, and business. We have every prospect of succeeding. We have the drive and talent, the ability to adapt to change, and the resolve to meet and overcome challenges. Our workers, employers and the Government have forged a strong tripartite partnership. Internationally we have a trusted brand name, and a reputation for integrity, quality, and reliability.

1.12 Globalisation favours economies like ours – open, nimble, and enterprising. But it also poses challenges, especially for our older and low-skilled workers whose wages and jobs are under growing pressure. We must do more to help this group of Singaporeans improve their lives, and to support their own efforts to do better for themselves and their children. We must target our assistance to those in need, and make a difference where it counts.

1.13 This Budget will therefore:

i. Support upgrading and restructuring of the economy

ii. Help Singaporeans Move Forward Together

iii. Share the fruits of growth with all Singaporeans through a Progress Package

PART II – UPGRADING AND RESTRUCTURING THE ECONOMY

2.1 Our first priority is to press on with upgrading and restructuring the economy, and create new jobs to replace old ones.

2.2 First, we must become a knowledge hub in Asia. Innovation, enterprise, and R&D will increasingly be the new sources of our growth. We are strengthening R&D efforts in the universities, research institutes, and industry. Our aim is to be a knowledge exchange, a key node in a global network of people and ideas, and a choice location for international events for both for-profit and non-profit organisations.

2.3 Second, we must build on our strengths in manufacturing and services, to promote activities that place a premium on trust, quality and service, not just efficiency and low cost. In manufacturing, we must raise our productivity and skill levels. In services, besides developing existing industries like logistics, info-communication, banking and finance, and tourism, we must seek new opportunities, such as in premier healthcare and education.

2.4 Third, we must support entrepreneurship and help promising local companies to grow into regional and international players.

2.5 Fourth, we must build up our human capital. We will continue to attract global talent who bring in new skills, create new value, and enlarge our economic pie. At the same time, we will invest in education and training, to equip Singaporeans with the skills and mindsets to succeed in a knowledge-based, innovation-driven economy.

2.6 Finally, we must maintain a competitive tax environment to attract investments, reward enterprise and draw talents. Let me touch on each of these areas.

Become a Knowledge Hub

2.7 First, becoming a knowledge hub.

Invest in R&D – Knowledge Creation

2.8 R&D is the foundation upon which we will build Singapore’s competitiveness. Just as investment in education builds up our human capital, so will investment in R&D build up our intellectual and knowledge capital base. The Research, Innovation and Enterprise Council (or RIEC) which I chair will spearhead this critical national effort. It will be supported by the National Research Foundation (or NRF) led by Dr Tony Tan. The RIEC will review our overall R&D framework and our R&D plans for three key sectors - the Biomedical Sciences sector, the Interactive and Digital Media sector, and the Environmental and Water Technologies sector.

2.9 R&D requires long-term commitment. To develop new capabilities, we must support projects on a sustained basis, buffering them from the vagaries of year to year budgetary pressures, and judging results over several years. I will establish an R&D Trust Fund, to be administered by the NRF, and will regularly allocate a portion of our budget for this Trust Fund. I aim to inject $5 billion into the Fund over five years and will start with an initial injection of $500 million this year. As worthwhile projects emerge, many of which will be multi-year commitments, we can tap on this fund to support them.

2.10 The R&D Trust Fund, together with MTI’s Science & Technology Plan 2010 and MOE’s academic research plans, will help raise Singapore’s gross expenditure on R&D from 2.3% of GDP in 2004 to 3% by 2010. This will put us on par with the European Union economies and close the gap with world leaders in R&D like the Nordic countries and the US.

2.11 Increased R&D investment will generate more intellectual capital which can be exploited and commercialised. We have already begun to do this. For example, Rolls-Royce and a Singaporean consortium jointly invested US$100 million in developing a commercially viable power system based on fuel cells. The Singaporean companies were able to supply cutting-edge technologies that met the high expectations of Rolls-Royce. Thus Nutek, a local SME that manufactures automated manufacturing systems, used its in-house engineering expertise to improve the production process for fuel cells.

2.12 A safe and reliable environment for the protection of Intellectual Property Rights (IPR) is a critical factor in persuading international companies to base their R&D activities here. Because of our reputation as a trusted partner for businesses, companies and other institutions are creating and hosting their intellectual property in Singapore, assured that their IP will be protected. Global Brands is the exclusive licensing agent for FIFA worldwide and Warner Brothers Consumer Products in Southeast Asia. Last year Global Brands announced the establishment of its global HQ here to manage their IP representation portfolio. BASF, one of the top two chemical companies in the world, is setting up its first R&D laboratory in the Asia Pacific here, to conduct fundamental research in nanotechnology. We must continue to provide a safe IPR environment for such companies.

2.13 We must also take a broader approach to recognising ownership of IP. Multinational corporations based in Singapore often have substantial economic rights in the form of regional control over their IP, although the legal title is held by the foreign parent. We will recognise and incentivise such economic ownership of IP, which is at least as important as legal ownership of IP. I will extend writing down allowances for IP acquisition to these economic (not just legal) owners of IP, on an approval basis. To encourage R&D collaborations, I will also accelerate the write down period for qualifying capital expenditure under cost-sharing arrangements from five years to one year.

Bring the World to Singapore – Knowledge Exchange

2.14 To become a knowledge hub, we must not only be a place for creating knowledge, but also be a centre for exchanging knowledge and ideas, and for people and businesses to network with one another.

2.15 Singapore is well suited for this role. As a society, our ethos is open, cosmopolitan and pragmatic, welcoming towards new ideas, and quick at adapting to a fast changing world. We are well wired up, with 52% of homes having broadband internet access, and nationwide wireless networks to keep us constantly in touch with one another and the world. But we must continue to plan ahead beyond present needs, and keep pace with rapid technological change.

2.16 Other countries and cities are already implementing ultra-high speed broadband and wireless networks. Some are laying fibre to homes, in anticipation of future demand. In today’s world, a national broadband network is basic infrastructure and a source of competitive advantage. We will develop a new national broadband network that is much faster than what is available today. It will offer fast, efficient connectivity to all – in schools, in offices and homes, and even on the move. It will help us plug into the global knowledge grid, and stay competitive with other cities. The cost is significant, but we can develop it together with the private sector progressively over several years, adjusting to demand at each stage. MICA will announce more details at the Committee of Supply.

2.17 Singapore must be a place where people, businesses and non-profit organisations from all over the world converge and exchange ideas. Several International Organisations (IOs) and Non-Governmental Organisations (NGOs) are already here. Last year, the World Intellectual Property Organisation (WIPO) set up in Singapore its first office outside the US and Europe. The Singapore office aims to promote intellectual property development and standards throughout Asia. WIPO has held conferences and symposiums here, using us as a platform for knowledge transfer among intellectual property experts. We will attract more IOs and NGOs to locate their headquarters and research work here.

2.18 Hosting international events also creates opportunities for knowledge networking. In 2005, we successfully hosted the International Olympic Committee session, as well as the Global Entrepolis@Singapore event which brought entrepreneurs, venture capitalists and industry captains together. Next month, we will host the first intellectual property diplomatic conference in Asia, where IP policy makers from WIPO member states will negotiate an international treaty concerning trademark laws.

2.19 In September, we will host the largest international financial meeting – the Board of Governors Annual Meetings of the IMF/World Bank Group. More than 16,000 delegates and officials will visit Singapore; they include finance ministers and central bank governors from 184 countries, top financiers, CEOs from the private sector and the international media.

2.20 I spoke at the last National Day Rally about the need to improve our service culture. To prepare for the IMF/World Bank meetings, we will train 28,000 service staff from the tourism industry, to go the extra mile in providing good service. We must work together to provide our visitors and delegates a memorable and outstanding Singapore Experience, so that they return home with eyes opened to the possibilities of Singapore and Asia, and hearts warmed by the graciousness and hospitality of our people.

Build on our Strengths in Manufacturing and Services

2.21 Our second focus is to strengthen our manufacturing and services hub. To do this, we must raise our productivity and build a strong service culture based on quality and trust. WDA, STB and SPRING are launching many initiatives to enhance our services infrastructure, systems and workforce training. These include the development of service competency standards and assessment tools, a national quality scheme to accredit organisations that provide good service, as well as certification and training programmes. The Government will invest $63 million over three years in these programmes.

Manufacturing as a Key Engine of Growth

2.22 Manufacturing remains a key part of our economy, accounting for about a quarter of our GDP. We aim to double our manufacturing output and value added by 2018. We must support it with R&D, create value through innovation, and become a global leader in niche areas.

2.23 Advanced economies like Japan have shown how to sustain their manufacturing edge through higher productivity and innovation. Canon is an example. Canon continues to manufacture cameras in Japan. It replaced its long conveyor belt assembly system with a cell system, where small teams of workers work in cells to assemble a product from start to finish. This is more efficient, because it allows for flexibility in production and workers can see the production process ahead of them. With the cell system, a worker can assemble a digital camera much more quickly.

2.24 We too must upgrade our manufacturing sector. We have made good progress. For example, Seagate, the world’s largest hard disk drive company, has vertically integrated its R&D, manufacturing and headquarters functions including intellectual property management in Singapore. Its automated “factory of the future” manufactures various hard disk drives here. Seagate develops and produces its latest generation of 1-inch hard disk drives here. These are used in advanced electronics products such as Creative’s Zen MP3 players.

2.25 Singapore is also home to a strong base of third party contract manufacturers like UMC and Chartered Semiconductor. Presently, tools bought on behalf of their overseas clients but used in Singapore for the manufacturing process attract GST; this is often added to the invoice, making us less cost competitive. To put our contract manufacturers on an equal footing with their counterparts in Taiwan or UK, I will allow the supply of tools used in the manufacture of goods for export to be zero-rated for GST. This change will take effect from 1 April 2006. IRAS will release details later.

Develop a Full-Service Global Financial Centre

2.26 In financial services, we are steadily becoming a full-service global financial centre. The Banker magazine has ranked Singapore first as “financial centre of the future”. I will take further measures to promote our wealth management, capital market and treasury activities. I will just highlight the key changes.

2.27 A critical mass of asset managers and advisors is located here, with assets under management fast approaching $1 trillion. To further support growth in the asset and wealth management industries, I will make the following changes:

§ First, the Designated Unit Trust scheme will be enhanced to allow other types of funds such as Restricted Authorised Schemes to qualify for the DUT status.

§ Second, qualifying domestic trusts and their underlying holding companies will be exempt from tax on their locally-sourced investment income as well as foreign-sourced income, to the extent that it mirrors the tax exemption enjoyed by individuals. Beneficiaries will also enjoy tax exemption on trust distributions made from such income.

§ Third, the scope of the Approved Trustee Company scheme and the tax exemption scheme for foreign trusts will be expanded to include a wider range of settlors and beneficiaries of the trusts.

§ Lastly, I will introduce a new tax incentive scheme which exempts from tax resident funds with foreign investors.

2.28 To encourage the development of our capital market and treasury activities, I will make the following tax changes:

§ I will grant tax exemption on foreign-sourced interest and trust distributions received by REITs listed on SGX (known as S-REITS). For S-REITs and their special purpose companies (SPCs) set up to hold overseas non-residential properties, I will also allow recovery of GST incurred on the setting up of SPCs and the acquisition and holding of overseas non-residential properties by SPCs.

§ I will expand the Qualifying Debt Securities (“QDS”) scheme to cover discount debt securities with tenure of more than one year.

§ I will expand the scope of activities qualifying for the Finance and Treasury Centre incentive to include trading and arranging of derivative products, subject to counter-party restrictions.

§ I will introduce a 5% concessionary tax rate on clearing income for qualifying clearing members of a Singapore Over-The-Counter (OTC) derivatives clearing facility for five years. This will reinforce our position as a major oil-trading, ship-broking and financial hub.

2.29 To further promote Islamic Financing activities, I will harmonise the tax treatment of four Shariah-compliant financial products with the conventional products to ensure a level playing field with respect to tax.

2.30 To support the growth of the captive insurance industry, which contributes to Singapore's position as an insurance hub, I will grant income tax exemption for approved captive insurance companies, for a period of 10 years.

2.31 A brief description of all the tax changes for the financial sector can be found in Annex A. MAS will release the details shortly.

Grow Dynamic Maritime and Logistics Industries

2.32 In the maritime and logistics industries, our business infrastructure and connectivity are key strengths. We must attract more international ship-owning and ship-operating companies to set up operations in Singapore. This must be supported by a comprehensive range of services which covers the entire maritime and logistics value chain, including financing. To support growth in these areas, I am introducing four changes in this Budget. Details can be found in Annex B.

2.33 First, to encourage the development of ship financing activities in Singapore, I will introduce a Maritime Finance Incentive to grant tax exemption for qualifying income of ship investment vehicles and a 10% concessionary tax rate for qualifying income of ship investment managers.

2.34 Second, to entrench shipping companies in Singapore, I will enhance the Approved International Shipping incentive by allowing companies to renew their incentives for a third period of 10 years, lengthening the maximum period of incentive from 20 years to 30 years.

2.35 Third, to lower the compliance cost for traders enjoying the 10% concessionary tax rate under the Global Trader Programme, I will remove the need for companies to show that the derivative trades are incidental to the physical trades before such income can be treated as qualifying income.

2.36 And finally, I will allow automatic GST suspension for goods removed from Zero-GST warehouses by all those who qualify under the Major Exporter Scheme and Approved Third Party Logistics Company Scheme. This will give them greater flexibility to conduct their business via logistics and warehousing companies.

Build Up New Services

2.37 Beyond our traditional services industries like finance and logistics, we will continue to grow new services industries like education, healthcare, and the creative industries. Our efforts are showing results. In education, we have brought in 16 leading international universities including INSEAD, Duke University, MIT and University of Chicago Graduate School of Business. We have also attracted the first private foreign comprehensive university, the University of New South Wales, which is expected to reach an enrolment of 15,000 students in 15 to 20 years’ time.

2.38 In healthcare, foreign patient numbers are growing rapidly – on average 20% per year. In 2005, about 374,000 foreign patients sought medical treatment in Singapore. They come not only from Indonesia and Malaysia, our traditional markets, but increasingly from the rest of Asia, particularly the Middle East. They seek treatment both at private and public sector institutions, attracted by our high medical standards, and reputation for quality and reliability.

2.39 In the creative industries, Singapore is attracting international design companies such as BMW Designworks, digital media firms and media funds. Singapore talents and enterprises are also making their mark abroad. Eric Khoo’s film “Be With Me” has won critical acclaim at numerous prestigious international Film Festivals. Singapore's first 3D animated film, “Zodiac, the Race Begins” has been sold to 22 countries after it was showcased at Cannes. To encourage creative talents, I have decided to include industrial design, interactive and digital media as new fields qualifying for the existing tax concessions that exempt 90% of the royalties earned by these creative individuals.

Support Entrepreneurship and Enterprise

2.40 The third area of focus is to support entrepreneurship, help local enterprises grow into global players and ease regulatory restrictions so as to promote enterprise.

2.41 Our efforts to encourage entrepreneurship are seeing some results. According to the 2005 Global Entrepreneurship Monitor report, Total Entrepreneurial Activity (TEA)[1] in Singapore increased from 5% in 2004 to 7% in 2005, still modest but encouraging. More budding entrepreneurs – be it from the ITEs, polytechnics or universities – are taking the plunge to start their own businesses.

2.42 For example, ten years ago Crestar Education Group first ventured into China and set up a nursery school for the expatriate community in Suzhou, where Singapore was helping to build an industrial park. Today, Crestar has 19 kindergarten centres throughout China, including Shanghai, Beijing, Shenzhen, Changzhou and Dalian.

Support Local Enterprises Going Global

2.43 Local enterprises aspiring to become international players can tap on a range of assistance to realize their potential for growth and internationalization. One measure to help SMEs is EnterpriseOne, a multi-agency initiative which will be launched later this month. The EnterpriseOne Portal is the primary channel to provide business information and government e-services. The portal is supported by a hotline and Enterprise Development Centres (EDCs) such as the Association of Small and Medium Enterprises (ASME), offering business advisory services. Customised initiatives such as the Local Enterprise and Association Development (LEAD) programme, will encourage industry associations to take the lead in developing enterprise competitiveness in their respective industries. MTI will elaborate on these schemes in the Committee of Supply.

Reduce the Regulatory Burden on Local Enterprises

2.44 One way to help entrepreneurs and businesses is to reduce the weight of regulation. Regulations raise invisible but damaging costs. Many laws require individuals, businesses and other private entities to retain records for substantial periods. For example, the Companies Act and the Income Tax Act require records to be kept for seven years. I regularly hear requests to shorten these record- keeping requirements, as businesses find them burdensome and costly.

2.45 We have valid reas