For the FY2012 out-turn, we are expecting a healthy fiscal surplus outcome amid buoyant tax revenues. Operating revenue for Apr-Nov 2011 is already running ahead of plan by around 15%, arising from healthy corporate income tax and stamp duty receipts. In contrast, the total expenditure for the Apr-Sep 2011 is under-shooting and only running at about 42% of FY11 plan. Even taking into account the lumpy nature of operating and development expenditure, the primary surplus likely exceeded $5b for the first 8 months of FY11, which is higher than the $76m overall budget surplus planned for in the FY11 Budget. Assuming the FY11 special transfer and net investment income contribution does not deviate from plan, the overall surplus could easily come in between $4-5b (equivalent to about 2+% of GDP). This would make the FY2012 fiscal position a front-runner on track to match, and possibly even surpass the FY2007 Budget outturn where a $7.6b overall budget surplus was recorded (equivalent to 2.8% of GDP then).

No big guns are expected for now, given the external settings are less than dire - while the global economy is in the midst of a slowdown, it does not qualify as on the brink of another global financial crisis (barring the stalled Greek PSI which could still be a wildcard), while the domestic economy is also not expected to enter a full-fledged recession at this stage, and the general elections are over. Hence, pre-Budget expectations could be slightly more muted, and a neutral to possibly a modest deficit fiscal target (<1% of GDP) may be in line for the FY2012 Budget.

The 2012 challenge of below-trend growth (1-3% with downside risks) and elevated inflation (forecast at 2.5-3.5% for headline CPI, and 1.5-2.0% for MAS core inflation excluding accommodation and private road transport) will likely imply a need for some immediate counter-cyclical measures and help for needy households. But policymakers would likely want to calibrate the short-term measures to keep some policy powder dry should the global economic environment deteriorate further, in spite of the fading tail risks from Europe. (Read full report)

Source : OCBC Investment Research