(SINGAPORE) The government's 2009 budget deficit is likely to be smaller than projected, leaving room for a substantial fiscal package this year, economists say.

While initial estimates last year were for an $8.7 billion deficit, or 3.5 per cent of GDP, Citi economist Kit Wei Zheng said in a report yesterday that a milder recession than feared means operating revenue is likely to come in above projections.

Based on existing estimates, and assuming an election is called before the next Budget, the government has room to spend at least $3.6 billion above revenue this year.

But extra savings from this year mean the government could in theory budget for a deficit of up to $5.8 billion, Mr Kit said. The actual deficit could be less - around $5 billion or 1.8 per cent of GDP - if some fiscal savings are paid back into the reserves, or saved if the election is delayed.

Last year, a massive $20.5 billion package put the Budget $8.7 billion in the red and forced the government to draw on the reserves for the first time.

But this year, operating revenue from stamp duty and GST is likely to have come in above projections, Mr Kit said, noting that stamp duty collection from April to September, at $1.1 billion, had exceeded the $1 billion forecast for the whole year.

Stanchart economist Alvin Liew expects a deficit of $8.1 billion, or 3 per cent of GDP, with a focus on medium to long-term spending rather than emergency rescue measures. 'The Budget is also likely to modify or reduce key fiscal stimulus measures introduced in the 2009 Budget,' he said in a report on Monday.

While cuts in personal or corporate income tax rates are possible but unlikely, and would be a 'positive surprise', Mr Liew said the GST rate could be lifted to 10 per cent by 2012, once the economy has fully recovered. An expected increase in tourism would broaden the domestic consumption base, making indirect taxation a more significant contributor to government revenue, he said.

Mr Liew said his more gloomy deficit forecast is due to an expected expansionary budget to pay for measures recently announced to boost infrastructure spending and productivity, coupled with lingering weakness in tax income.

Economists expect the focus of the Budget to be, as expected, on the recently announced recommendations of the Economic Strategies Committee, which the government has broadly endorsed.

These include proposals on changing foreign labour policy, seizing growth opportunities in new industries, spurring the growth of local companies, enhancing land productivity and establishing Singapore's first export-import bank.

Mr Liew said the new policy on foreign workers could disproportionately burden the construction sector, low-end manufacturers and labour-intensive services industries like the hotels and restaurants.

Citi's Mr Kit said spending on transport infrastructure is likely to increase substantially to $14 billion-plus this year, from $11.5 billion in 2009 and just $3.4 billion in 2008. He also expects more spending on education and training, given its present low share of GDP, at just 0.3 per cent.