"Our increasing dependence on foreign workers is not sustainable," Deputy Prime Minister and Finance Minister Tharman said in his budget speech for the fiscal year beginning April 1.

"A continued rapid infusion of foreign workers will also inevitably affect the Singaporean character of our society."

"We must therefore take further measures to reduce the inflow of foreign workers, and help our businesses adapt to the permanent reality of a tight labour market," Tharman said.

Measures to stem the rise in the number of foreigners in the city-state include lowering the maximum ratio of lower-skilled non-locals in the workforce to 60 percent for manufacturing companies, down from 65 percent currently.

For services firms, the cap that limits the number -- known as "dependency ratio ceiling" -- will be lowered to 45 percent from 50 percent.

MAJOR ASIAN HUB

Singapore, a major Asian hub for banks and multinationals, is facing pressure from citizens to tighten immigration and cap the number of foreigners, who now make up one-third of the island's population of 5.2 million.

Friday's annual budget speech was the first since Singapore's ruling People's Action Party saw its share of votes fall to the lowest since independence in May 2011 parliamentary elections. The PAP's result reflected about rising income inequality and overcrowding of buses and trains due to the surge in the number of foreigners coming to Singapore.

Last year, Singapore-based companies employed an extra 79,800 foreigners -- mainly from countries such as China, India and the Philippines -- more than double the 36,600 increase in local employment, according to Singapore's Manpower Ministry.

To offset the higher costs that businesses will incur, the government will increase grants and tax benefits for companies that invest in training and equipment to boost productivity, Tharman said.

Some observers expressed concern about moves to make it harder for companies to hire people from abroad.

"The proposed reductions in the dependency ratio ceiling do not appear to be addressing an already dangerously tight labour market," said David Sandison, tax partner at PwC Services LLP in Singapore.

"It remains to be seen whether the measures introduced to encourage employment of older workers will counter-balance this proposed move to restrict the employment of foreign workers," he added.

Singapore's economy shrank 2.5 percent in the fourth quarter from the preceding three months on an annualised and seasonally adjusted basis, and the government has forecast GDP growth of 1-3 percent this year, down from 4.9 percent in 2011.

Unemployment remains low, however, at 2 percent, helped by the huge expansion in labour-intensive service industries such as tourism as well as government measures aimed at tightening the flow of low-skilled workers from the region.

BUDGET SURPLUSES

Singapore expects to report a overall fiscal surplus of S$1.3 billion for FY2012/3, equal to about 0.4 percent of gross domestic product, down from $2.3 billion in the current fiscal year.

The overall surplus does not include receipts from land sales and returns on from some of the city-state's billions of dollars in overseas investments that are booked directly into reserves.

Citigroup, for instance, estimates Singapore collected S$10 billion from land sales between April 2011 and January 2012.

Given the huge surpluses, Tharman is under no pressure to rein in spending, unlike his counterparts in many developed countries.

Tharman said Singapore will double its yearly expenditure on healthcare to S$8 billion from the current S$4 billion over the next five years as well as spend S$1.1 billion to improve bus services.

Singapore will set aside S$3.6 billion over five years to finance a programme which will help offset goods and services tax for lower-income families. He also announced other steps to help a large part of the population had not benefitted from strong economic growth the last decade.

Singapore has the world's highest proportion of millionaires but there is no minimum wage and some jobs pay less than S$1,000 a month. The government does, however, top up the wages of lower-income Singaporeans through a programme called Workfare and on Friday it announced a programme to offset the goods-and-services tax paid by lower-income families.

Earlier this month, rival Asian financial centre Hong Kong unveiled a budget that included nearly HK$80 billion worth of measures to support its economy, including a 75 percent income tax rebate capped at HK$12,000 to help the poor.

Tharman said "We are restructuring and upgrading our economy, so that workers can enjoy higher incomes... We are also introducing new initiatives, and deploying more resources to uplift and support lower- and middle-income Singaporeans."

(Additional reporting by Harry Suhartono, Eveline Danubrata and Saeed Azhar; Editing by Richard Borsuk)

• A Permanent Economic Emergency