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New hope for closing income gap

This year’s Budget has been more progressive than previous ones — not only are there more opportunities for and help given to the low-income group to move up the ladder, there is also a larger tax liability for the affluent. It may pave the way for reducing the income gap.

This year’s Budget has been more progressive than previous ones — not only are there more opportunities for and help given to the low-income group to move up the ladder, there is also a larger tax liability for the affluent. It may pave the way for reducing the income gap.

The Department of Statistics’ latest key household income trends indicate that although median monthly household nominal and real income increased last year, the Gini coefficient (an income inequality indicator) also trended upwards, even after accounting for government transfers and taxes.

Real income of the bottom 10 per cent fell by 1.2 per cent, while for the top 10 per cent, it grew by 5.1 per cent before adjustment of imputed rent. A widening income gap may create societal anxiety and the Budget has made a concerted effort to address the issue. Three schemes in particular are helpful, but there are also concerns.

The most prominent is the Wage Credit Scheme, where the Government will co-fund 40 per cent of wage increases for Singaporean employees over the next three years.

Unlike the Jobs Credit Scheme in 2009 which was introduced across a broad base to save jobs, this scheme is inclusive and targeted specifically at helping the employment of low- to medium-wage Singaporeans.

This is most helpful to small and medium-sized enterprises (SMEs) which hire most of the workers in the lower-income group. But there are reservations among employers that the scheme only finances the wage increases and may not help to reduce current high labour costs.

The other 60 per cent of the wage increase has to come from productivity gains for the firms to stay competitive, and there is no certainty that restructuring will be successful in generating sufficient revenue or cost savings to finance this. After all, incorporating advanced technology and machinery into work processes needs time, and workers also take time to change their mindset and acquire new skills.

And what about those firms which try hard but are yet unable to attract Singaporean workers, and have no choice but to rely on foreign workers whose levies have increased significantly? Are downsizing, relocating or ceasing operations the only options?

Some assurance from the Government that this scheme may be made more generous and extended beyond 2015 would help address anxieties.

WEALTH TAX EFFECT

The second scheme is to increase the tax liability of the rich in the form of higher property and car taxes at the top end. It is natural to expect the top 10 per cent of income earners to contribute more tax revenue. The usual concern is whether this will drive them out of Singapore, along with their assets, talent and contacts.

To what extent this wealth tax will change the consumption and investment behaviour of the rich remains to be seen. But it is unlikely the rich would move their assets abroad as Singapore has no excise duty or capital gains tax; income tax remains competitive and corporate tax is low relative to other developed economies. Its attractiveness as a safe place to live and raise children also remains.

While revised car taxes do not affect the lower or middle income, the curbs on car loans effected this week will. Even though it is in borrowers’ interest to repay loans early, the cut in repayment period from 10 to five years means a severe trade off with other expenses for households that need a car. The larger down payment is a constraint for even young managers and executives.

While it is difficult for the Government to determine who needs a car more, some tweaking of the restrictions, to target luxury cars and allowing leeway for households with children and elders, would be helpful.

The third scheme aims to increase social mobility and raise hope for the low income. Transfers in the form of GST (Goods and Services Tax) vouchers and rebates are an immediate help but do not help them climb the income ladder. The best way to break the vicious circle of poverty is still through education, which opens the way to higher-paying jobs.

The Budget enhances subsidies, assistance and bursaries to enlarge the education opportunities for children in low-income households. The fact that low-income earners can pin their hopes on the next generation is an important confidence booster.

Progressiveness is a strong theme in Budget 2013. Although it offers no minimum wage law nor a blanket pay increase for the lower-income, it pledges more opportunities for better-paying jobs to be taken by Singaporeans. And with more wealth tax revenue for redistribution and enhanced social mobility for the children of the low-income, there is new hope the Gini coefficient may shrink in the future.

Dr Tan Khay Boon is a Senior Lecturer with SIM Global Education.

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Budget 2013

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