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Budget helps unlock new opportunities for S’pore

Going into Budget 2016, Singapore faced several major challenges. Our slowing economy and ageing population resulted in the slowest pace of job growth in recent history and a sharp uptick in retrenchment.

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Going into Budget 2016, Singapore faced several major challenges. Our slowing economy and ageing population resulted in the slowest pace of job growth in recent history and a sharp uptick in retrenchment.

Despite widespread concerns about a skills shortage in Singapore, experienced PMETs (professionals, managers, executives and technicians) remained substantially more likely than other groups to remain unemployed for the long-term, suggesting a growing skills gap in the economy.

Productivity growth continued to lag, while business costs remained high due to the tight labour market and continued high demand to live and work in Singapore. The Government has responded with an expansionary but prudent Budget that addresses many of the challenges facing the Singapore economy.

The Budget has largely stayed the course set by previous Budgets in focusing on economic restructuring and social inclusion, but with a renewed emphasis on targeting transformation in collaboration with industry and society.

Singapore’s greatest challenge — and opportunity — lies in the Small and Medium Enterprises sector. SMEs account for two-thirds of all employment but generate slightly less than half of GDP — lagging behind larger enterprises and multinational corporations.

Yet despite successive Budgets granting generous Government incentives targeted specifically at SME restructuring and upgrading, productivity has been slow to improve.

The dramatic tightening of foreign manpower in recent years has not yet resulted in meaningful productivity growth. Indeed, SMEs continue to hold out hope that the Government will reverse its policies in the areas of foreign manpower restrictions and levies.

The Government has stayed the course and resisted calls to reverse Singapore’s progress towards economic restructuring.

The planned schedule for foreign manpower levy increases — announced in previous Budgets — has been maintained, save for concessions to the embattled Marine and Process sectors.

Relaxing our foreign manpower policy would have lessened the present pain of SMEs at the expense of sacrificing the long-term prospects of the economy.

Even China is running out of low-cost workers; Singapore cannot practically rely on indefinite access to cheap foreign labour. Support for SME upgrading has consisted of successive subsidies aimed at lowering the cost of investments and innovation. Unfortunately, incentives in the form of Government subsidies can distort business decisions.

Investments that would never be made using the company’s own money are eagerly contemplated when taxpayer money is involved. If such investments eventually produce social dividends in the form of a more vibrant and higher skilled economy, then such public expenditures may be worthwhile.

However, such subsidies also risk supporting a culture of public rent-seeking, the worst excesses of which were manifested by “consulting” companies whose business model was to defraud both companies and the Government of Productivity and Innovation Credits by selling companies “innovations” that were neither productive nor needed.

The Industry Transformation Programme announced by Finance Minister Heng Swee Keat yesterday adopts a more targeted and critical approach to SME transformation that could address market distortions arising from a less calibrated subsidy policy. The right balance to draw between avoiding distorted prices and ineffective grant schemes is hard to achieve. While the one-stop shop for grants will do much to reduce search costs for SMEs, other transactions costs of applying for grant schemes remain.

Grant administrators are rarely in a position to understand fully the practical needs of industry. The call in this Budget for transformation to be led by industry and unions is both pragmatic and necessary.

A MISSED OPPORTUNITY ON THE REVENUE SIDE?

On the social side, enhancements to support for children from low-income families and the long-awaited launch of the Silver Support Scheme continue the theme of boosting social inclusion from recent Budgets.

These enhancements could benefit children from lower-income families in particular, who may not have the financial resources to benefit from prior schemes which required co-savings in the Child Development Account.

A particular challenge is helping families living in rental housing who have previously owned public housing. The Fresh Start scheme aims to provide such families with a new public housing grant of up to S$35,000, but will be contingent on the families showing effort in employment and school attendance.

While the idea of helping those who help themselves is important, lower-income families in rental housing often face significant challenges to ordinary functioning and may require extensive social work support to sustain employment.

Funding for such support schemes will be needed to help lower-income families take full advantage of these new programmes.

On the revenue side, a significant new source of recurring revenue comes from the transition of Temasek Holdings from contributing Net Investment Income to contributing Net Investment Returns — which is based on total expected returns rather than actual income only.

This measure should satisfy those who have long argued that Singaporeans deserve to benefit from the returns of our national investments. Now, all our sources of long-term investment returns can be drawn on to benefit Singaporeans today.

But it also means that in the future, there are unlikely to be further sources of revenue that can be tapped without the pain of increasing taxes on people or on companies.

One potential missed opportunity for reform on the revenue side concerns the move to cap total personal income tax reliefs at S$80,000. The tax relief cap does improve progression but is not nearly bold enough.

The fundamental inequity of any tax relief-based system is that higher income earners benefit substantially more from the same relief. The Central Provident Fund contribution tax relief, for example, is worth relatively little for the median income earner and saves only seven cents on the dollar, or half of that if other reliefs are taken into account.

But the same CPF contribution tax relief for high-income earners is worth close to 20 cents per dollar contributed to CPF. A fairer reform would replace tax reliefs with refundable tax credits which avoid the regressive implications of the tax relief system.

Overall, the 2016 Budget stays the course towards a more socially inclusive and economically vibrant Singapore. The Budget promises to not only overcome challenges, but also unlock new opportunities for both businesses and Singaporeans.

ABOUT THE AUTHOR:

Dr Walter Theseira is a senior lecturer at SIM University.

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