Budget 2013 does not address many current problems sufficiently

By Ravi Philemon

The PAP Government has acknowledged some of its shortfalls in this year’s Budget. For one, the Finance Minister acceded that in the previous decade, our productivity growth rates were well below the norms of developed economies, even as our labour force grew significantly. The Minister also accepted that there is an urgent need to ameliorate inequality because the risks it poses to social cohesion is great. Soon after the Prime Minister admitted that the PAP Government lacked 20/20 foresight, the Finance Minister too has acknowledged the shortcomings of the Government.

The Prime Minister in responding to Budget 2013, said that the immediate priority for the Government is to solve housing and transportation issues. Yes, the housing and transportation issues need solving, but there’s a need to look at these problems as not being separate, but interlinked with the hurdles the nation faces.

The three biggest hurdles this nation faces are inequality, falling total fertility rate, and a rapidly ageing population. In tackling these three problems, Budget 2013 did not go far enough.

Changes in CPF contribution for low-wage workers

The revision proposed in the Budget with regards to CPF contribution rates for low-wage workers, where employees aged above 35 years and earning >$50, >$500, ≥$750 to follow the existing rates of employees earning ≥$1,500, is welcomed. Retirement adequacy is especially important for low-wage workers.

The PAP Government however could have reviewed and revised the employee’s contribution rates to CPF for older workers. Currently, CPF contribution rates are cut when workers reach 50 years of age, cut again when they reach 55, and cut further when they turn 65. The reason the Government has retained this CPF contribution rate, which is unfairly discriminatory to older workers who have contributed much in the prime of the years to the country, is because they want to entice businesses to keep older workers employed, especially in a recession by making them cheaper. They worry that older workers once retrenched will find it very difficult to be reemployed.

Any Government truly concerned about the welfare of its citizens who are older, will consider legislating appropriate anti-ageism laws, instead of making older workers cheaper for businesses to hire by docking their wages unfairly.

Introduce retirement grant

Many citizens of Singapore still struggle with issue of retirement adequacy despite having one of the highest savings rates and highest social security contribution rates in the world.

According to the Ministry of Manpower’s report titled, ‘Occupational Wages, 2011[i], the Median Monthly Gross Wages of Cleaners, Labourers & Related Workers, peaks at $1,416 at age 35 – 39. It then starts to decline gradually as the workers get older, to $961 at age 60 – 64. Similarly, for Service & Sales Workers, wages peak at $2,582 at age 40 – 44, and then declines to $1,493 by age 60 – 64.

This statistical evidence points to unfair discrimination of older workers. As there’s a compression of years in morbidity as life expectancy increases, older citizens of Singapore should not be disincentivised to work for more years of their active life.

In order to incentivise the citizens of Singapore to work longer, and to give citizens an assurance of security in old age, a tax-free, inflation-indexed, means-tested (both income and savings) retirement grant should be established; where the Government will match $X for every $1 the citizen of Singapore voluntarily saves using  cash, or from savings in the citizen’s Central Provident Fund ordinary account.  Retirement adequacy is an important component in ensuring that all citizens of Singapore enjoy ‘happiness, prosperity and progress’.

Workfare Income Supplement

This year, employees over 65 years of age will receive about $116 in cash and $175 in CPF per month in Workfare Income Supplement (WIS) payments.

The higher cash quantum is welcomed, but it must be remembered that it is the PAP Government’s ‘cheaper, better, faster’ policy which has created this low-wage situation for a significant number of workers, and the need for remedial action like Workfare.

In 2012, the Government spent $450m in WIS for work done in 2012. In 2013, it will spend $650m in WIS for work done in 2013. This is an increased spending of about 30 percent from last year. Such Government subsidies for low-wage jobs, will only ensure that low-wages continue to be artificially depressed, and will not incentivise employers to use their workers more effectively to increase productivity, move up the value-chain, and in the process, create better paying jobs.

Budget 2013 could have kick-started minimum wage policy instead of enhancing Workfare by providing phased-out subsidy for employees to implement minimum wage. A minimum wage policy will also moderate the excessive reliance on foreign workers.

For example, with a minimum wage of $7/ hour, a worker who works 44 hours/week and 4 weeks/month, will earn a gross salary of $1232. After contributing $245 to CPF, the worker will have a take home pay of $987. Compare that with a worker earning $5 an hour. That worker will take home $704, or almost $300 less.

The Government could have supported such a policy shift by subsidising employers the entire amount of the shortfall for the minimum wage for the 1st-year. A maximum of two-thirds subsidy from the shortfall in the 1st-year in the 2nd-year, and a maximum of one-third subsidy from the shortfall in the 1st-year  in the 3rd, and zero subsidy from the 4th year onwards. The 3-year buffer period and appropriate Government subsidies, would have provided businesses enough impetus and room to up productivity, and raise workers salaries accordingly.

Wage Credit Scheme

The Budget announced Wage Credit Scheme (WCS), a 3-Year Wage Co-Funding Transition Support Package, to incentivise businesses to share productivity gains with their employees by increasing their employees’ wages.

While the initiative to co-fund productivity driven wage increases is appreciable. It is debatable if WCS will increase productivity and wages of employees in tandem, because the co-funding is not tied to productivity growth; which means that employers who cannot afford wage increases, will face pressure from their employees to raise their salaries anyway, because of the co-funding component from the government.

What the Budget could have done instead is to enhance the Productivity and Innovation Credit[ii] (PIC) scheme. Currently six qualifying activities under the PIC allow businesses to enjoy 400 percent tax deductions/allowances and/or 60 percent cash payout for investment in innovation and productivity improvements. Instead of WCS, the Budget could have included a 7th qualifying activity under the PIC scheme, where businesses that appropriately document labour productivity (labour productivity being the ratio of output to input [man hours spent as well as number of employees used]) and wage increases in tandem with increases in labour productivity, will be entitled to claim 40 percent of such wage increases given to citizen employees earning a gross monthly wage of $4000, for a 3-Year period.

This would have given employees the confidence that the wage increases will not stop after the third year when the Government co-funding stops, because it is tied to their effort in increasing the profitability of the business; and it is also a better scheme because businesses are incentivised to share productivity gains with their employees. A scheme where the cart is not put before the horse.

Goods & Services Tax

In Budget 2013, the Government announced a one-off Goods & Services Tax (GST) Voucher Special Payment[iii], equivalent to an extra GST Voucher payment, to help lower- and middle-income households with their cost of living pressures.

To moderate the regressive nature of GST, the PAP Government has made the GST Voucher scheme a permanent transfer scheme. But where estimated Budget surplus has exceeded estimation year-after-year, is there a need to maintain GST at 7 percent? The National Solidarity Party (NSP) has argued that GST can be reduced to 5 percent to benefit all Singaporeans[iv], and I agree with NSP’s position on this.

Even if the PAP Government will not reduce GST to 5 percent, they should grant GST exemption for basic essential goods and services. Foreigners for example, may claim GST refund for unconsumed Medication, Medical Supplies and Medical Consumables. For Singaporeans though, GST is not absorbed for such supplies and consumables.

Progressive Taxation

This year’s Budget increased “property tax rates for high-end residential properties, the largest increases being for investment properties – in other words, those that are not owner-occupied.” Indeed, this is a move in the right direction. But the intent for progressive taxation does not go far enough.

The last 2 hikes in GST were accompanied by cuts in corporate and income taxes. At a time when the income gap was widening, this PAP Government shifted the tax burden from the rich to the poor through the GST increase, and the tax cuts. The estate duty was abolished in 2008. When abolishing the estate duty, which is a tax on accumulated wealth, the Finance Minister, Tharman Shanmugaratnam , encouraged individuals who have accumulated wealth to think of how they can use it to make a contribution to society[v].  The estate duty should be reintroduced to redistribute wealth in our society, reduce the wealth gap and to fund more public spending on social services.

Lower concessionary Foreign Domestic Worker (FDW) Levy

The Budget proposes that from March 2013 onwards, families with dependents such as children, elderly parents and family members with disabilities will pay a lower concessionary levy for their FDW. For such households, FDW levy will be reduced to $120 per month, down from the current S$170.

Right now, FDWs wages are generally pegged to their nationalities, and not to the scope of work that they do, or their area of expertise. A Filipina FDW is generally paid about $500, an Indonesian FDW, about $450, an Indonesian FDW, about $400, and a Sri Lankan FDW, about $350.

The levy for the FDW was initially introduced to discourage families from being overly-reliant on such workers. But for families with children, elderly parents and/or family members with disabilities, the work a FDW provides would be essential and necessary. Such families should not be penalised by requiring them to pay $1440 per year for hiring a FDW. The Budget should have eliminated the need for levy for the first FDW such families. Singaporean families can be enabled to use such tax savings to pay a more decent wage for their foreign domestic workers with such an initiative.

Restricted Financing for Motor Vehicles

The Monetary Authority of Singapore has reintroduced financing restrictions for motor vehicles[vi]. With the new restrictions, purchases of motor vehicles will require a down payment of 40 to 50 per cent of the car purchase price in cash, including relevant taxes and the Certificates of Entitlement (COE). In addition, the tenure of the loan has been changed to 5 years instead of 10. These restrictions apply to both new and used cars, but not to motorcycles and commercial vehicles.

This reintroduction of financing restrictions, will hit families with young children and/or elderly parents the hardest. And these are the Singaporean households, for whom the need for a car is genuine and they may not have sufficient cash component to pay the down payment for such need. With COE hovering at $80,000 for cars up to 1600 cc, and at about $90,000 for cars above 1600cc, motor vehicles were fast becoming a luxury meant only for the rich, and with the reintroduction of these financing restrictions on motor vehicles, cars, which are a necessity to some Singaporean households, have gone firmly beyond the reach of most Singaporeans.

The PAP Government should revisit the restrictions requiring  a down payment of 40 to 50 percent of the car purchase price in cash as it seems draconian, and require no more than 20 percent in cash for motor vehicle purchases. The 5 year tenure of loan for such purchases is reasonable.

To moderate the COE prices, the government should consider allowing only citizens to purchase motor vehicles (restriction should not apply to commercial vehicles and/or motorcycles). With a large pool of rental cars which citizens seldom use, foreigners can lease motor vehicles from private operators.

Retail Sales

The Retail Sales Index[vii] points out that the retail sector remained lackluster last year. The Report said, that ‘compared to a year ago, retail sales decreased 1.5% in December 2012. Excluding motor vehicles, retail sales went down 0.4%.’  Budget 2013 could have considered a retail rebate scheme where retailers could give 3 percent of the GST back to the consumer as a rebate in the form of shopping vouchers. Such a scheme would have boosted consumption, and would have kept the retain scene here more vibrant.

Budget 2013 Not Far-Sighted Enough

If the Budget had been more far-sighted and had included policy initiatives such as these that are indicated here, Budget 2013 would have better enabled businesses become more productive, while better addressing inequality at the same time. Such policy initiatives would be better mitigated the falling fertility levels, as well as the needs of an ageing population.

Ravi Philemon is the Executive Director of a charitable organisation and a member of National Solidarity Party. The opinion expressed here is his own.