Tackling income inequality should be Govt’s top priority

Our national productivity drive needs to start from the top. We currently have three very senior ministers advising the PM, three ministers in the Prime Minister’s Office—two of them without any portfolio—nine ministers of state and six parliamentary secretaries, most of whom are drawing multi-million dollar salaries. Does the prime minister of such a small country really need so many advisers and ministers assisting him?

This is my response to the Finance Minister’s Budget 2010 speech.

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Income inequality is one of the biggest challenges our nation faces. The median household income in 2009 was only 71 per cent of the average income, down from 74 per cent in 1999 [see note 1]. This means that the few very high income earners are pulling up the average, while the large number of lower income earners are pulling down the median. The share of wages in GDP has declined from 47 per cent in 2001 to 41 per cent in 2006 [see note 2]. The Gini coefficient–a measure of income inequality–rose from 0.436 in 1990 to 0.478 in 2009, indicating a widening income gap.

Increasing income inequality has been shown to coincide with higher divorce rates [see note 3] and crime rates [see note 4], particularly property crime. Singapore’s wealthy elites can no longer afford to simply turn a blind eye to the plight of the poor, thinking it will not affect them–because it will, eventually.

Reducing income inequality should be the top priority of the government. This government needs to pay more than just lip service to the goal of ensuring that all Singaporeans benefit from economic growth.

GDP: A poor measure of economic performance

Before we come up with solutions, we first need to evaluate how we are measuring our economic performance. Gross Domestic Product (GDP) growth is the most commonly used measure used by this government to measure economic performance. However, GDP measures mainly market production, not the people’s well-being [see note 5]. Conflating the two will paint an overly rosy picture about how well-off Singaporeans are, and result in the wrong policy decisions.

This government must stop feeding Singaporeans with a diet of only GDP and “resident” unemployment rates as a gauge of how well our economy is performing. Instead, a basket of alternative measures including the Gini coefficient, median income, household consumption and productivity growth should be used.

Make taxation more progressive

We need to revise many elements of our tax system to make it more progressive in nature–that is, to tax the rich more than the poor. Over the last decade, our tax system has been changed to favour the rich more and more. The estate duty has been abolished, income tax and corporate tax rates have been reduced, and the Goods and Services Tax (GST) has been raised.

The GST is a regressive tax, because the poor pay more as a percentage of their income than the rich for essential items. It is also expensive to administer, especially for smaller businesses. I have in previous years argued against the hike in the GST, and call for the government to revert the GST rate back to 5 per cent or lower.

Many of the current tax rebates and reliefs benefit higher income earners more than the poor. For example, Child Relief, Spouse Relief, Parent Relief, Course Fees Relief and Parenthood Tax Rebate all go towards reducing taxable income or taxes. However, only those earning higher incomes will benefit from these reliefs and rebates. Since only about 30 per cent of the labour force pays income taxes, a large majority of Singaporeans cannot claim the benefits from these measures.

I propose that these rebates and reliefs be converted into tax credits that benefit all qualifying individuals equally, regardless of taxable income. Some of these credits could be disbursed as cash, or deposits into individual’s CPF or EduSave accounts. The quantum of the credit does not need to equal that of the current relief. A quantum for all these credits should be worked out such that it will be revenue neutral compared to the current amount disbursed, and they can be spread over a few years just like tax rebates. By having tax credits instead of reliefs or rebates, lower income Singaporeans will benefit more.

The Child Development and Co-savings Scheme is another scheme that benefits the rich more than the poor. Many low-income families do not have $6,000 cash to deposit in the co-savings account for their children, to get the dollar-for-dollar matching from the government. Many are not even aware of this scheme. The government should find a way to help lower income families receive the same benefits from this scheme as their wealthier counterparts.

Improve Workfare

I will now turn to the implementation of the Workfare Income Supplement (WIS). WIS was adapted from similar schemes in the US and the UK, called the Earned Income Tax Credit and the Working Tax Credit respectively. While the intent of the scheme is good, its implementation so far has been poor. With such a large proportion of the WIS being deposited into workers’ CPF accounts, and the infrequency of payouts, the WIS may not be achieving its original intent, which is to motivate workers to stay on their jobs longer.

Firstly, the quantum of WIS payouts should be increased for all workers, so that it can serve as a form of a minimum wage for low income workers. Secondly, instead of requiring workers to apply for the credit themselves, why not simplify things for them by having employers top up their workers’ salaries, and later filing for the rebate? This will put the much-needed cash in the hands of the workers every month, instead of having them wait six months to receive their income supplements. It is similar to how training companies claim course subsidies from the Workforce Development Agency (WDA) upfront.

Thirdly, WIS should be given more in cash than in CPF and Medisave contributions. The proportion of contributions CPF should be roughly the same as for normal wages (i.e., 20 per cent). This will provide workers with much needed disposable income.

Fourthly, there should not be a qualifying period of six months of continuous work to be eligible for WIS. No worker chooses to be out of work, and those who have difficulty holding down jobs should be helped more, rather than less. Lastly, WIS should apply equally to employees, the self-employed and daily-rated workers. There should not be discrimination against certain types of workers in terms of the quantum disbursed or the percentage cash is given out.

Fund On-the-job training

In all the government-sponsored training schemes, there is a very strong focus on formal classroom instruction. But it has been found that about 70 per cent of learning is achieved on the job, 20 per cent is from interaction with mentors and colleagues, and only 10 per cent is through formal training. It is no wonder that many workers complain that all the time they spent on training has yielded few tangible results for them. Instead of spending so much money on the Employment and Employability Institute (e2i) and expensive training providers, the government should provide employers with more wage subsidies to cover the cost of on-the-job training (OJT). This is already being done for some government scholars who are seconded to private sector companies, where the government foots a proportion of the scholar’s salary, so that the scholar gets a chance to work at a more senior level than his experience warrants, and in the process gains the necessary high-level private sector experience. This same principle can be applied to lower-skilled workers, to help them gain the necessary experience and skills on the job.

Rein in government spending

As more money will need to be allocated to social support schemes for the low-income, the need arises for alternative sources of revenue. However instead of simply raising taxes like the GST, the government should look into cutting its spending.

The government needs to re-examine the rationale and utility of its commitment to spend up to 6 per cent of GDP on defence. This is an arbitrary figure which is not necessarily grounded on the operational needs of the Singapore Armed Forces (SAF). Can the SAF maintain its current state of readiness, and be just as effective with 4 per cent or less of GDP? I’m sure 300,000 Full-time National Servicemen (NSFs) and NSmen would heartily agree with this statement! With a budget of well over $11 billion a year, just a small percentage reduction in defence spending could save taxpayers hundreds of millions of dollars, which can be used for uplifting the situation of low income  Singaporeans.

Lastly, our national productivity drive needs to start from the top. We currently have three very senior ministers advising the PM, three ministers in the Prime Minister’s Office—two of them without any portfolio—nine ministers of state and six parliamentary secretaries, most of whom are drawing multi-million dollar salaries. Does the prime minister of such a small country really need so many advisers and ministers assisting him?

It was recently announced that salaries for political appointment holders are estimated to be $58.28 million, or 8.8 per cent higher than last year [see note 6]. I find this unacceptable, given the current state of the economy and the national drive for productivity.

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Notes:

[1] Department of Statistics

[2] Asher, Mukul, “Singapore’s policy responses to ageing, inequality and poverty” (2008).

[3] The Growing Gap – Income Inequality in Massachusetts; 2006; Massachusetts Budget and Policy Centre, quoting an essay by Robert Frank, Cornell University, “Inequality Matters”, Lardner, James and Smith, David A., eds., p144.

[4] Nilsson, Anna, “Income inequality and crime: The Case of Sweden” (2004).

[5] Stiglitz, Joseph, et. al., “Report by the Commission on the Measurement of Economic Performance and Social Progress” (2009).

[6] TODAY, 23 February 2010.

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7 thoughts on “Tackling income inequality should be Govt’s top priority”

  1. a proposal by a china expert for alternative measure for GDP
    as management lingo goes:”What you can’t measure,you can’t manage”

    GDPW, or gross domestic product welfare

    GDPW refers to the ultimate economic output that has been transformed into social welfare. Theoretically, the negative welfare value is subtracted from the positive welfare value to get the GDPW.

    GDPW=现行GDP+正内部性生产福利价值-负内部性生产福利价值-负外部性经济福利价值=现行GDP+(非正规性生产价值+非市场性生产)—破坏性生产价值(非法生产价值)—补偿性生产价值(包括:补偿自然灾害型损失生产价值、补偿人为事故型损失生产价值、补偿正常损耗型损失生产价值等三个部分)—资源耗减价值-环境退化价

    Since GDP is the ultimate monetary representation of gross product, GDPW can rely on the GDP data calculated by the United Nations System of National Accounts (UNSNA).

    Positive welfare value refers to the factors that contribute to the progress of people’s livelihoods while the negative welfare includes all the factors that bring down the quality of life, such as drugs and pollution.

    Unlike GDP, GDPW is consistent with the creation of welfare and focuses on the tangible wealth that goes to the welfare sector. Based on this reason, GDPW is a more scientific index to measure economic growth. GDPW measures the amount of welfare that human production has accumulated. It will effectively amend the flaws in the existing GDP accounting system.

    GDP doesn’t reflect social welfare

    According to a report published by the UNSNA in 1993, the current GDP measuring system is primarily centered on economic production. This system effectively reflects economic growth, but fails to represent the progress of social welfare. Therefore, this indicator has the potential to lead economic development astray. Cheng’s proposed GDPW is not going to revolutionize GDP – it is merely an amendment within the GDP framework, and the two indices are closely related.

    Calculating GDPW is a complicated process that involves economics, accounting and environmental factors, and its methodology is not flawless.

    GDPW calculation standard

    The nature of GDPW is to amend and modify the existing GDP based on the creation of social welfare. Production is the prerequisite of welfare. To convert economic growth to welfare progress requires considerations of both internal and external economic factors.

    The concept of scientific development requires attention not only to GDP growth but also to the improvement of the general public’s living standards. Therefore, the welfare accounting system represented by GDPW marks a new ideology that the ultimate purpose of economic development is to raise people’s happiness.

  2. Very good response. We need more people like you in the Parliament. Perhaps you could get your views translated in Chinese, so that you could reach out to more people.

  3. I’m writing a article in my blog about how this severe income inequality has cost many policies to become unworkable. It breaks the workability of many policies and when they are broken, they worsen effects of this inequality.

    One example is the govt policy to have people shoulder as much of the healthcare burden as possible. The cost of healthcare is driven by the rise in income of the richest folks. Because of the income gap, affordability decrease rapidly as we move down the rungs. Now the healthcare burden becomes heavy for these folks (they don’t have access to good treatment, preventive care) and that undermines their ability to work and sinks them down further.

    Govt policies are putting some in a virtuous cycle and others in a vicious one. The end result will be very bad…

  4. You made a number of nice points there. I did a search on the issue and found mainly folks will have the same opinion with your blog.

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