Narrowing the income gap – Budget 2013 speech

To help SMEs hire more Singaporeans, I would like to propose that the government provide a temporary wage subsidy for SMEs to hire economically inactive and out-of-work Singaporeans. These include homemakers, the unemployed, and some senior citizens and persons with disabilities. I will call this the “New Hire Wage Credit” scheme. It could pay for one-quarter of the first six months’ salary of each new hire and should be available for the next three years.

This was my speech in Parliament during the Budget Debate on 5 March 2013.

————————————–

Despite what was described as an “inclusive” budget last year aimed at creating more opportunities for lower- and middle-income Singaporeans, Singapore’s income gap widened in 2012. According to the Department of Statistics, after adjusting for government transfers and taxes, Singapore’s Gini coefficient rose from 0.448 in 2011 to 0.459 last year, indicating increased income inequality. It was much higher than the average of 0.311 in the OECD (a grouping of 34 mostly high-income, developed countries), after adjustments for taxes and transfers (OECD 2012).

In his Budget speech, the DPM and Finance Minister correctly pointed out that income inequality poses a risk to social cohesion. However it is not just social cohesion that is threatened by inequality.

Nobel Prize-winning economist Joseph Stiglitz (2012) has pointed out that inequality could stifle economic growth, and could result in lower economic efficiency and productivity. A high level of inequality can also lead to lower levels of trust in government and business, an effect that we are clearly witnessing in Singapore. High inequality contributes to slowing social mobility. This in turn devalues the concept of meritocracy that we hold so dear to in Singapore. A study by several World Bank economists found that an increase in income inequality has a “significant and robust effect of raising crime rates” (Fajnzylber et al. 2002).

Continue reading “Narrowing the income gap – Budget 2013 speech”

My thoughts on early elections

The Sage of Singapore has spoken:

He (MM Lee) said there would be ‘no purpose’ in holding an election in Singapore before 2011, but the timing of a poll will depend on the health of the global economy.

Actually I agree with him.

Amidst all the speculation in the media and blogosphere that elections are coming, I can’t fathom why the PAP government would want to call early elections.

I think public opinion and confidence in the government is currently at an all time low. While “low” is not low compared to countries like Japan, where the prime minister’s approval ratings are in the teens, it is still too low to win as convincingly as the last time round.

Let’s face it: Whether elections are held tomorrow, next year or in January 2012, the PAP is going to win an outright majority. The question is by how much and whether they will lose any more seats in the next election.

But common wisdom states that the best time (for the PAP) to hold an election is at the start of a recession, or towards the tail end of one. MM Lee, and even his son the PM, has said that 2009 could see an 8% contraction in the economy. This would be an appalling performance, and more so if our economy contracts more than our neighbours and competitors.

The 2009 Budget contains billions of benefits for companies, but just peanuts for Singaporeans. That’s not a recipe for electoral success, since companies don’t vote.

Of course the PAP is free to act on its hubris and call for elections nonetheless. We’ll see what dent the opposition can make on the ballot box.

Bring back our 5% GST, Tharman

In his Budget Speech 2008, Finance Minister Tharman Shanmugaratnam said that the higher than expected 7.7 per cent growth and low 1.6 per cent unemployment was a result of the Government’s “broad-ranging efforts to restructure the economy, labour market and fiscal system” and “delivering superior performance”.

Actually, the global economy has done exceedingly well in the past year, powered in part by double digit growth in China. Stellar economic growth is not just due to the Singapore Government’s efforts. Interestingly, when the Singapore economy is doing badly, the Government turns to blame the external environment like the Asian Financial Crisis, SARS and the Iraq war. Unsurprisingly, PAP MP Seng Han Thong blamed inflation worldwide for Singapore’s inflation problems, when in fact much of Singapore’s inflation was caused by the GST hike and hikes in property taxes.

Financial Year (FY) 2007’s overall Budget balance is expected to be a whopping surplus of $6.4 billion against a projected deficit of $0.7 billion (difference: $7.1 billion). In FY 2006, the budget deficit was $1.3 billion against a projected deficit of $2.9 billion (difference: $1.6 billion).

It seems that more often than not, government economists’ projections of the budget position seem to be far off from the actual numbers. Obviously from a political perspective, underestimating works in favour of the Government, as it gives the Finance Minister something positive to report at the next Budget Speech. However, constantly underestimating the next year’s fiscal position may result in the government spending less than it can actually afford to on essential services and assistance for the poor. It will also increase pressure to raise taxes unnecessarily.

The Goods and Services Tax (GST) hike is a prime example. The $7.1 billion additional windfall more than covers the $0.3 billion given out in Workfare Income Supplements (WIS).

Singaporeans will recall that the rationale given last year for the GST hike was to help the poor, not to increase overall revenue. The past year’s budget position suggests that the GST hike was not necessary to achieve this. In fact, the GST hike raked in $1.2 billion more than expected, even though it was implemented just 7 months ago.

Consumer price inflation was 4.4 per cent in December 2007, and overall inflation for 2008 is expected to be between 4.5 per cent and 5.5 per cent. The Minister has acknowledged that the sharp rise in the Consumer Price Index (CPI) at the end of last year was “partly due to the GST increase in July”.

I support WP Sec-Gen Low Thia Khiang’s call in Parliament yesterday to bring the GST back down to 5%. NMP Gautam Banerjee also echoed this point, as did NCMP Sylvia Lim today.

I also stand behind my earlier articles in December 2006 asking for the GST not to be raised in the first place:

.

Is a GST hike the only solution?


The Singapore government seems to have concluded that only way to decrease income and corporate taxes while increasing funding for social assistance to help the poor is through a GST hike. Although I have no doubt that the Ministry of Finance and the Cabinet went through much deliberation before arriving at this conclusion, it seems to be a less-than-ideal solution to helping the poor, for the reasons I explained in Part I and Part II of this series.

But if the GST isn’t increased, how are we going to find the money to “tilt the balance in favour of the poor”? I explore a few possible alternatives, and I invite readers to comment on them and add their suggestions.

1. Use the capital gains from Net Investment Income (NII)

Currently, the Constitution defines Net Investment Income (NII) as the dividends and interest earned from investing past reserves. Just before announcing the GST hike, PM Lee announced that the government will amend the Constitution and seek the President’s approval to re-define NII to include capital gains.

The NII for this year is projected to be almost $2.4 billion. Citigroup economist Chua Hak Bin told TODAY (15 November) that he “won’t be surprised if the NII doubles once you incorporate capital gains”.

This could mean an additional $2.4 billion into the government coffers — almost 60 per cent more than the extra $1.5 billion that the GST hike is expected to reap. It is almost 3 times the entire operating expenditure of the Ministry of Community Development, Youth and Sports in 2005. Is $2.4 not enough to help the needy?

2. Further increase vice taxes

Although smokers know that each budget speech usually brings bad news for them, they may not be aware that Singapore actually has a lower cigarette tax burden than many other developed countries. In Denmark, Ireland, the UK and Portugal, the cigarette tax is upwards of 80 per cent, while in Singapore it is just over 50 per cent. [Note: These were 1999 figures. The cigarette tax has probably gone up across the board since then.]

Cigarette taxation has been proven to be one of the most effective ways of preventing young people from picking up the habit and helping smokers kick the habit by making cigarettes less affordable.

There is also scope to increase liquor duties further, especially for hard liquor. The Singapore Armed Forces (SAF) should also abandon its provision of duty free beer to servicemen.

In the same vein, betting taxes on 4-D, Toto, Singapore Sweep, soccer betting, private lotteries and fruit machines in private clubs should also be increased to discourage people from gambling away their family money.

The annual revenue gain from the 2005 increase in tobacco duties was about $158 million. Similarly, the increase in liquor duties in 2003 resulted in an annual revenue gain of $9.4 million.

Given the benefits of vice taxation to Singaporeans’ health, the savings on healthcare and social service expenditure, the reduction in drink driving and the increase in government revenue, there is no reason why Singapore should not aim to top the world with its taxation on vices.

3. Collect more taxes from tourists

Currently, just 1 per cent cess tax is levied on cessable items sold by tourist hotels, tourist food establishments and tourist public houses. Cessable items include hotel rooms charges, food and beverage, corkage charges and cigarettes sold at hotels.

Cess could be increased to at least 3 per cent or more. In addition the number of cessable items could also be increased to include telephone and Internet charges, the hire of vehicles, tour guide charges and services of dance hostesses (yes, the last item is currently non-cessable!).

The government collected $30.46 million in cess last year. A threefold increase in cess could therefore net an additional $60 million, even without factoring in the increase in tourist arrivals envisaged in the coming years.

Currently, tourists may claim a refund of the GST paid on their purchases under the Tourist Tax Refund Scheme. The government should also eliminate this scheme. Although GST refund schemes are practiced by several other countries, there is no pragmatic reason for Singapore to follow suit. Canada recently announced that it will end its GST refund programme next April.

Some may argue that these moves could discourage tourists from coming to Singapore. But isn’t the main benefit of tourists the money they bring? If some el cheapo tourists were to really shun Singapore because of excessive cess or no GST refunds, then I don’t think they are the kind of tourists we should be courting.

4. Impose a luxury tax

A luxury tax is any tax on the sale of items not considered to be essential to a reasonable standard of living. Items such as high-end cars, fine dining and expensive entertainment could be subject to this tax. Compared to income tax, this would be a fairer way of taxing the rich, yet not penalising those who work hard but are prudent in their spending on luxuries.

5. Stop giving election handouts in cash

On the eve of the last two elections, the government saw it fit to disburse a total of $7.8 billion in cash to Singaporeans through New Singapore Shares (NSS), the Progress Package and Economic Restructuring Shares (ERS). Although less well-off Singaporeans were given larger packages, high income earners still received at least $200 to $400.

Several ruling party MPs had questioned the fiscal prudence of this generous give-away. For the rich, a few hundred dollars did not make much of an impact on either their bank books or their voting patterns. A friend of mine who is a successful investor in the financial services sector even asked me last month, “What is the Progress Package?”

These handouts were given in the form of cash deposits in one’s bank account or CPF account. Although they were meant to cushion the impact of economic restructuring, many less frugal Singaporeans saw it as ang pow money to be spent immediately on luxuries. The longer-than-usual queues at ATMs all over town and the extra long store hours in Orchard Road on the day the Progress Package was disbursed were suggestive of where many “struggling” Singaporeans had spent this money.

The government should have been more prudent in this respect. The money should not have been wasted on giving to the rich, who have no need for cash assistance from the government. It would have been better if it spread out and given in the form of vouchers for essential items rather than in one lump sum cash payment. This would have ensured that the money was not frivolously spent.

6. Reduce government administration expenditure

The government wants to reduce the tax burden for the rich (including MNCs) so they won’t pack up and leave. However it will be impossible to increase revenue without taxing the rich more, either directly or indirectly. This is because most of the tax burden in Singapore already falls on them. If the government wants more money to spend but does not want to make life more expensive for the rich, the best solution would be to reduce on government administration expenditure.

This is not a new
proposal, and indeed the government has already set up a Cut Waste Panel to look into this matter. The Panel has received almost 3,700 suggestions from the public but has agreed to implement just 91 of them – a 2 per cent take-up rate. For the remaining suggestions, government ministries have claimed that they are either already being done or “have been addressed in current policy/practice”.

Assuming that most Singaporeans who wrote in to the Cut Waste Panel had genuine observations and concerns, it is surprising that only 91 suggestions were deemed implementable.

One of the most politically contentious issues is salaries. Manpower costs make up the largest component of government administration expenditure.

Even if one were to completely accept the government’s anti-corruption and talent retention arguments for paying our ministers and top civil servants the highest public sector salaries in the world, is it really necessary to pay them so much more than their counterparts in the richest countries? (The Singapore President earns 3.7 times more than the US President, and the Singapore Prime Minister earns 6.4 times more than the British PM.)

Recently Minister in charge of the civil service Teo Chee Hean said that civil service salaries would rise next year in order to retain talent. Senior Minister Goh Chok Tong also hinted at a rise in ministerial salaries. KTM has pointed out that increasing the Staff Grade salary benchmark will mean that the salaries of the hundreds of Superscale officers will increase. This would cost taxpayers millions of dollars, on top of the already sky high salaries that the ministers and top civil servants earn.

Is this really the most effective way to retain talent and prevent corruption? Human resource practitioners know that salary is not the most important reason why talented employees stay on the job. In fact, a high salary often succeeds in retaining non-performers while having a marginal influence on retaining talent. Having previously worked in the civil service, I know that there are many other reasons besides salaries that result in such a high turnover rate. The government cannot keep throwing money at a problem without solving the root cause.

And if exceedingly high pay can prevent corruption, why is it that so many African dictators continue accepting bribes even when they already have billions stashed away in Swiss bank accounts? Greed knows no boundaries. The Singapore Civil Service has managed to stay relatively corruption-free not because of its very high salaries, but because of the very heavy penalties imposed on offenders.

The GST spin and the whole truth

Part 2 of the series on the GST hike

Continuing from my previous post, this post will highlight some of the spin that the government and the mainstream media has been putting out to soften the blow of the GST hike announcement. It will also explore some other possible reasons for the government’s decision, not all of which have been publicised.

In most other developed countries, a two per cent increase in consumption tax – which will impact every single resident in the country – would be cause for a huge public outcry. In Hong Kong, the government’s mere proposal to introduce a 5 per cent GST sparked huge protests in August by 3,000 to 10,000 Hong Kongers, including local businesses operators, traders and retailers.

Unsurprisingly in Singapore, where street protests are banned, the shock announcement has been met with meek acceptance by MPs and the mainstream media, and a sense of resignation by the general population.

The spin

The government and the mainstream media are fond of comparing figures with other countries to show how much better off Singaporeans are. TODAY’s report (15 November) dutifully did a “consumption tax comparison” between Singapore and other countries. It cited how Australia, Europe, the UK and New Zealand have GSTs of between 10 and 17.5 per cent.

The sales tax in the US was listed as being “up to 9.4 per cent”, but the report conveniently omitted the fact that some states like Oregon, Delaware and Montana don’t even have sales tax. In New York city, although the sales tax is 8.325 per cent, essential items like groceries and clothing under US$110 are exempt.

The report also failed to mention that these countries are all welfare states (to varying degrees) which spend a higher proportion of government revenue on public assistance and health care than Singapore. Australia, for example, spent A$17.1 billion or 2.3 per cent of its GDP on just welfare services in FY2002-03. In contrast, the Singapore government’s total expenditure on health and community development, youth and sports in 2005 took up only 1.28 per cent of that year’s GDP (assuming that all of it goes to public assistance, which it certainly doesn’t.)

On the other hand, Japan, a developed economy just like Singapore, has continued to maintain its 5 per cent consumption tax. Hong Kong, which has a corporate tax rate that is 4 per cent lower than Singapore’s, has yet to even implement their proposed 5 per cent GST.

Local blogosphere hasn’t been so acquiescent in its reaction to the GST hike announcement. It is one of the hottest topics on local blogs, with article after article (some say too many) slamming the GST as a regressive tax which will hurt the poor.

The mantra that the government is singing to Singaporeans is that the GST hike is about “tilting the playing field in favour of the poor”. Coming hot on the heels of the tragic suicide by a Singaporean in financial crisis and the Wee Shu Min affair, the government has probably calculated that the best way to sugar coat this bitter pill is to emphasise that most of the additional revenue collected will go to help the poor.

The whole truth (well, at least some of it)

The actual reasons for the increase are not as clear cut as the sound bites portray. Firstly, the government is trying hard to balance the budget, which is currently in deficit. Between FY2002 and FY2006, the government accumulated a net overall budget deficit of $4.23 billion. (Note: This figure does not factor in additional inflows like capital receipts from statutory boards – more of this in my next post.) In certain circumstances, a large and prolonged budget deficit could lead to higher inflation and interest rates (although not necessarily so).

Secondly, the GST hike will give room for the government to further lower corporate and top bracket personal income tax rates to increase economic competitiveness. As globalisation and Singapore’s high operating costs are resulting in more and more multinational companies (MNCs) relocating to lower cost countries like China, the government is desperately trying to boost the incentives for these entities to remain in Singapore. Slashing direct taxes for high income earners and MNCs is seen as key to achieving this.

Thirdly, with the elections over (but not too recently) and the PAP receiving its “strong mandate”, there is no better time than now to feed Singaporeans the bitter medicine so they will have more time to forget its unpleasant aftertaste before the next elections in 2011.

Lastly (and this is what the government is emphasising), with an ageing population, growing income inequality and more populist pressure to increase social spending, the government is embarking on a policy shift to provide a little more financial assistance to the needy. Someone will have to pay for this “Workfare” assistance.

However, it is unlikely that the entire $1.5 billion expected windfall from the GST increase will be used to fund social assistance programmes. Institute of Southeast Asian Studies researcher Terence Chong told TODAY (15 November) that he “doubt(s) the full amount will be used purely for assistance programmes. Some of it may go into research and development costs, some may be used to fund education.”

Conclusion

Despite the concerted efforts by the government and the media to paint a rosy picture behind the GST hike, it is clear that the announcement is not going down well with most Singaporeans, except the fiscal conservatives who dominate the Establishment. Keeping in mind that it is still three months before Budget 2007 is officially announced, I would not exclude the possibility that the government might back down slightly under pressure on the GST hike. Singaporeans might either see a very gradual increase in the GST rate or generous offset packages to help them cope with the hike.

* * * * * *

Coming up next….Some suggestions on how the government could balance the budget without hiking the GST.

.

Is GST really a fairer tax for the poor and SMEs?

This is a first in a three-part series of commentaries about the impending GST hike. In this first part, I will examine the impact of GST on the lower income earners and small businesses. Part 2 will analyse the government’s and media’s “spin” accompanying the announcement of the hike. In Part 3, I will explore some of the alternative sources of revenue that can be used to increase social assistance to the poor yet balance the budget, as well as ways to cushion the impact of the GST hike for the poor.

On Monday, Prime Minister Lee Hsien Loong announced that Singapore’s Goods and Services Tax (GST) will be increased to 7 per cent in 2007, from the current 5 per cent.

The decision to increase in the GST requires much greater scrutiny by the public, consumer groups, small businesses and the Opposition. The government needs to stop its political spin and be fully transparent with Singaporeans on this issue. It needs to explain clearly why the GST hike is necessary, whether any alternative solutions have been explored, and outline exactly what it intends to do with the increased revenue from this tax increase.

So far Singaporeans have been told by the government and the media that the extra revenue will be used to fund increased social assistance programmes that will benefit the lower income groups.

While it is laudable that the government intends to increase public spending to help needy Singaporeans, it is disingenuous to put out a message that this tax increase will benefit the poor.

The GST, unlike income tax, is widely recognised as a regressive tax. This is because it taxes both rich and poor for all items, including essential goods and services such as clothing, food, utilities and transport. Since the poor have less disposable income, the GST effectively takes a higher percentage of income from the poor than the rich.

Impact on businesses and the economy

The GST hike will also negatively impact the bottom line of small businesses. Currently, businesses with less than $1 million in revenue a year cannot pass the GST costs of their goods purchases (their “input GST”) to their customers if they are not GST-registered (which most aren’t). So a mama shop owner (a small sundries retailer) will be paying 7 per cent tax for all the goods he purchases from wholesalers, but will not be able to collect any of it back from his customers.

An increase in consumption tax will also reduce consumer spending. While this may be good for individual savings, will be bad for many businesses and could impact the overall economy of the country.

The Singapore Chinese Chamber of Commerce & Industry (SCCCI) issued a statement yesterday expressing “great concern and disappointment” at the impending GST hike. SCCCI added that “the proposed hike is likely to have an immediate and detrimental effect on local spending, and add to the cost burden for many local companies. Our long-term competitiveness will also suffer.”

The GST has been pitched in the past as “a fairer tax”. But fairer to whom? If the government is really keen on improving the lot of the poor and small businesses, a GST hike is certainly not the best way to go.

* * * * * *

Coming up next…Putting the “spin” on the GST hike.

.