Budget 2012-Part TwoPublished: 2nd March 2012
In Part 1, we focussed on the format of the budget which the Reform Party believes should be laid out to IMF standards, the international benchmark for budget presentations in developed Nations. Where in full footnotes and explanations are provided. We also highlighted the fact that no amount of debate will ever furnish a comprehensive list of assets and their valuations including the assets held by but not limited to our sovereign wealth funds the Singapore land authority the government of Singapore directly, as even our Elected President does not hold the power to ascertain these details. In Part 3 we will focus on the round up to the budget and the various quasi-debates raised.
Here in part 2 we go through various individual aspects
The conclusions reached in our first response to the Budget are unaltered. In particular we strongly refute the FM’s claim to have introduced a strongly progressive tax system.
While the Reform Party is ideologically committed to keeping the burden of taxation as low as possible and sees no reason to raise taxes on higher incomes at the moment we take the view that much more needs to be done to raise the income levels of those at the bottom. Our policy goals include:
- Universal health insurance
- Universal and compulsory free education up to pre-university level
- A minimum old age pension
- Allowing HDB owners to buy the freehold of their properties
- Much more generous levels of child benefit
- A possible guaranteed minimum income for those in full time employment replacing Workfare.
- Tighter immigration controls or higher taxes on foreign labour or an across the board minimum wage
(A) dealt with in part 1.
(B) An Inclusive Society. A Stronger Singapore
Unrealistic Productivity Targets
We note the Finance Minister appears to be backtracking on his target of 2-3% productivity growth per annum. This will indeed be challenging given that productivity growth last year was only a little over 1% in 2011 after the bounce-back in 2010.
Back in 1991 the government announced a productivity growth target of 3-4% per annum as part of the IT 2000 initiative (see William Gibson’s article, Disneyland With the Death Penalty, http://www.wired.com/wired/archive/1.04/gibson.html?pg=5&topic=&topic_set=) . In the event they achieved around 2% per annum over the period 2000-2010 and this was aided by a tremendous surge in 2010. As usual the Statistics Department have not explained this but it seems to have been due to new investments in pharmaceutical and petrochemicals production. This was only just as fast as the US (helped again by the surge which is unlikely to be repeated) but less than half that achieved by South Korea over the same period.
If we look at manufacturing output per hour this grew only about 60% as fast as the US over this period even including the 2010 outlier. With real incomes being ultimately determined by productivity growth it is unlikely that the Finance Minister can raise real median incomes by 30% over the next ten years unless he redistributes a large part of the unnecessarily high government surplus to Singaporeans (which the RP has advocated for some years now)or by redistribution from profits to wages through higher transfer payments financed by higher taxes on capital or by raising wages by restricting the inflow and raising the cost of foreign labour.
Since his remuneration is now partially tied to real median incomes and real incomes of the bottom 20% he is likely to resort to both options. In fact the government is already raising the cost of foreign labour through various measures bringing government policy closer to that of the Reform Party which has called for either tighter immigration controls or higher taxes on foreign labour or an across the board minimum wage.
Use of Questionable Statistics
Just as the Budget lacked clarity on the real extent of the Government’s surplus so the Finance Minister employed questionable or irrelevant statistics to buttress his arguments.
The FM cites growth in real median income per household member which he says has risen by just under 17% over the last five years. However the performance over the last ten years is not quite as impressive as it rose only less than an additional one percent over the additional five years. More importantly he has not corrected for any changes in the ratio of employed members to dependents per household. Singaporeans are having fewer children. More old people may be forming separate households where no one works (households where no one works are excluded from the statistics). The high cost of housing might mean adult children and other employed family members are more likely to live to remain under one roof than move out and form a separate household. For all these reasons and more median incomes per household member could rise without there being any rise in real wages. Therefore it is difficult to understand why the FM has chosen this statistic but not provided us with any explanation.
(C) Restructuring to Sustain Growth
A Genuine Commitment to Reduce Our Dependence on Foreign Labour?
The Reform Party welcomes moves to reduce the dependence on foreign labour. Only by raising the productivity of Singaporeans are we going to raise living standards in the long term. GDP growth fuelled by merely increasing the amount of labour inputs is not sustainable in the long term.
However the measures announced by the FM come after two years in which the number of foreign workers has continued to soar and has gone well beyond the targeted share of one-third of our workforce. It is also not clear that they will have the desired effect. They also fail to go far enough.
Firstly the reduction in the Dependency Ratio Ceiling could presumably be circumvented by the expedient of setting up new companies or subcontracting work to or seconding workers from companies that still have room to employ foreign workers to those that do not.
Secondly the reductions in the dependency ratio ceiling are very gradual and for existing foreign workers there is a long time to phase in the new restrictions.
Thirdly, there have been prosecutions recently of Singaporean firms for putting phantom Singaporean workers on the payroll and just paying them CPF in order to use the additional headroom to employ foreign workers. How confident is the FM that this problem is not widespread? Wearing his other hat as Minister of Manpower, can he confirm that MOM has an adequate budget to investigate and stop these abuses?
Fourthly, if the DRC were fully utilized it would allow a much higher level of foreign workers in the total workforce than one-third so the ceilings are still too high.
The RP doubts the sincerity of the government’s commitment to reduce the number of foreign workers and look after the interests of Singaporean workers. These doubts are reinforced by the government’s plans to grow labour-intensive sectors of the economy such as tourism. An example is the plan to build 26 new hotels by 2014. The workers for these will presumably to a large extent have to come from abroad.
The increase in the salary hurdle for EP and SP holders are still too low given that it comes after several years when it was not increased at all. We would also like the FM to answer, in the light of recent reports of fraud, how confident he is that the practice of inflating salaries so as to qualify for a higher category with fewer restrictions is not prevalent.
Even the increase in foreign worker levies may not have the desired effect if employers are able to source cheaper labour from new sources or if foreign workers or middlemen absorb part of the rise in costs. In that case the Treasury benefits from what international trade theory calls a positive terms of trade effect but Singapore workers do not benefit as the price of foreign labour remains unchanged.
For these reasons the RP would prefer either a minimum wage, greater quantitative restrictions on foreign workers, or a flat tax on foreign labour set sufficiently high to equalise the cost of employing foreign and domestic labour at the median income level.
Yet More Wasteful Corporate Subsidies
The Reform Party generally dislikes the idea of a wage subsidy as it encourages companies to use labour unproductively. We prefer a minimum wage instead with lower levels for older and young workers. This would not be a burden on the taxpayer.
We are sceptical as to the value of the other benefits provided and concerned about their revenue cost. This is particularly true as we have yet to see any audit of previous corporate subsidies for productivity enhancements and training. In the absence of figures we suspect that a large percentage is wasted. Even the minimal safeguards on the quality or content of training courses have been removed, presumably as a disguised way to subsidise firms to keep employees on and stop unemployment levels rising. In that sense it may actually have the opposite effect from that intended and reduce productivity. It is also indiscriminate and rewards firms regardless of whether they are profitable or have actually improved productivity. In place of the way the FM seems to be tossing bundles of cash out of a helicopter the RP would prefer to cut the overall tax rate while at the same time channelling funds in a more targeted manner to new start-ups and promising technologies.
However any further cuts in the corporate tax rate may ultimately be self-defeating if Obama succeeds in getting a minimum tax on US corporations passed which would act to negate the advantages of investing in tax havens. It is possible the EU could also follow suit.
Do We Need to Subsidise Tourism Even More?
The RP is concerned about the FM’s injection of $900 million into the Tourism Development Fund. As usual we are not provided with any details of how the money is spent. Once the FM allocates money to a fund that seems to be the end of Parliamentary scrutiny of how that money is spent or not spent and whether there has been mismanagement or fraud. We discussed the lack of transparency of the budgetary process in Part One so we will not labour the point here.
However we reiterate our view that the government needs to demonstrate the cost-benefit analysis that led to this decision. Tourism is not an industry that has spin-off benefits or increasing returns to scale. Jobs created are usually labour intensive and go mostly to foreigners. In addition it may be going to subsidise prestige events like the F1 race. It is difficult to see how the direct and indirect costs of this event are justified by the returns. Events like this impose many negative externalities on Singaporeans in the form of higher levels of congestion and pollution.
(D) Enhancing Our Transport System
Why is the government subsidizing privately owned public transport operators?
The Reform Party is at a loss to understand the rationale for providing $1.1 billion to the listed companies to buy new buses. There could be no clearer indication that the whole public transport system is a mess. It is an uneasy mixture of state majority shareholding with private shareholders (SMRT) and a listed private company (ComfortDelgro) with the major shareholder (around 14%) being the investment arm of NTUC and the many of the board of directors and senior management having close ties to the GLCs and the PAP. In addition ComfortDelgro has numerous overseas investments including running a major share of the bus services in London.
We have previously called for an urgent review of the terms under which both SMRT and SBS Transit lease rolling stock and track from the SLA after the recent MRT breakdowns. This appears to be heavily subsidized which needs to be justified in view of the 44% private shareholding in SMRT and SBS Transit’s ownership by a private company. SMRT and SBS Transit also enjoy subsidized security costs as NS men are used to provide security and SMRT is not billed for the costs unlike public transport operators in the UK, for example, who have to bear the costs of security. SMRT pays dividends to its private shareholders as does ComfortDelgro and it is difficult to see why they should be subsidized. Neither company faces any real competition which is necessary as a spur to efficiency and lower costs or any effective regulation. This removes the major justification for private ownership.
The purchase of new buses appears to be yet another tax payer funded subsidy for a profit based corporation. As usual the FM has provided few details of the financial arrangements. Under what terms are the new buses being provided to the public transport operators? Is it a lease or an outright grant? Will there be any recovery of the cost to the taxpayer? As discussed above, ComfortDelgro has extensive overseas operations where it runs more modern busses. What steps has the FM taken to ring-fence the Singapore operations to prevent the monopoly profits and taxpayer subsidies being used to subsidize expansion and investment in other countries’ bus services?
We would prefer to see that a subsidy be given directly to the people in the form of free bus travel passes for senior citizens and school age children. I note that in the UK where ComfortDelgro runs Metro line, transport is free for these citizens.
The Reform Party would prefer that the government first explore the option of opening up public transport to greater competition as a spur to greater investment and higher quality service before being so liberal with taxpayers’ money.
(E) A Fair and Inclusive Society
Fundamental Reform Necessary
The FM has announced some incremental steps to help senior citizens, the disabled and those on low incomes. However though these expenditures might seem impressive, they appear much less so when set against the additions to already generous corporate subsidies, the continuing real increases in defence expenditures without any credible regional threat and the unnecessarily high level of government surpluses as a proportion of GDP.
The increase in CPF contributions will not go far to address the problem of older citizens who have too little in their ordinary CPF accounts. In Part One we criticised the FM’s announcement of various schemes to enable our seniors to unlock the savings tied up in their property. We felt that the lack of transparency and the government’s control over the housing market make it impossible to judge whether senior citizens are getting a good deal on the switch from larger to smaller units. If the studio units are overpriced relative to larger units then the Silver Housing Bonus may be nothing of the kind. We are concerned that the sellers will not benefit from the profits from replacement of their relatively low-density housing with much higher-density smaller units. The HDB and the government’s confidence trick is to convince Singaporeans that upgrading is being done for their benefit when in fact it more than pays for itself. The Reform Party would allow HDB owners to purchase their freeholds which would allow them to benefit fully from rising property values.
The Reform Party repeats its call for the introduction of a basic old age pension which would be paid to all who have contributed to CPF for a minimum number of years regardless of whether they have enough savings in their Ordinary Account to purchase an annuity giving the same income stream when they retire. Appropriate safeguards against moral hazard or attempts to disguise the true level of assets would have to be enacted however.
Increase in Health Spending Cannot Disguise Fall in Healthcare Infrastructure to Developing Country Levels
The increased spending on healthcare comes after years of grossly inadequate spending when Singaporeans had to endure shortages of beds and long waits at polyclinics. We had fallen to the level of much poorer countries such as Thailand and Malaysia in the number of beds, doctors and nurses per capita. If this had happened in any other advanced country it would not have been tolerated by the electorate.
The Reform Party would introduce a comprehensive universal health insurance scheme to replace the current inadequate patchwork of Medifund, Medisave and Medishield.
Much More Should Be Done For Disabled
It is shameful that despite our high income levels this government continues to neglect the disabled particularly their educational and mobility access needs. While there is more money provided for early intervention this is still inadequate. 2000 places barely begins to scratch the surface of the problem. The Compulsory Education Act does not even make it compulsory for children with special needs to attend school thus freeing the government from the commitment to provide funding for their needs. This is in stark contrast to other advanced countries such as the UK where the government is required by law to educate special needs children even if this requires extra teachers and classroom assistants in normal schools as well as special schools. In this as in everything else the PAP government suffers from a Victorian approach to those who through no fault of their own draw the short straw in the lottery of life.
The FM is also doing too little to help the disabled into employment. It was recently announced that companies doing business with the US government would as a condition of their contract be required to ensure that at least 7% of their employees were disabled. Similar provisions exist in other advanced countries. The government should make a start by mandating that a certain percentage of jobs with government bodies, stat boards and GLC companies be filled by disabled people. In addition all companies of a certain size should be required to make their workplaces accessible to disabled workers. Whilst new building s have some access, older buildings need to be mandated to be retro fitted and this applies to public buildings as well.
We would be interested in knowing how the FM arrives at a figure of 3% of Singaporeans with disabilities. Undoubtedly he is using too narrow a definition which while it may save the government money in the short term does nothing to deal with it longer term.
Uplifting Lower Income Families?
The question here is why education is still not free, universal (the disabled are excluded), or compulsory beyond primary level. Education should be completely free from pre-school up to pre-university levels. The cost of doing this is small when compared to the regular increases in other unproductive areas of the Budget and the very high level of government saving.
In addition, while bemoaning the drop in fertility rates, the government is still doing too little to help with child care costs particularly for low income families. We favour a means-tested and simple to understand Child Credit targeted at low income families to replace and improve on the current inefficient and unnecessarily complex patchwork of financial assistance schemes. The Baby Bonus is slanted towards those with a high level of savings to begin with and thus does not really help those in need. We suspect that the eligibility for these schemes is probably assessed in an arbitrary and non-transparent manner.
An Unfair Tax System
To claim that Singapore’s tax system is progressive is like saying that Singapore is democratic. It may be progressive but it is much less progressive than the tax systems of most advanced nations. This is an example of the Orwellian double speak which has characterised our government for too long.
In his Round-Up Speech in 2011the FM produced statistics to show that the lower income groups received more in benefits than they paid in taxes. However absolute amounts are not relevant unless they are corrected for the share of total income earned by that portion of the income distribution. We need to see what pre-and post-tax and benefit income shares are before we can say whether the tax system is progressive. We also need the FM to explain exactly how he calculates benefits as we are not sure whether they are provided to all households without conditions and whether they consist largely of payments into Medisave or CPF Special Accounts or rebates on already overpriced utilities which are not available to meet household expenditures.
In most advanced countries the lowest deciles would pay no taxes except indirect ones and would receive far greater benefits than lower income groups receive in Singapore. For instance in most European countries medical care and education would be entirely free but in Singapore the lower income groups have to pay for them. A quick analysis using the Household Expenditure Survey 2011 shows that the 71st to 80th decile may have paid about 3.6 times as much in tax as the 11th to 20th decile but they earn nearly eight times as much. Other reasons to doubt the validity of the FM’s assertions include:
- Most of CPF can only be used to pay for housing which in combination with the government’s near-monopoly over the provision of housing for the bulk of the population ensures that this asset is over-priced. CPF forms a much larger proportion of the incomes of the less well-off. The balance is put into Medisave or held back to purchase an annuity. Medisave and Medishield do not even cover routine medical expenses and are likely to be wholly inadequate to meet lifetime medical expenses for lower income groups. Part of their income will have to be set aside to meet medical and educational expenses that in other advanced nations are wholly covered out of taxes or insurance premiums paid by the state and employers.
- The FM has not included the higher costs imposed on consumers in the form of higher prices and user fees because of government monopolies in areas like public transport, housing, utilities, mobile services and other basic goods. These take up a larger proportion of the incomes of the lower deciles than of the higher ones.
As we approach the end of Budget 2012 we have not done enough to address discus or open out a debate on our unfair tax system.