Press Release by The Reform Party on 23 February 2010

The Reform Party has already set out its response to the report by the Economic Strategies Committee in its press release dated 3^rd February 2010.

We said there that “there must be serious doubts about the government’s ability to deliver given that the track record in this regard (of raising productivity) of the last ten years has been so poor and whether anything more than lip service is being paid to weaning the economy off its dependence on cheap foreign labour.”

The 2010 Budget has done nothing to allay our doubts. In fact it has increased them. The Honourable Minister talks about the need to raise our productivity growth rate to 2 to 3% per annum from its current level of less than 1% p.a. However, given that productivity fell by 1.1% in 2007, by 7.8% in 2008 and by 4.7% in 2009 (for a cumulative fall of 14%), we require at least six years of productivity growth at 2% p.a. to get back to where we were in 2006. In the meantime most of the advanced economies continued to perform better than Singapore. This was particularly the case in the US where productivity has risen by 5% over the last four quarters. In manufacturing alone our productivity grew by an average of 0.7% p.a. over the period 2000-08 whereas South Korea, Taiwan, Sweden and the US managed 7.4%, 5.2%, 4.8% and 4.6% respectively over the same period.

Out of a group of 17 economies we were second from bottom.

So even if we manage to double our productivity growth rate over the longer term we will still be unlikely to close the gap that has grown much wider over the last ten years. We will undoubtedly see a jump in the productivity growth rate in the short-term provided our output recovers rapidly on the back of global economic growth. That may allow the PAP to proclaim the short-term success of their strategy on the basis of what would have occurred anyway. However once the global economy slows down or goes into renewed recession (unlikely but still possible) productivity growth is likely to stagnate once more.

The same faulty reasoning is evidenced in the Honourable Minister’s assertion that the foreign worker policy raised wages for Singaporeans. He justifies this by pointing to a rise in median income per household member, after adjusting for inflation, of 20% in the period 2005-2008. However, using the government’s figures, the rise over the whole decade appears to have been more like 18% because median incomes fell in 2008 and 2009. The Minister has claimed that this demonstrates the success of the government’s policies. However this could have occurred without any rise in the living standards of the median Singaporean citizen. A plausible explanation is as follows.

Firstly though he omits to tell us, he probably means residents (which include PRs) and not just citizens when he talks about Singaporean households. Over the past decade the resident population grew by 15% while the resident labour force grew by approximately 25%. This was undoubtedly due to the surge in new citizens and PRs as a result of the government’s liberal immigration policies. The majority of these new residents did not have dependents (hence the much faster rise in the resident labour force than the resident population) and all of them would have had jobs so the proportion of working adults in the average resident household would have risen. As a result we would have seen an increase in real median income per household member without any real increase in the median incomes of Singaporean citizens who were already here before this period began, i.e., the majority of us.

Another reason why the Minister’s figure is misleading is that it excludes households consisting solely of non-working persons over 60. If their incomes fell during this period or their numbers increased as a proportion of total households), due not only to the aging population but also because of the diminished employment opportunities for senior citizens as a result of the government’s open-door foreign worker policy, then excluding this group would distort the figure for median income per household member and make it look better than it really is.

So the Minister has painted an exaggeratedly rosy picture of the government’s failed economic policies of the past decade while at the same time not even beginning to grasp the enormity of the transformation necessary in the economy if Singapore is to prevent the productivity gap with the advanced economies continuing to widen. However the Reform Party has serious doubts as to whether the measures set out in the Budget will have the effect of achieving even an increase in the productivity growth rate that will take us to the bottom end of the range that the other major industrialized economies are achieving. Taking each of the Minister’s major initiatives in turn, our comments are as follows:

Continuing Education and Training

The Reform Party supports substantially increasing the amounts spent on continuing education and training. In fact we have been saying for some time that Singapore invests too little in education and human capital and drawing a direct correlation between rates of productivity growth and amounts invested in public education. It’s no coincidence that Sweden invests nearly 8% of its GDP in education and had one of the highest productivity growth rates. The neglect of investment in our education system and our own workers by this government for an extended period of time is a major factor in our poor productivity record and also the need to import so many foreign graduates and skilled labour. The Reform Party intends to increase substantially the amounts spent on education at all levels and not just on continuing education and training. In any case $500 million p.a. is probably too small an amount given the scale of the productivity problem and the size of Singapore’s GDP. In addition only the sketchiest details are provided as to how this money will be spent. For instance, the maximum grants given under the related Workfare Training Scheme are far too small to realistically cover the cost of retraining older workers.

At the same time the Reform Party would want to make sure that the funds were not wasted as so many other of this government’s schemes seem to have been. For instance why do we need a new National Productivity Council when we already have SPRING? The government’s answer to everything seems to be just to create more bureaucracy at increased cost to the taxpayer.

Productivity and Innovation Credit

While the Reform Party supports in-principle the idea of tax breaks to boost productivity this measure is not targeted enough to achieve the desired effect, while at the same time inviting creative accounting on the part of companies to reclassify expenditures to fall within these categories. The Reform Party would like to see the tax breaks restricted to specifically productivity-boosting investment.  We fail to see the benefit from extending the scope of the tax break to other types of investment. We already have one of the lowest corporate tax rates in the world and invest nearly 30% of our GDP (a share that has risen substantially over the last few years) so it is hard to see that more broad-brush tax breaks are the answer. Just as with the Jobs Credit Scheme which was a wasteful and ill-conceived labour subsidy which contributed to the dramatic fall in labour productivity, the Productivity and Innovation Credit is likely to lead to wasteful over investment which will depress profitability, ultimately leading to stagnation as the reliance on exports and investment to drive growth rather than consumption becomes more pronounced.

National Productivity Fund

This is only a fund and not actual spending and represents a commitment of only up to $1 billion for the first five years, or $200 million p.a. As the fund is to be disbursed by the National Productivity Council for specific productivity initiatives the risk must be that it is wasted and not properly accounted for. In the example cited, construction, productivity improvements are much more likely to come about if the supply of cheap labour to the construction industry is reduced. The gradual nature and relatively small size of the increase in foreign worker levies mean that this is unlikely to come about. In fact the cost of foreign workers may not rise if employers have enough bargaining power to ensure that they do not bear the cost of the increase. There may be a role for a National Productivity Fund but the Reform Party believes that it is more likely to lead to the waste of taxpayers’ money and is no substitute for using the price mechanism to achieve economic goals. This is a government that rightly is opposed to the development of a welfare state as far as individuals are concerned but seems always prepared to make an exception for business.

Increase in Foreign Worker Levies

As pointed out above, the increases will be too gradual and of too small size to radically affect the demand for foreign labour. In fact depending on employers’ bargaining power and their ability to turn to cheaper sources of labour, there may not be any rise in the total cost of labour and thus no incentive to raise productivity. This is why the Reform Party has consistently advocated the use of a minimum wage instead which would apply to all workers and thus force employers to cut back on the least productive and low-skilled workers first. It is worrying that the Minister says that the growth target is still 3-5% p.a. when the target for productivity growth is only 2%. Assuming that our domestic workforce (excluding new citizens and PRs) is shrinking, this means that the government still intends to allow the foreign workforce to grow, possibly by considerably in excess of 3% p.a. This is the clearest signal that this Budget does not represent a change in the failed policies of the past that have not benefited the average Singaporean. We will continue to see a rise in the foreign worker population despite the government’s statements to the contrary.

In addition the Reform Party would like the Minister to have provided some estimate of the additional revenue to be raised from the increases. Given that the average foreign worker levy is expected to rise by $100 by 2012, it seems reasonable to expect more than $1 billion p.a. in additional revenue to be raised by 2012. So while it may be true that the government is committed to up to $1.1 billion p.a. in extra spending to boost productivity and encourage innovation the effect of the increased taxes will mean that the Budget is revenue-neutral and possibly contractionary  if spending under the various schemes is less than anticipated.

Growing Globally Competitive Companies

Naturally the Reform Party supports this aim but it is difficult to see how creating another set of new acronyms and promising yet more spending is any different from the numerous other initiatives announced by the government in previous Budgets. The Reform Party believes that it is high time that the plethora of schemes be audited for efficiency and to ensure that they are not just providing jobs for under-employed bureaucrats without any market experience.

The Reform Party is fully supportive of the commitment to increasing R&D and of the National Research Fund. However it would like to see Singapore concentrate on areas such as the commercialization of innovation rather than trying to duplicate what is being done by the big boys-the US, EU, Japan and China. Also this government fails to recognize that the restrictions on freedom of expression as well as the system of rote-based learning have to be changed if Singapore is to become competitive as a “knowledge” economy. This government fails to recognize that those countries which consistently top the charts for innovation are those that also have the highest levels of human freedom as measured by several objective indices, i.e., Finland, Sweden, Denmark, the US, Canada, Japan and the UK. Singapore ranks in the lower half of the table on most of these indices. Is it any accident that South Korea and Taiwan, which have out-performed Singapore by a wide margin on measures of productivity and innovation, also have considerably freer political systems?

Including All Singaporeans in Growth

Despite impressive-sounding phrases about the government’s achievements in this area, this Budget’s initiatives do very little to achieve this objective. The social safety net is very meagre compared with other economies at a similar stage of development yet far from improving our economic performance this has damaged it. Singapore is one of the most unequal societies in the world (a higher Gini coefficient than the US) despite being only a small city. There is increasing evidence that very high levels of income inequality are correlated with undesirable outcomes in terms of a whole range of indicators of a society’s well-being. Whilst we are not in favour of redistributive taxation, these are some of the measures the Reform Party would introduce if elected to power to ensure a more inclusive society:

• Reduce taxes and fees on the less well-off
• Introduce a minimum wage
• Invest in creating a system of basic universal health insurance to replace the inadequate Medisave and Medishield schemes. This government needs to recognize that public health is an investment good rather than a welfare drain. This can be funded by earmarking part of CPF contributions
• Create a system of limited unemployment insurance to be funded from CPF
• Introduce a basic old age pension again to be funded from CPF contributions
• Allow individuals to decide how much they wanted to put into CPF once the above three objectives had been met.
• Introduce universal, free and compulsory education from pre-school to secondary level
• Expand tertiary enrollment substantially and provide assistance for people at all stages of working life to complete degrees or further education as part of an expansion of the Continuing Education and Training Initiative announced in the Budget
• Privatize Temasek and GIC and distribute equity to Singaporean citizens
• Dismantle the GLC structure and adopt a more pro-active competition policy
• Release more land for low-cost housing and inject more competition into the low-cost house building process by allowing private sector to compete with HDB
• Ensure that NS burden was fairly shared by new citizens and PRs
• Adopt a more rational immigration policy where the growth in the labour force is driven by genuine skill shortages rather than by a desire simply to expand the size of the economy

Budget Position

It is difficult to follow the government’s reasoning here or to obtain any kind of clarity. The Minister talks about the basic deficit (the balance of Operating Revenues and Expenditures) being 2.6% of GDP.  However, after the Net Investments Return Contribution and before top-ups to trust and endowment funds, this is reduced and becomes a surplus of 0.2% of GDP. There is no reason in economic terms not to include the whole of the income from our investments, rather than 50% and in that case we are running a considerable surplus of around 3% of GDP. Also top-ups to trust funds does not represent actual spending so has no effect on the government’s overall fiscal position. The Reform Party would have liked to see further tax cuts or increased spending of at least 3% of GDP to advance the objectives above and to stimulate our economy in a weak global economic environment.

Conclusion

Despite acknowledging what the Reform Party has been pointing out for some time, the government has set undemanding targets for productivity growth that are likely to be met anyway as the economy recovers from recession. Singapore is in danger of slipping further behind the advanced economies with all the consequences this entails for real incomes. Yet the Budget fails to address this and instead we get another round of wasteful corporate subsidies and tax breaks rather than targeted incentives to raise productivity. The government has ducked the opportunity to introduce a minimum wage as a means of forcing business to use labour more productively and instead opted for a relatively painless rise in foreign worker levies. These are not likely to have much effect and may even be absorbed by the foreign workers themselves. The Reform Party supports the additional amounts allocated to Continuing Education and Training and to boost public R&D. However this can only be part of a big boost in investment in education which we have called for for some time. While the government pays lip service to building a more inclusive society, this is unlikely to happen until they adopt the Reform Party policies outlined above. Only by investing more in our own people instead of allowing easy recourse to cheap foreign labour are we likely to get a sustained jump in productivity growth.

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