Debate on Annual Budget Statement

Mr Deputy Speaker, 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, after adjustments for taxes and transfers.

In his Budget speech, the Deputy Prime Minister 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 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.

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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 on raising crime rates".

I am glad to note the Deputy Prime Minister's view that meritocracy alone will not guarantee social mobility. For too long, we have been told that we can attain the "Singapore Dream" as long as we work hard and have the talent. This is not necessarily so. There are many other factors that hold an individual back, many of which are beyond his or her control. Some have to do with an individual's socio-economic background, and others are institutional, like our high stakes examination system, which often depends so much on expensive tuition to excel in.

I welcome the moves towards making our tax system more progressive. This is an important step towards a fairer society. Comments by some analysts that this is a "Robin Hood budget" are misplaced. Singapore still trails behind many other developed countries in the progressivity of its tax system.

The first step towards building a truly "democratic society based on justice and equality" is to acknowledge that we are all in this together. The wealthy in Singapore − and we have the highest percentage of millionaires and the second-highest percentage of ultra high net-worth households – the wealthy must be prepared to contribute their fair share of taxes.

The rich do not exist in a vacuum. They need employees who are engaged and working productively to increase their companies' output and profits. They also need good public infrastructure from the transport networks to the National Broadband Network, all of which are financed largely by tax dollars, to lubricate the gears of our economy.

Sir, I support the idea of providing temporary wage subsidies to firms to help them to employ Singaporeans and to improve the pay of local employees.

The Wage Credit Scheme (WCS) is a generous scheme aimed at encouraging companies to share their productivity gains with their employees. While I believe the WCS will help to raise wages of some workers, I am not sure how effective it will be at raising productivity, which the Deputy Prime Minister said is our "most important economic priority".

Perhaps, the Government expects that the productivity initiatives, like the PIC, will see a high uptake and, as these companies benefit from productivity

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increases, the WCS will encourage them to raise wages. But productivity investments made now will only bear fruit some time down the road, by which time the WCS might be about to expire.

The WCS will certainly help firms which already plan to raise wages now. But these are likely to be companies which are already profitable, and will include a disproportionate number of MNCs and GLCs, rather than SMEs. Those which are experiencing a squeeze in profits are unlikely to raise wages even with the WCS, since they will still have to foot 60% of the wage increases for the next three years, and 100% thereafter.

The WCS also does not help firms to hire new local workers in the wake of a tightened foreign worker inflow, since it only subsidises salary increases for existing workers. This is a need which has not been adequately addressed in this Budget.

Many SMEs lament that they cannot find locals to fill their vacancies; they say many Singaporeans prefer to work for MNCs. However, SMEs often have difficulty matching the pay scales of MNCs.

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. This subsidy should be in addition to the existing Special Employment Credit for persons with disabilities and older workers.

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.

The New Hire Wage Credit would be available to workers earning less than $4,000 per month or the equivalent in part-time pay and only SMEs should benefit from it. Companies would only be able to claim the New Hire Wage Credit for a particular position once, and for new hires who have not benefited from the scheme in previous jobs. This would encourage the SME to put in place good HR practices to help retain the staff, and the new hire to stay on the job longer. In addition, to prevent workers from changing jobs just to take advantage of this scheme, companies would only be eligible to claim under this scheme if they hire someone who has been unemployed for at least the last

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four months.

With this scheme, SMEs will, firstly, be able to attract more Singaporeans by offering a higher starting pay. This will help to meet SMEs' current manpower needs without having to increase the overall foreign worker headcount. Secondly, it will help increase the resident labour force participation rate by increasing the opportunity costs of not working. And, thirdly, it will help unemployed Singaporeans to secure jobs.

I estimate that this scheme will cost about $396 million over the next three years, an amount which can be covered under this year's Budget.

Mr Deputy Speaker, I would now like to speak briefly about productivity. Since 2010, the Government has set itself a goal of raising productivity by 2% to 3% per annum on average over 10 years. It has committed $5.5 billion from 2010 to 2014 to help achieve this. The Government set up the National Productivity and Continuing Education Council (NPCEC) in April 2010 to galvanise the nation to achieve this national productivity target.

The Council has identified 16 priority sectors to improve productivity in. Topping this list is the construction industry, which benefits from a $250 million Construction Productivity and Capability Fund (CPCF) to boost productivity growth.

In his Budget speech, the Deputy Prime Minister has said that raising productivity is our "most important economic priority". But what has our productivity drive achieved so far? In 2010, productivity growth was 11.1%, which was a rebound after two years of negative growth of -7.3% and -3.6% in 2008 and 2009 respectively. In 2011, productivity growth dropped to 1.3%. Last year, it dropped further to -2.5% on the back of five consecutive quarters of decline. This latest drop was broad-based, with the manufacturing, construction and services sectors all experiencing declines. In the construction sector, annual productivity growth fell to -0.2% in 2012 despite all the focus of the NPCEC.

Based on current trends, it is hard to see how we are going to achieve the target of 2% to 3% per annum average productivity growth over 10 years. The Government itself does not seem very optimistic. The Deputy Prime Minister has said that this target is "ambitious but we must make every effort to achieve it". The recent Population White Paper qualified at least twice that it is "an ambitious stretch target".

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I can understand that some productivity initiatives have a long gestation period, but how long will it be before we can start seeing results? Each year that passes with low productivity is one more year that our companies are getting less competitive, and one more year in which our workers will experience slow growth in their incomes.

This year's Budget seems to be focused on enhancing the existing PIC scheme. Is the Government satisfied that the PIC is effective in producing the desired outcomes? If productivity continues to languish below 1% or 2% for a further two quarters this year, will the Government consider more drastic measures before the end of this year to boost productivity?

In conclusion, Mr Deputy Speaker, this Budget has the right focus on economic restructuring, reducing our reliance on foreign manpower and raising the incomes of Singaporeans. I have outlined in my speech some suggestions on how we can better help SMEs through their restructuring journey, while at the same time helping economically inactive and unemployed Singaporeans to find jobs. I hope that with a more distributive Budget, we will start to narrow the income gap and improve the well-being of all Singaporeans.