Budget 2016 and the remaking of Singapore's economy

A check of articles in our database in the past year on structural challenges faced by the Singapore economy throws up quite a few. Search two years back and there are no such articles. This could be an indication that the long-term nature of these issues is coming more clearly to the fore now.

Call them structural challenges or intractable problems - these are issues for which there is no overnight fix. It would be unrealistic to expect tomorrow's Budget to address them fully and they are probably best left to the Committee on the Future Economy.

However, there is no running away from the fact that these structural challenges will form the backdrop for the Budget and affect policymaking.

PRODUCTIVITY

Productivity is the Gordian knot which not only Singapore but also many developed countries have failed to cut - this is so even in the United States, the home of innovative companies such as Google and Amazon.

In a recent speech, the US Federal Reserve vice-chairman Stanley Fischer talked of the dramatic fall in the rate of productivity growth in the US "and in much of the world" over the past 20 years. "There are few issues more important for the future of our economy, and those of every other country, than the rate of productivity growth," he said.

Ditto in Britain which last week released its Budget. The Office for Budget Responsibility(OBR) said that productivity growth has yet to return to the trend seen before the global financial crisis. It is productivity, the OBR noted, that helps determine wage growth and the speed at which the economy can grow without generating inflationary pressures. Such pessimism has resulted in the OBR cutting the GDP forecasts for Britain by about 0.3 percentage point a year to an annual average of 2.1 per cent over the rest of the decade.

Experts say it may be that productivity in technology is not being properly captured although others blame it on the lack of investment in capital. With an ageing population, it is going to be even tougher to boost productivity with the inevitable outcome that living standards will drop.

In Singapore, labour productivity is poor, although there have been improvements. Value-added per worker dipped 0.1 per cent last year, better than a 0.5 per cent fall in 2014. Using value-added per actual hour worked - a more accurate reflection of what's happening - there was an increase of 1 per cent last year, similar to the 1.1 per cent increase in 2014.

To address this challenge, past Budgets have used measures such as Productivity and Innovation Credits (PICs) or tax credits for firms that made substantial investments to revamp their businesses, an R&D tax deduction scheme and various lending programmes for small and medium-sized enterprises (SMEs), notes HSBC economist Joseph Incalcaterra.

With productivity being such a key link in the economy, it is likely that Budget 2016 will see continued efforts on this front.

STRUCTURAL UNEMPLOYMENT

A recent poll by the government feedback unit Reach found that Singaporeans were worried about the slowdown in the economy and whether that would mean poorer job prospects for them here. Respondents wanted the Government to take a closer look at older workers while middle-aged workers also wanted new schemes to help those hit by the slowdown to learn new skills and move into fresh industries. Older workers were also worried about their income stagnating as job opportunities decline.

Some of the recent figures highlight the risk of structural unemployment among professionals, managers, executives and technicians (PMETs).

Of the Singaporeans and permanent residents who lost their jobs last year, more than seven in 10 (71 per cent) were PMETs, up from 66 per cent the year before. One in three of the resident workers made redundant last year was aged 40 to 49, despite this group making up only about one in four of the overall resident workforce.

The Ministry of Manpower had said earlier this month, that it "is closely monitoring the current economic and labour market situation and is strengthening employment support to help displaced locals re-enter employment".

DBS economist Irvin Seah said in a report that the Budget could include measures like a temporary deferment of income tax payments for retrenched workers, subsidies for employers' Central Provident Fund (CPF) contributions and boosts to the Workfare Training Scheme to upgrade the skills of low-wage resident workers.

There may also be top-ups for the SkillsFuture scheme and more initiatives on the training and skills upgrading front.

LOW RETURNS

This is an issue that plagues the global economy - the problem of low returns with the result that investors take on higher risk to get that higher yield. Experts say that the low-yield situations stem from factors such as weak overall global demand, as well as deleveraging pressures in Europe and emerging markets and the after-effects of the global financial crisis.

These factors, therefore, mean that GDP, inflation and profit margins are all going to be weak.

If the likes of Temasek Holdings and GIC are unable to attain the levels of returns in the past, funding big-ticket expenditure will be a concern in the future. If economic growth is slow, corporate profits will be weak and tax revenues will also weaken.

BUDGET 2016 AND BEYOND

HSBC's Mr Incalcaterra, therefore, reckons that the Budget will see "a careful mix of operational and development expenditure increases" in particular as this is only the first year of the Government's term and the position has to be neutral.

Taking all the structural challenges into consideration, this is an opportunity for the Budget to set a new direction.

The thrust of recent Budgets had been to make things more equitable and progressive. The moves included helping the lower-income as well as the old with the $8 billion Pioneer Generation package. The 1 percentage point increase in CPF contributions by employers to employees' Medisave account is a welcome recognition of how much of a worry health costs are to people. Fortunately, such changes were made while Singapore's coffers were healthy.

Tax changes, such as raising the top rate of income tax to 22 per cent, all point to Singapore becoming a more progressive society. Such moves are welcome but now is the time to take stock.

The Government has been more than supportive of businesses.

The PIC scheme, where companies get a hefty tax deduction if they invest in any of the six qualifying activities, is one of them. But it is not clear how far the scheme has boosted innovation and productivity.

There have also been abuses of the scheme where consultants have helped companies to claim for non-existent activities. And the generous interpretation of the qualifying activities - where even a course on body language secrets is advertised to be eligible for PIC - should be relooked.

Given the structural challenges of an ageing workforce, slowing growth and lower investment returns, the Government has no choice but to be more mindful of spending and one of the ways of trimming expenditure should be tighter scrutiny of these schemes.

At the same time, the Budget cannot be all about reining in spending.

The challenges of slow growth and weak investment returns make it all the more imperative that Singapore's economy has to grow.

The past Budgets have focused on strengthening the social fabric of Singapore's society; now it is time to put growth at the top of the agenda.

Whether by automation or by going overseas or by encouraging companies to collaborate and develop interesting ideas, this Budget has to encourage growth. Only by being more sensible about spending while growing the economy can some of these challenges be met.

sushyan@sph.com.sg

This article was first published on March 23, 2016.
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