Singapore Budget 2014: Expatriate living costs survey does not reflect locals' costs: Tharman

Cost-of-living reports, such as the Economist Intelligence Unit one that has just ranked Singapore the priciest city in the world, are aimed at comparing costs of living for expatriates and thus do not reflect the cost of living for a local resident, Finance Minister Tharman Shanmugaratnam said in his wrap-up speech on the Budget debate on Wednesday.

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Here is an exerpt from a transcript of Mr Shanmugaratnam's round-up speech on Mar 5:

"Before we go into the first main theme - the economic challenge of restructuring - let me first deal with the issue of costs, which many MPs have rightly raised. First, the issue of cost of living. Second, the issue of business costs, particularly for our SME sector. I will speak about each of these in turn.

First, cost of living. Mr Nicholas Fang and Assoc Prof Eugene Tan, have mentioned the latest EIU report, which ranks Singapore the most expensive city in the world.

"I do not particularly want to focus on this report in its own right, but to explain a couple of very basic things about such reports that come out from time to time, whether it is the Economist Intelligence Unit (EIU) or Mercer ones, which are really aimed at measuring expatriates' cost of living in different parts of the world.

They are useful tools for HR managers and corporate HQs as they decide where to place their people. When they are placing them in a particular place, they need to know how to compensate them adequately based on the cost of living. It is a useful tool.

"They are basically aimed at comparing cost of living for expatriates in different cities or countries. Hence, there are two things that make these surveys quite different from the factors that affect the cost of living for Singaporeans.

"First, exchange rates. An important reason why we have become an expensive place for expatriates is that the Singapore dollar has strengthened. Indeed, the EIU report points this out.

"The Singapore dollar has strengthened over the years, including in recent years and this means that it is a more expensive place for someone who is paid in a foreign currency, or for a corporate HQ abroad whose earnings are in foreign currency. As the Singapore dollar strengthens, it becomes more expensive.

"But the reverse is true for Singaporeans.

"The stronger Singapore dollar improves purchasing power for Singaporeans - in Singapore because imported goods become cheaper (and for us, food and everyday items are all largely imported).

"And it also improves purchasing power when Singaporeans go abroad - you can see that from the latest travel fair last week. The stronger Singapore dollar, through steady appreciation, has been good for Singaporeans but it does mean that Singapore becomes a more expensive place for expatriates on foreign currency earnings.

"The second important difference has to do with what goods and services are being measured as part of the cost of living basket in these surveys.

"The EIU tries to put together a basket of what they think are expatriate costs, perhaps more on the higher end of expatriates. It is quite different from the goods and services consumed by ordinary Singaporeans, which our Consumer Price Index (CPI) basket measures.

"For example, the EIU basket includes imported cheese, fillet mignon. And Burberry-type raincoats, which are not very common in Singapore. It also includes the price of the four best seats in the theatre; and three-course dinners at high-end restaurants for four people.

"These items are in the EIU cost of living basket. Indeed for some of these items, Singapore is expensive. I do not think they are irrelevant for an expatriate cost of living basket, but it is quite a different matter for a cost of living basket for Singaporeans.

"Transport is also part of the cost of living basket for these expatriate indices. But they cover just cars and taxis, not public transport. Our public transport is significantly cheaper than most other cities - New York, London and Tokyo. We are comparable to Hong Kong but significantly cheaper than most other cities. Even our taxi fares are cheaper. But our cars are expensive because we are a small place.

"For an expatriate who wants to own a car, it is expensive in Singapore. But if you are talking about an average Singaporean taking public transport, costs are in fact much cheaper than many other cities.

"So I highlight this just to point out the differences. It is not that these surveys are wrong, or that they are misguided. But they are measuring something quite different from the cost of living for an ordinary local in different cities around the world.

"Now, there are unfortunately not many surveys that try to measure the cost of living of ordinary residents. But there was a good study done by the Asian Competitiveness Institute in 2012, which compared purchasing power in different cities.

"They specifically distinguished the cost of living for expatriates and the cost of living for a typical resident household. They looked at all sources of data, including the EIU studies and the World Bank's International Comparison Programme, and constructed separate consumption baskets for expatriates and for ordinary residents. They found that Singapore was indeed quite expensive for expatriates compared to other cities.

"At the time of their study, Singapore was ranked 5th out of 109 cities in the index in terms of costs for expatriates. But costs for Singapore residents were very different. We were ranked 61st out of 109 cities when we compared the cost of living for residents. We were quite similar to other Asian cities like Hong Kong, which was ranked 58th, or Seoul which was ranked 60th. That is the basic difference.

"From time to time, these surveys will come up, and people will give it a spin, but they are measuring something quite different from the cost of living for our residents.

"What is important for us is that Singaporeans, and particularly low- and middle-income Singaporeans, have incomes that grow faster than the cost of living. That is what is important and what we have fortunately been able to achieve.

"In the last five years alone, if you take our median households, their incomes have gone up faster than the cost of living as measured by the CPI index. It has gone up by about 10% in real terms. There is a similar rate of growth for the low-income household, about 10% in real terms.

"Indeed, for the low-income households, if you exclude from the CPI index the imputed rentals for those who own their homes (they do not actually have to pay rentals), then the increase in real incomes of the 20th percentile household was 19% over the last five years.

"There is thus significant improvement, and we keep our eyes focused on that. Keep our eyes focused on how the average Singaporean and the low-income Singaporean is doing with regard to their incomes, relative to the cost of living."