Assoc Prof Jamus Jerome Lim (Sengkang): Mr Speaker, while the Workers’ Party retains its opposition to the GST hike – believing that there are indeed alternative revenue sources available – and we recognise that this Budget embeds the self said hike, we also acknowledge that the Budget is a forward-looking one, aimed at both stimulating medium-term growth, as well as improving progressivity. For those reasons, it has my support.
Nevertheless, I believe it falls short in a number of areas. My speech will begin by offering some direct responses to the Budget, before moving on to offer suggestions on how we may inspire growth via three of its key drivers: labour, capital and productivity.
My first observation is that the fiscal policy stance will be contractionary. To be clear, the fiscal balance, using the Government’s accounting conventions, will result in a deficit of -0.3% of income in the fiscal year just past and there is projected deficit of -0.1% for the year to come.
But Members will undoubtedly be aware that this fiscally conservative approach tends to reduce the amount of available revenue, which in turn is more likely to throw up a deficit. I will not quibble over whether this methodology is justified. It has been litigated and relitigated already in this House. But simply point out the fact, evident to all economists, that the Budget is, by conventional international standards, in surplus.
We may argue that this position is well justified; after all, we are not currently in a recession and we do need to build up a fiscal buffer should one visit us next year, and the Government is also constitutionally bound to run a balanced Budget during its full term. But let us just recognise that just two years after the worst recession in our country since Independence, and notwithstanding the many giveaways in this year’s Budget, our fiscal impulse has decisively turned negative.
In my speech on the Income Tax (Amendment) Bill last year, I had suggested that one option available to the Government for rebating some of the unexpectedly higher revenue receipts to the people was to beef up of the GST Voucher (GSTV) scheme. In particular, I had suggested that the Government’s claim that GSTV would offset 20 years of GST payable had been eroded by inflation, by between one month to a year, depending on one’s flat size.
The Budget’s announcement that the permanent voucher scheme would be increased restores the Government’s original promise of offset years, and in fact, if anything, exceeds it, with an additional $3 billion boost to the Assurance package. It therefore offers much-needed support for coping with higher costs of living. Of course, the increase in cash quanta of between $100 and $150 has been somewhat diluted by higher sticker prices. Still, even taking inflation into account, the Budget still offers real increases of between $94 and $104measured in last year’s dollars, or $90 and $135 in 2021 dollars. This is welcomed.
In my speech on last year’s Budget Statement, I had also outlined a number of alternative revenue levers that the Workers’ Party believes are viable ways to raise revenue. These included an externalities lever, which would increase sin taxes; as well as a wealth tax lever, which requires greater contributions from those who can afford to pay more.
As I explained then, it would be even possible to mix and match between the levers to derive a revenue mix that we can all accept.
I note that this Budget, by introducing additional taxes on high-end properties, luxury cars and tobacco, pulls some of the levers that we had previously suggested. While they do not go as far as we would like, they do add a cumulative $600 million to revenue.
To paraphrase Groucho Marx – a few hundred million here, a few hundred million there, and soon, you are talking about real money.
The Budget also raises the CPF ceiling from $6,000 to $8,000. Minister Wong explained that this was about “keeping pace with inflation”.
I understand that this will not affect lower-income earners, who earn below the ceiling and that, while it will reduce take-home pay for those earning more than $8,000 by about $400, the increased employer contributions mean that certain workers would enjoy a modest pay bump of around $340 as their employer contributions rise.
Pay increases to cope with inflation are certainly a good thing as is making sure that our savings are adequate for retirement. However, for the typical middle-class family in Sengkang, the smaller take-home will stretch already tight budgets. The $400 could mean cutting back on tuition fees or that extra visit to the dentist for the family.
Is there an alternative way?
One wonders why the Government did not choose the route of returning the employer contribution to the full 20% instead. After all, this was the status quo in the 1990s until the Asian Financial Crisis. The employer share has since been cut and raised a number of times since but the equal share that was the case in the past has never been restored.
While I understand the need to provide employers with relief in the wage bill during a recession, we are not in one now. While restoring the employer contribution alone will not fully make up for the additional CPF savings that would result from an increased ceiling, one is still left to wonder why this approach was not part of the consideration for addressing the effects of inflation on CPF.
Mr Speaker, I mentioned that one important thrust of this year’s budget was to sustain long-term growth. I now move on to discuss three ways I think we can do even more.
During 2021’s Committee of Supply debate, I sketched out the case for heightened total R&D expenditures, noting that its share – of a little shy of 2% of GDP – fell behind not only the global average of 2.3% but also those of leading knowledge-oriented nations such as the United States, Japan, Korea and Israel.
Two years hence, this remains the case. But if anything, the gap has widened.
The latest data reveal that spending by these other nations have all ticked up, as has world R&D spending, which is now up 0.3 percentage-points to 2.6% of GDP. In contrast, our national R&D rose only to 2.2% as a result of a collapse in output that year. As a share of GDP in the prior year, it remained mostly stagnant at 2%.
At the time, the Government stressed that our public expenditures do not significantly lag that of a number of advanced economies. It cited the spending of 0.7% relative to Denmark, Sweden and Switzerland, all of which spend around 1%.
This Budget, to be clear, will inject the Productivity Fund with another $4 billion, which should bring our public share closer to that of our comparators.
But where is the discrepancy between the public and private? It starts with an acknowledgement, which I believe that the Government will agree with, that public R&D cannot be expected to carry the load on its own. Rather, it needs to be a catalyst for our otherwise woeful private-sector spending on R&D.
Recognising this is key since there is evidence that the two are indeed complements and raising public R&D directly will contribute to greater business R&D. Moreover, such spill-overs may be even greater for open economies such as our own.
But what is necessary to elevate our lagging national productivity is both of these working in tandem. Here is where a combination of increased spending in public R&D, coupled with strong tax incentives to foster private R&D, would come in.
This Budget introduces an Enterprise Innovation Scheme meant to enhance tax deductions for innovation-related activities in Singapore. This will take advantage of exemptions for R&D credit in the OECD’s Base Erosion and Profit Shifting (BEPS) framework. Specifically, countries are indeed allowed to continue awarding R&D contracts to reduce MNCs’ tax bills.
The strategy is straightforward. Generous tax credits create incentives for firms to locate their R&D activities in a subsidiary in Singapore, which in turn books R&D fees off revenue from the firm’s entities in other jurisdictions.
Singapore is a signatory to the agreement and so adhering to the stipulations to BEPS eventually will be a given. R&D credits offer an opportunity for us to stimulate our domestic research activity in a perfectly legitimate fashion. But aspiration aside, up till now, the absolute number of firms assisted remains small – to the tune of about 520 companies.
The question is how the Government plans to scale up this assistance, especially among SMEs.
This echoes a point made by my hon friend, Leon Perera, in a speech that highlighted our missing mid-sized firms, way back in 2016.
What has been the main inhibitor to more enthusiastic take-up? Could these constraints be relaxed, especially if we were to ease up on the need for recipients to demonstrate short-term results?
Minister Wong also announced that the SME Co-Investment Fund would enjoy an additional injection of $150 million. This is welcome, especially if it is directed towards investment and innovation.
Our public expenditure on R&D remains inadequate, especially, in my view, in the “D” part of R&D. In 2020, applied research expenditures actually declined by 4.3% even as spending in a number of other classes rose. This is especially worrisome, since it is translational research of this form – basically, adapting basic research into commercially viable products, which often experiences a higher failure rate – where the Government can play a critical role in risk sharing, with a potentially high payoff for the economy.
Such vehicles already exist, such as A*STAR, EDBI or EDB New Ventures. But in my conversations with those in the sector, the need for officers in such agencies to meet short-term key performance indicators (KPIs) has been cited as a constraint.
Adopting the “venture” mindset requires tolerance of higher loss ratios. Would the Government consider setting up specific funding buckets that will allow the funding of moonshots with more flexible targets and fill more of the gap between seed and Series A funding?
Another approach is to undertake the exercise hand-in-hand via a more involved public-private partnership (PPP) model.
There is evidence that public credits directed towards PPPs can spur private-sector innovation as can better matching of universities with startups. Such an approach would be especially fruitful in areas such as biotech and pharmaceuticals where we have world-class upstream research produced by our universities along with excellent specialised downstream production capacity but, up till now, insufficient midstream capabilities.
Speaking of BEPS, it is worthwhile thinking carefully about the practical rollout of the treaty. The terms require that the global minimum corporate tax rate be set at 15%. Minister Wong shared that to comply, a domestic top-up tax would likely be implemented here in 2025.
My hon friend, Louis Chua, had previously made the point that the effective tax rate faced by MNCs and SMEs differ. According to the Government, the effective corporate tax rate averages between 8% and 10% for MNCs and around 3% for SMEs.
Notwithstanding the ongoing uncertainty about the implementation of BEPS, the Workers’ Party continues to urge the Government to maintain this differential treatment of MNCs and SMEs, insofar as the effective corporate tax rate is concerned and to treat all MNCs regardless of size equally.
By our calculations, even with a reasonable loss of corporate and personal income taxes arising from the agreement, this approach to BEPS will still be a net positive for Government revenue. Placing the burden of higher corporate taxation on the shoulders of MNCs that are more able to afford it – a point that the hon Member Hazel Poa has mentioned earlier on – and who are the primary targets of the agreement in any case will provide a better business climate for our SMEs to eventually grow and become international companies in their own right and help rebalance our economy away from our historical reliance on multinationals.
Sir, in the 2021 Committee of Supply, I had spoken about how reskilling via schemes such as SkillsFuture could be better paired with a re-employment promise. At the time, I had also suggested a natural end-to-end complementarity between redundancy insurance at the point of separation, to re-training, to eventual reintegration into the workforce.
In his speech, Minister Wong spoke about introducing Jobs-Skills Integrators as a means of better empowering our workers. He also spoke about strengthening our safety nets but glaringly misses out how our net still provides inadequate support at the point of unemployment.
The Stanford economist, Paul Romer, once quipped that “a crisis is a terrible thing to waste”. It is a pithy way to emphasise how competing interests may be willing to question their long-held assumptions and come together to confront a common problem. COVID-19 was our crisis du jour and the generous support we offered then to displaced workers offered us a tantalising glimpse of how valuable redundancy insurance can actually be.
This Government likes to reiterate that “a job is the best welfare.” But what happens when our workers lose their jobs for reasons little related to their performance or ability?
It seems to me that as a society, we need to help these workers get back on their feet. In other words, we need a backup support system for redundant workers to access their first-best welfare system – which is a job.
One of the common reasons cited for not deploying an unemployment insurance scheme is the potential corrosive effects that having such insurance could have on workers’ incentives to search for a job, at least until the payout period ends. In the worse-case scenario, detractors fear that having unemployment insurance will encourage quits because workers are confident that they will have a fallback source of income.
This is the crux of the objection by the then-Second Minister for Manpower, Mrs Josephine Teo, in her response to then-Workers’ Party Non-Constituency Member of Parliament Daniel Goh’s speech on redundancy insurance.
Notwithstanding how our proposal is for involuntary redundancy, not all forms of unemployment, these so-called “moral hazard” concerns are well recognised. However, the theoretical fear does not find much support in the empirical data.
Studies of advanced economies that have rolled out such insurance schemes tend to find little adverse effects for employment outcomes. Moreover, we should not simply focus on the negatives and conclude that the scheme is a bad one. The flip side of a greater willingness to quit is the reduction of insecurity and worry associated with a lost job or an end to the helplessness and frustration felt when stuck in a job that is making one unhappy.
The converse of a possible free rider who is soaking up welfare payouts and therefore voluntarily remaining unemployed is a parent who does not need to worry about being able to afford sending their child for tuition or to the doctor just because they lost their job.
Indeed, economists understand full well this trade-off and suggest that the optimal design of unemployment insurance schemes is to properly calibrate the tenure requirement – that is, how long an unemployed worker can benefit from the scheme – with a monetary requirement, which determines how much payout a worker can receive.
Interestingly, optimal schemes tend to pair a larger monetary requirement with a low tenure requirement. Other tweaks may entail a diminution of benefits over the course of one’s unemployment spell or to deploy a wage tax after re-employment that increases the longer an individual has remained unemployed.
The Workers’ Party longstanding proposal, raised at least since our 2015 manifesto, on redundancy insurance is broadly consistent with these principles.
Our suggested coverage duration of about six months is lower than the one year or more common to schemes in other countries, albeit still in line with our nation’s lower than average unemployment spells of about two months. The proposed payout of 40% of the last-drawn salary is about average but still on the low side for advanced economies.
We were deliberately conservative here to ensure financial sustainability. However, we leave open the door for increases based on consultation and social consensus.
We also stress the importance of flexibility. Workers made redundant may choose to front-load their benefits if they have urgent bills to pay but may opt to rely on savings initially and only receive payouts later in the event that their unemployment turns out to be longer than anticipated.
In the spirit of encouraging risk-taking and entrepreneurship, we can also consider including the self-employed in the scheme, perhaps with different contribution shares, as we did during COVID-19.
Another major thrust of Mrs Teo’s critique of our proposal at the time was that it was better for the Government to bear the burden of unemployment support, rather than to layer another cost onto our businesses.
But is this a fair characterisation? As this House is aware, the incidence of a tax differs from those who are asked to pay it. In our view, part of the contributions toward redundancy insurance will be passed on to the workers. This part amounts to workers taking care of other workers. But to ensure that the tripartite nature of the social contract remains intact, the Government should also step in and contribute regularly to this pool in the form of a special-purpose development fund.
Mr Speaker, there are many things in this Budget that I like, but as I have explained, I think it remains incomplete in a number of areas that I believe can inspire long-run growth, for our people and our country.
23 February 2023