Budget 2023, which was unveiled on Valentine’s Day, comes at a time when Singapore and its population are facing significant challenges in a world emerging from the Covid-19 pandemic that is still riddled with uncertainties.
With inflation climbing globally, the cost of living is a serious concern for Singaporeans.
Younger families need help with housing and the expenses of raising children.
As the population ages, older workers need help to stay employed – not just because the nation needs to utilise their skills, but also so that the burden of supporting them does not fall on a shrinking population.
Amid a skills mismatch, structural unemployment could also become an issue.
With healthcare costs set to keep rising, the Government needs to raise funds for its spending while balancing its budget at the same time. Hence the shift towards more progressive taxation, with the better off paying more.
Meanwhile, supply chains remain disrupted and geopolitical tensions remain high. This puts more pressure on businesses, which are already dealing with rising wage bills.
Budget 2023 tried to address many of these issues head-on.
To tackle the higher cost of living, Singaporeans will get higher cash payouts under the Assurance Package and GST Voucher scheme. Other vouchers are also in place to help qualifying households.
To help lower-wage workers, the Government will top up $2.4 billion to the Progressive Wage Credit Scheme, co-fund wage hikes, extend credits to support the hiring of senior workers, and encourage employing former offenders and people with disabilities.
It will increase support for young families through payouts, while making it easier for first-timers to get Build-To-Order flats through an extra ballot. First-timers dipping into the resale flat market will get increased grants.
There will be more help for lower-income and senior citizens through top-ups to the ComCare Endowment Fund, ElderCare Fund and MediFund.
But those buying higher-end cars or more expensive homes will have to pay more duties and taxes.
While all these steps are in the right direction, will they help Singapore’s households, workers and businesses navigate the challenges they face, not just in the year ahead, but in the longer run?
In a roundtable discussion moderated by Straits Times associate editor Vikram Khanna, panellists Suan Teck Kin, head of research for UOB, Ong Pang Thye, KPMG managing partner, Annie Koh, professor emeritus of finance at Singapore Management University (SMU), and Patrick Tay, assistant secretary-general of the National Trades Union Congress, dissect the issues.
Cost of living
Although Singapore has weathered high inflation before – particularly in the 1970s – a tight labour market and a more advanced economy makes managing inflation without relying on unsustainable levels of government support even harder now.
“(If) you look at those times, it was a very different world,” said SMU’s Professor Koh.
“We lived with inflation then, but we had excess capacity (on) the supply side, and therefore we could surmount it because we could have lower wages,” she said about inflation in the 1970s.
When inflation got too high back then, the ensuing recession put downward pressure on wages, in turn moderating inflation, added Prof Koh.
However, in the current tight labour market, wages will not decline in the same way, so other ways of cushioning the impact of inflation are needed.
Yet, Singapore cannot rely on government support year after year to deal with inflationary pressures, in what is likely to be an inflationary decade ahead, according to Deputy Prime Minister and Finance Minister Lawrence Wong in his Budget statement on Tuesday.
This prompted Mr Khanna to ask the panellists: “So, we’ve got to somehow manage to beat the impact of inflation without government support. How do we do that?”
In response, NTUC’s Mr Tay said having a very competitive workforce filled with skilled talent ensures Singapore businesses are competitive globally, and workers can share in the resulting success.
“Therefore, you see in this Budget not just a pro-business budget, but also a very pro-worker budget to make sure that our workforce is constantly reskilled, upskilled and multi-skilled to keep pace with many of the disruptions, the changes and the challenges,” added Mr Tay, who is also the MP for Pioneer.
Prof Koh said another potential solution could lie in foreign employees based near Singapore, such as the nascent technology talent hub of Batam, Indonesia.
“Remote and hybrid working would allow businesses, especially small and medium enterprises, to bring the total cost of employment down, if you think creatively – and it also gives our workers the opportunity to work cross-culturally with different talents from different parts of South-east Asia.”
Innovation could also form part of the solution, said UOB’s Mr Suan.
“Cost is one thing, but the other bit is the value that we create from these higher costs.”
He noted that Budget 2023 addresses the need for innovation with moves like extending enhancements to the Enterprise Financing Scheme for another year till March 31, 2024.
“So, if we can create higher value through innovation by companies, we’ll be on the winning side already because we create better value and higher value compared with the cost.”
A drive to support older workers, as well as include more workers from vulnerable demographics such as people with disabilities and former offenders, was a hallmark of the redistributive Budget 2023, the panellists agreed.
“In fact, in the run-up to this year’s Budget, I think there were two topmost concerns amongst workers, unions and union leaders: cost of living and jobs,” Mr Tay noted.
“In this Budget, I think we have positively assisted in these two aspects.”
However, he said the labour movement’s call for the Government to provide interim unemployment support for retrenched staff while they look for new jobs was not addressed.
Responding to a question from Mr Khanna, Prof Koh said the labour measures announced in the Budget form a crucial part of Singapore’s economic strategy moving forward amid deglobalisation, trade tensions and anti-inflationary policies.
“I think the adjustment in the strategy is focused on good workers, so I think the human capital element (of the budget) was a very strategic slant,” she said.
“If you have dedicated, motivated employees, and you invest in them, that will make a difference because it will result in our competitive advantage and bring more companies, because tech and talent come hand in hand.”
The panellists welcomed the introduction of Jobs-Skills Integrators, which are institutions that ensure training will improve employment and earnings prospects by working with industry, training and job placement partners.
Mr Tay said alleviating structural unemployment arising from skills mismatches is a key challenge for Singapore, and there is a need to channel workers into jobs that are growing or are being transformed into new jobs.
Agreeing, KPMG’s Mr Ong said many members of the Singapore Business Federation have given feedback on the difficulty of finding enough workers.
He expressed hope that Jobs-Skills Integrators could encourage training that results in good job prospects with more precision than blunt policy tools like training grants.
Mr Ong also noted that although Budget 2023 has taken steps to include people with disabilities and former offenders in the workforce, platform workers are another pool of talent that may be tapped to work in sectors facing labour shortages.
“They’re important, but we need them in other areas of our economic sectors.
“We need them to be part of that workforce so that we become more competitive.”
With an ageing population in Singapore, cost pressures for the Government will rise, which means it may need to raise taxes to cope with the additional costs, said Mr Suan.
A recent paper by the Ministry of Finance highlighted that healthcare expenditures are likely to rise in the coming decade, said ST’s Mr Khanna.
An ageing population will lead to both less income tax revenue and increased expenditure in areas like healthcare, said Mr Suan.
Singapore is planning to implement changes to the minimum corporate tax rate.
A global minimum effective tax rate of 15 per cent will be introduced for large Singapore multinational enterprises in 2025.
The Republic is making these changes under the Base Erosion and Profit Shifting initiative, or BEPS 2.0, a global framework for the reform of international tax rules.
In the best-case scenario, this would have a neutral impact on corporate tax revenue in 2025 and beyond, said Mr Suan.
“We cannot rule out other tax revenue sources we may have to look at to raise more tax revenue,” he added.
The Government could also address this issue in other ways, including raising revenue through increased goods and services tax (GST), hiking other taxes such as asset taxes and estate taxes, and lowering the minimum threshold for businesses to pay GST.
Mr Khanna pointed out that the threshold for registered businesses in Singapore to pay GST is when the value of annual taxable turnover exceeds $1 million.
This is much higher than in other countries, he said.
Taxable turnover refers to the total value of all taxable supplies made in Singapore by a company.
In response, Mr Ong said that there would be a compliance cost associated with lowering the threshold for GST registration for businesses in Singapore.
Companies unable to pass on the GST to their consumers will have to absorb it themselves.
There will also be implementation costs for small and medium-sized enterprises.
Exempting smaller companies from paying GST helps them keep costs down, which should also dampen inflationary pressures, he added.
In a world where geopolitical tensions have shaken up and sometimes disrupted supply chains, Singapore has a choice to make. It may opt to pursue a more resilient supply chain, even at the expense of efficiency.
This can be achieved by leaning towards trade partners that remain trustworthy amid global trade tensions, reviving domestic production capabilities, or seeking out trade partners that are closer to home geographically, with easier logistics, said the panellists.
That is, to use the new lingo in business and economic circles: friendshoring, reshoring and nearshoring.
Unfortunately, the lowered efficiency may also result in higher costs for both consumers and businesses, said Mr Suan.
“Now the challenge is that the cost of things would not be as low as what we used to get (earlier) because, at that time, you had globalisation (and) the best efficiency, but now we have to consider resiliency as well.”
He added: “These are challenges that we need to manage because higher costs also mean inflation for Singapore – the cost of our materials and food and all that.”
Thankfully, Singapore’s enduring strengths of good governance and being a good global citizen persist despite the global uncertainty, putting Singapore in good stead to build the more resilient chain it now needs.
“Investors value the continuity, certainty and predictability of Singapore’s government policy, and that’s very important for foreign investors,” said Mr Suan.
He said increasing trade flows between China and Asean are a very important development and the Republic is in a very good position to capitalise on this.
Echoing his sentiments, Prof Koh said being part of the Asean community was “very good strategic positioning” for Singapore amid trade tensions.
“Encouraging our small and medium enterprises, our promising local enterprises, to go international is also a very good strategic move,” she added.
Singapore’s role as a talent hub could also help embed it into global trade and talent flows, Mr Ong said.
“We have a great talent pool, and it’s also the attractiveness of Singapore as a location... So, in my view, we need to play up those strengths. This has played out during the pandemic, with Singapore doing all the right things.”
The Government may end up with a budget surplus, despite projecting a slight deficit, if the trend from earlier budgets during the current term of government holds up for Budget 2023.
Although a deficit of $3 billion was projected last year, the revised expected deficit ended up at only around $2 billion, said Prof Koh.
In FY2021, an expected deficit turned out to be a fiscal surplus of $1.9 billion.
This shows that Singapore could earn more and spend less than expected.
“And that is why, if we do it right strategically, then, hopefully, this year’s small deficit could turn into a surplus,” she said.
A significantly smaller deficit of $350 million is projected for financial year 2023.
Mr Suan said: “Assuming that things go normally, I think our revenue should be able to come in to ensure that we have a balanced budget over the course of the five years.”
He added that the deficit was not insurmountable. “In terms of revenue, we came in much stronger than expected. So hopefully, we are going to get that same positive surprise as well on the revenue side, as long as we don’t get into any kind of crisis or any sort of deep recession.”
Both panellists were responding to questions from Mr Khanna on how the Government could generate more revenue and cut costs to balance its books over the course of its current term, ending 2025.
However, Mr Suan said: “For the longer term, I think we need to pay close attention to the structural issue. The demand for expenditure will be higher.
“As an ageing society, income tax revenue, (and) perhaps also corporate tax revenue may be affected as well, but at the same time, expenditure would have to go up, especially to cater to the ageing population.”
Mr Suan also said the impact of the global minimum corporate tax of 15 per cent that Singapore has to implement in 2025 remains to be seen.
“Is it going to be more or less? The best that we can hope for is that it’s going to have a neutral impact on that.
“But with the pressure for expenditure going up, and the tax revenue possibly under pressure to come down, we cannot rule out what other tax revenue sources we may have to look at to raise more tax revenue beyond 2025,” he said.
“The GST rate may have to go up further.”
Mr Khanna asked the panellists if it was possible to lower the threshold for compulsory GST registration of businesses from the current $1 million in taxable annual turnover, to increase the number of businesses that have to pay GST, instead of the tax rate.
To this, Mr Ong said lowering the threshold could make it very hard for small and medium enterprises to operate in Singapore, as they would either have to pass on the cost to consumers or absorb it.
These enterprises would also incur a cost to implement paying GST into their operations, he added.
“So I think we are in a better position, and friendlier to our businesses... that helps them to go about (their business) and, at the same time, keep the cost down, bringing the inflation lower than what it would have been in other countries.”