Companies will have to rely less on foreign workers and become more productive if the service sector is to remain competitive.
That has led to the Dependency Ratio Ceiling - the proportion of foreigners on work permits or S Passes a firm can employ - being cut from 40 per cent to 38 per cent on Jan 1 next year, and to 35 per cent on Jan 1, 2021.
The quota for S Pass workers - mid-skilled foreigners paid at least $2,300 a month - will drop from 15 per cent to 13 per cent on Jan 1 next year, and to 10 per cent on Jan 1, 2021.
The last quota reductions for the sector were in 2013.
Firms that already exceed the new levels will have to meet the quotas when applying for permit renewals.
Finance Minister Heng Swee Keat said the decision to reduce the quota was done "after much deliberation".
Although some companies - such as those in manufacturing - have done well to deploy staff efficiently, service segments such as retail and food and beverage remain very labour-intensive, he added.
Growth in the number of S Pass and work permit holders in services has been picking up pace. It rose by about 3 per cent a year, or 34,000 in the past three years.
Indeed, the increase in the number of S Pass holders in services last year was the highest in five years.
Budget for economic development agencies for FY2019.
These trends may be unsustainable, noted Mr Heng. "We need to act decisively to manage the manpower growth in services, and encourage our companies to revamp work processes, redesign jobs and reskill our workers," he said.
"Our workforce growth is tapering, and if we do not use this narrow window to double down on restructuring, our companies will find it even harder in the future."
Mr Heng said a sustainable inflow of foreign workers is needed to complement local staff while Singaporean workers upgrade themselves and enterprises build deep capabilities.
Higher funding of up to 70 per cent under two grants will be extended to March 31, 2023, to help firms adjust to the changes.
These are the Enterprise Development Grant (EDG), which funds projects for firms to improve efficiency and internationalise, and the Productivity Solutions Grant (PSG), which subsidises the cost of off-the-shelf technology to help companies boost productivity.
The funding cap of 70 per cent had been due to drop to 50 per cent after March 31 next year for the EDG and for certain sectors under the PSG.
The Ministry of Manpower also provides some flexibility for companies to employ more foreign workers while they move to an operating model requiring fewer employees under the Lean Enterprise Development Scheme. There is also provision on a case-by-case basis if firms need to bring in foreign workers with specialised skills that are lacking among Singaporeans.
Meanwhile, there will be no changes to the foreign worker levy rates this year.
Manpower Minister Josephine Teo said in a Facebook post yesterday that if service industries remain very labour-intensive and see too much growth in foreign manpower, job quality may not improve significantly and workers will face poorer wage growth prospects.
But she noted that there is a global skills shortage in areas such as artificial intelligence and data science, and so Singapore must still welcome top professionals from overseas to complement local talent.
PwC Singapore tax leader Chris Woo and OCBC economist Selena Ling said the lower service-sector quota will probably force enterprises to turn more to technology. Mr Woo called it "necessary medicine" for the medium term.
Maybank Kim Eng senior economist Chua Hak Bin said the changes could lead to higher costs as firms may need to raise wages to attract locals in the tight labour market.
High-tech solutions are not always an immediate boost. Yee Cheong Yuen Noodle Restaurant director Veronica Koh said that as her customer base is older, they are not so keen to use the iPad ordering system she tried to implement. But she said that with the quota being tightened, she will have to keep trying. "We will probably look to automation and a range of government support to help us cope."