Singapore tries to redress income gap

Posted by Wayne Arnold under Policy Watch on 22 February 2007

Singaore's government budget sought to maintain its international competitiveness while redressing a yawning income gap.

SINGAPORE'S government unveiled a budget Thursday, Feb 15, that sought to maintain its international competitiveness while redressing a yawning income gap as the prosperous island-state makes the shift from a manufacturing- led economy to one led by knowledge-based services.

"We are taking a bold new approach to help those at the lower end of our work force," said Tharman Shanmugaratnam, Singapore's second finance minister. "Their wages are being held down by globalization. "

In what economists said was a paradoxical mix of policies, the new budget lowers corporate taxes and raises sales taxes. But it also increases contributions by employers to mandatory employee pension funds and offers S$4 billion, or US$2.62 billion, in subsidies to offset the increased tax burden on poorer Singaporeans. Most significantly, the budget introduces a system of "workfare" benefits to Singaporeans forced by retrenchment to find new jobs.

"It's a radical move," said Chua Hak Bin, an economist at Citigroup. "For the first time it's acknowledging that you need an enhanced social safety net."

Singapore's moves are part of growing international recognition that globalization, while producing unprecedented global prosperity, is also leaving significant portions of the world's workers behind, particularly among the politically powerful middle class. With workers forced to compete globally, "the role of government has to be more important to make sure workers are protected," Noriel Roubini, a professor of economics at the Stern School of Business at New York University, said last month at the annual meeting of the World Economic Forum in Davos, Switzerland.

Perhaps no other nation sits as closely to the flow of globalization as Singapore. The trade through its busy ports exceeds its entire economy in value.

Singapore has been able to ride trends in the global economy to provide jobs for its citizens and raise what was a third-world nation at the time of independence in 1965 to one of the world's wealthiest nations today.

But since China burst onto the global economic landscape, Singapore's government has been struggling to reduce its dependence on factory-produced hard disks and semiconductors, turning its planners to the task of engineering a more nimble economy led by entrepreneurs. As a result, Singapore has been opening its doors to skilled foreign workers, providing incentives for entrepreneurs and promoting not only information technology, but biotechnology and financial services.

So far, Singapore appears to be managing well. After growing 7.9 percent in 2006, the economy is on track to grow 6.5 percent this year. But last year Singapore's government revealed that while average wages were rising with the economy, incomes among the bottom 30 percent of households had actually fallen since 2000.

The statistics underscore a growing anxiety among Singaporeans that has challenged the social contract that has kept Singapore's ruling People's Action Party in power since independence. In return for job growth and rising wages, Singaporeans have tolerated sweeping government intervention into not only their economy, but every aspect of life from freedom of expression to childbearing, even toilet habits.

While maintaining a longstanding aversion to anything that smacks of welfare, the government offered a host of measures Thursday to alleviate those concerns and arrest a slide in support for the ruling party shown in elections last May. The government will, for example, help fund retraining of retrenched workers and offer financial support for those who find new jobs. Such benefits were offered on a one-time basis last year before the elections, but the new budget would make such payments permanent.

The budget increases government spending on health care to 3 billion dollars by 2012 from 2 billion dollars a year at present. It also raises the percentage of workers' salaries that employers must pay into a national pension scheme to 14.5 percent from 13 percent, effectively giving most workers a raise.

Companies will benefit, however, from a lower corporate tax rate: Tharman announced that corporate taxes would be lowered to 18 percent from 20 percent as of 2008.

Sources and Relevant Links:

International Herald Tribune Singapore tries to redress income gap 15 February 2007

Think Centre Is Singapore an inclusive society? 06 December 2006

Think Centre Think Centre 2007 New Year Message 3 January 2007

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