Table of Contents
C.1. To raise Singaporeans’ incomes over the next decade, we must first sustain our economic growth. Without a growing economy, no strategy can realistically raise incomes, whether for the average citizen or those at the lower end of the workforce.
C.2. We expect Singapore to be able to sustain growth of 3% to 5% on average over the rest of the decade, lower than the 4% to 6% we had expected for the last decade. It is however not possible to achieve this steady rate of growth every year. We cannot avoid the impact of global recessions, but our strategy is to recover quickly each time. We also seize the opportunity to grow faster when global conditions are positive because we know that the economic cycle will eventually turn.
C.3. By growing faster when conditions are right, we are not therefore going for growth for its own sake. It is the way for us to achieve an average growth that is in line with our longer-term potential, and thereby grow Singaporeans’ incomes on a sustainable basis.
C.4. We saw this in the last decade. We had three recessions – in 2001, again from 2002 to 2003, and during the global financial crisis in 2009. Despite these recessions, we averaged creditable growth of 5.5% per annum over the decade. This was only possible because we grew well during the recoveries following each recession, making up for the periods of slow growth.
C.5. Had we not seized opportunities and attracted investments vigorously after each storm, we would have done significantly worse than we actually did over the decade. Incomes of Singaporeans would have grown much more slowly or not at all, with the brunt of the difficulties being borne by those at the bottom.
C.6. Consider what happened to low-income Singaporean workers, at the 20th percentile of incomes. Their wages grew by about 23% in the last decade, or by 5% in real terms. (This is without taking into account the Workfare payments they have received since 2008.) But virtually all the increase in their incomes happened in the second half of the decade, when our economy grew well. It more than made up for the first half of the decade, when weak economic growth kept wages at the bottom stagnant (see Annex A-1).
C.7. Because we grew well in the second half of the decade, we brought unemployment down, raised demand for workers and enabled wages to pick up for many at the lower end of the workforce.
C.8. The challenge of keeping jobs and growing incomes for low-skilled workers is ever-present. The reasons are well-known – competition from China and other emerging players has exerted downward pressure on wages of low-skilled workers all around the world, at the same time that IT and other technologies have replaced many simpler jobs in factories, offices, stores and other workplaces. It has led to stagnating or falling wages at the bottom end in most developed societies. In Asia, we see it happening in Japan; even in Korea, which has a competitive and dynamic economy, wages of those at the bottom end have fallen in real terms.
C.9. Fortunately for us, we have been able to avoid a sustained decline, and instead achieved some growth in real incomes at the 20th percentile of workers over the last decade, unlike in many other economies. Further, we have created many more jobs. More of our people have joined the workforce, raising our participation rates closer to OECD levels. The result has been higher household incomes, as more members of the family have been able to find work, including part-time jobs.
C.10. This chart (Chart 2) shows what happened. For Singaporean households at the 20th percentile of incomes, real incomes went up by about 8% over the decade – as growth in the second half of the decade more than offset the decline in real incomes that took place earlier. Further, this increase in incomes does not take into account the significant increase in net transfers from the Government that low-income households received over the decade.
C.11. Income growth was stronger for median Singaporean households. Their real incomes grew by 21% over the decade – again with more of this growth taking place in the second half-decade.
C.12. Our growth strategies are therefore working. We can and should do more to help Singaporeans who have seen little improvement in their wages. For example, the NTUC and WDA have been working intensively to up-skill workers in the cleaning and security industries and partner with companies to create better paying jobs for them.
C.13. But the vast majority of Singaporean households, including both the median and the lower-income households, have seen significant improvement in real incomes in the last five years, and consequently for the decade as a whole. Growth has also given us the resources to invest for Singaporeans’ future, in education and healthcare, and in providing the highest quality living environment in Asia. We have grown so that we raise living standards and benefit our people.
Changing How We Grow
C.14. However, we are changing the way we grow. Our local workforce will expand slowly in the next 10 years. We also should not become ever more dependent on foreign labour. We must therefore restructure our economy and raise skills in every job, so that productivity becomes the key driver of growth.
C.15. Even including the exceptional productivity growth we experienced last year on the back of strong GDP growth, productivity improvements contributed to just one-third of our economic growth over the past decade1. In the next decade, productivity needs to contribute two-thirds of our economic growth. Otherwise we will fall short of the 3% to 5% economic growth that we are aiming for.
C.16. We have targeted to improve our productivity by 2% to 3% per year on average, or 30% cumulatively over 10 years. This will be significantly higher than the 20% increase we managed over the last decade. Achieving this will bring us up to today’s levels of productivity in the most advanced economies – the US, Japan and the Scandinavian region.
C.17. It is a challenging target, but we are devoting substantial resources to achieve it. Last year, we set aside $1 billion in a National Productivity Fund (NPF), and set up the National Productivity and Continuing Education Council (NPCEC) to oversee its use and coordinate the national effort to boost up-skilling and raise productivity. We also lowered taxes to support a broad base of investments in productivity, through the Productivity and Innovation Credit (PIC) scheme.
C.18. Budget 2011 will build on the strategies that we embarked on last year. I will now elaborate on the specific initiatives.
Enhanced Support for Business Restructuring and Skills Upgrading
C.19. We will provide a significant boost to the schemes we announced last year to help businesses to restructure their operations, up-skill workers and create better quality jobs.
Doubling our Investment in the National Productivity Fund
C.20. Our industry associations, businesses, unions and government agencies have been working out detailed roadmaps to tackle the productivity challenge.
C.21. For example, NParks has been working with the landscape industry and WDA on a new apprenticeship scheme which will provide training to build deeper trade skills, and a structured career path. An apprentice with qualifications from ITE could start off with a pay of $1,500, and aspire to become a Master Tradesman in 10 years, and more than double his starting pay. The upgrading of jobs will be complemented by increased use of technology, such as automatic irrigation and targeted weed control systems, which can reduce need for low-skilled manpower by 30% to 50%.
C.22. The utilisation of the NPF is expected to reach $150 million by this year, and based on plans for the various industries, will reach more than $800 million by 2015. This amount could grow, as more proposals come in over the next few years.
C.23. To ensure continued support beyond the first five years for this long-term effort to restructure our industries, I will top up the NPF with another $1 billion this year. This will bring the total fund size to the target of $2 billion.
C.24. More details on the work of the NPCEC will be provided by DPM Teo Chee Hean during the Budget Debate.
Further Enhancement of Productivity and Innovation Credit (PIC)
C.25. Last year, I introduced the five-year PIC scheme. The scheme was especially geared towards SMEs. Taking into account feedback from the various trade and business associations, I will make significant enhancements to the PIC scheme.
C.26. I will now allow businesses to deduct from their taxable income 400% of their expenditures in any of the six broad categories of investment under the scheme, for example, training or investment in automation equipment. This is up from the 250% tax deduction introduced last year. I will also raise the cap for such claims for each category of investment from $300,000 to $400,000 of expenditure. As before, businesses can undertake any number of investments in a year, in the six categories.
C.27. Let me illustrate the significance of this enhanced scheme, with the example of a company which makes investments totalling $500,000 – comprising $400,000 on automation equipment such as computers, and $100,000 on training for its staff. Under the scheme introduced last year, it would have enjoyed savings of $187,000 off its tax bill. With the enhanced PIC, it will now enjoy almost double the tax savings, amounting to $340,000. In other words, the PIC scheme will pay for two-thirds of the value of its investments (see Annex A-2 for details of this example).
C.28. I will also enhance the current cash payout option under the scheme, which was introduced last year to benefit SMEs who pay little or no taxes currently, but wish to invest in productivity and grow. I will allow businesses to opt for a cash payout of up to $30,000 for the first $100,000 of their investments, in lieu of tax deductions. This is an increase from the maximum grant of $21,000 that a business can currently get under the PIC.
C.29. I will also introduce other changes to make it easier for businesses to make full use of the PIC scheme. First, to help SMEs benefit from the PIC scheme, last year I had allowed businesses to combine their annual expenditure caps for YA 2011 and YA 2012. I will now extend this principle, so that businesses can combine their annual expenditure caps for the following three years, from YA 2013 to YA 2015. It will help an SME that is planning a large investment in any one year to benefit from the full 400% tax deduction.
C.30. Second, PIC benefits are currently limited to spending on R&D done in Singapore. Responding to the feedback we have received, I will now also allow businesses to enjoy PIC benefits on expenditure for R&D done abroad.
C.31. For the companies that are investing in productivity improvements, it effectively amounts to a significant cut in the corporate taxes that they would pay. Take for example a medium-sized company with annual turnover of about $5 million and net profit of $200,000, and which invests $40,000 in productivity. The generous tax deductions under the PIC would reduce the company’s tax burden by some 60%, from 8% to 3% as a percentage of its net profits (see Annex A-2 for details of this example).
C.32. These changes will take effect immediately, so that businesses can enjoy the enhanced deductions for YA 2011 for the productivity investments they have already made. The PIC scheme will cost the Government $520 million per year.
Expanding Training Support
C.33. We are moving ahead with our Continuing Education and Training (CET) plans. Last year, we announced the Workfare Training Scheme (WTS) to give additional training support for older, low-wage workers. This year, we will strengthen our support for professionals, managers, executives and technicians (PMETs), who in fact now make up more than half of our workforce.
C.34. We will increase both the capacity and quality of CET for PMETs. The Ministry of Education (MOE) will expand the capacity for diploma-level programmes at our polytechnics by about 60%, to about 10,000 places by 2015. The Ministry of Manpower (MOM) will also introduce an umbrella programme for PMETs, Skills Training for Excellence Programme (STEP).
C.35. We will also make it more affordable for PMETs who wish to upgrade their qualifications or obtain new skills. First, we will increase subsidies significantly for Singaporean adults who pursue their first degree or diploma on a part-time basis at any of our polytechnics, CET centres, universities or UniSIM. They will receive the same percentage cost subsidy on their part-time courses as what a full-time student currently enjoys. For example, it will mean a part-time undergraduate student in an engineering degree at NTU will pay about $16,000 over a five-year course, down from $21,000 currently. Trainees who obtain their first part-time polytechnic diploma, ITE NITEC or Higher NITEC certificate will benefit from increased subsidies through a completion award. Those who complete their first Workforce Skills Qualification (WSQ) diploma or certificate can also qualify for the award. This award will be applicable to Singaporeans who graduate from 1 March 2011.
C.36. About 30,000 Singaporeans will benefit from these subsidies. Our CET enhancements will cost the Government about $30 million per year. More details on these initiatives will be announced by the Minister for Education and the Minister for Manpower in the Committee of Supply (COS).
C.37. In addition to these enhancements for PMETs, I will also make a $500 million top-up to the Lifelong Learning Endowment Fund (LLEF), thus increasing the fund size to $3.6 billion. This will increase the base level of long-term assured funding for CET, to complement the allocations from future annual budgets.
Adjusting to Higher Labour Costs
Raising Employer CPF Contributions and CPF Salary Ceiling
C.38. As our economy has recovered strongly, it is timely that we review our CPF contribution rates and the CPF Salary Ceiling. In 2003, we cut the total CPF contribution rate by three percentage points to 33%, and set a target range of 30% to 36%. In the years since, we have progressively raised the employer contribution rate. With the outlook for continued growth in 2011, we will raise the employer contribution rate by another 0.5 percentage points, from 15.5%2 to 16%, which will restore the total contribution rate to 36%. The additional 0.5% will go into the Special Account.
C.39. We will also revise the CPF Salary Ceiling from $4,500 to $5,000 per month to keep pace with income growth in recent years. This will align the salary ceiling back to the 80th percentile income, and help middle-income Singaporeans. To give employers sufficient time to adjust, both these changes will only take effect in September this year.
C.40. In line with the higher CPF Salary Ceiling, we will also raise the contribution cap within the Supplementary Retirement Scheme (SRS), which offers tax incentives to encourage voluntary retirement savings to complement the CPF.
C.41. We also want to help self-employed persons (SEPs) increase their savings under the CPF scheme to enjoy the good interest rates and save for their medical and retirement needs.
C.42. The CPF Board and NTUC have been active in reaching out to the SEPs and encouraging them to make Medisave contributions. Companies that work with SEPs can also help. For example, under the National Taxi Association’s Drive and Save scheme, taxi companies have agreed to co-contribute to the Medisave of their taxi drivers.
C.43. To support such initiatives, I will grant tax deduction to eligible companies that make voluntary contributions to the Medisave accounts of their SEP partners, up to $1,500 per SEP per year. I will also exempt SEPs from paying tax on these contributions. This will take effect from YA 2012.
Managing our Reliance on Foreign Labour
C.44. Last year, we had set out a schedule to progressively raise foreign worker levies and tighten the levy tiers from July 2010 to July 2012. Since then, our economy has grown much faster than either the Government or businesses expected. The local labour market is at virtually full employment levels. If we do not take further steps now to raise the Foreign Worker Levy, it will be difficult for us to prevent the proportion of foreign workers from rising over time, and exceeding our long-term target of one-third of the workforce.
C.45. We will thus introduce further levy increases for all sectors this year. Most of the additional measures will be phased in at six-monthly intervals, starting only from 1 January 2012, and extending till 1 July 2013, one year beyond the previous schedule. This will give companies time to prepare for the changes.
C.46. Last year, we announced that average levy per foreign worker for the Manufacturing and Services sectors will be raised by about $100 between 2010 and 2012. For the Manufacturing sector, over and above the earlier announced increase of about $100, we will increase the levy by an average of another $60 by July 2013.
C.47. We will go further in the Services and Construction sectors, where the scope for productivity improvements is greatest. For the Services sector, we will tighten the levy tiers and raise levies such that the average levy goes up by a further $180 by July 2013 on top of the earlier announced increase of about $100. For the Construction sector, average levy rates will go up by a further $200 over the same period on top of the earlier announced increase of about $130.
C.48. To manage the continued increase in demand for S Pass holders, we will also increase the levy rates for this category from $50 prior to the adjustments made on 1 July 2010, to $300 to $450 by July 2013, depending on the number of S Pass holders hired by the companies.
C.49. The overall dependency ratios for all categories of foreign workers (Work Permit as well as S Pass holders) will remain unchanged. The Ministry of Manpower (MOM) and the Ministry of National Development (MND) will release more details on Monday.
C.50. Taken together, the increases in foreign worker levies and CPF contributions will raise business costs. The CPF changes will increase annual labour costs of businesses by 0.5% on average. The Foreign Worker Levy adjustments, including those announced last year, would add roughly 1.7% to annual labour costs when fully implemented in 2013. This is the right time to make these adjustments, while the economy is growing well.
C.51. However, the increases in foreign worker levies are not merely a cyclical response to current conditions. This is the direction we are setting for the long term, so as to provide clear and strong incentive for businesses to upgrade their operations, train up their workers and reduce their dependence on lower-skilled foreign workers. We understand that when the economy is doing well, the number of foreign workers will rise faster. But this has to be offset by a slowdown or even reduction in the number of foreign workers when the economy grows more slowly. Hence, should demand for foreign labour continue to strengthen beyond what we expect in the next two years, the Government will have to review if there is a need for further tightening.
C.52. In the past too, we had made short-term reductions to foreign worker levies in response to economic downturns, as a means to reduce business costs. We will avoid cyclical adjustments to foreign worker levies in the future. Instead of cutting levies, we will adopt other measures to help companies through a downturn, such as the enhanced training subsidies we provided in the last recession.
C.53. The Government is also providing firms with substantial assistance to help them upgrade their operations and train their workers, through the NPF and the enhanced PIC scheme. Companies should take maximum advantage of these schemes to restructure, improve their efficiency, grow their businesses, and to offset the impact of higher labour costs over time.
Helping Companies with Rising Costs
C.54. I recognise that many companies have seen significant cost pressures in the last year besides increases in their wage bills. Rentals have increased, and so have utility bills. I have therefore decided to provide a set of one-off support measures for companies this year.
Corporate Income Tax Rebate and SME Cash Grant
C.55. First, companies will receive a 20% corporate income tax rebate, capped at $10,000, in YA 2011.
C.56. However, many of our small companies may not benefit fully from the corporate tax rebate as they pay very little taxes. In fact, more than 85% of eligible companies will receive less than $5,000 from the tax rebate. Therefore, I have also decided to provide the option of a one-off SME Cash Grant this year, amounting to 5% of a company’s revenues in YA 2011, subject to a cap of $5,000. They must, however, have made CPF contributions in YA 2011.
C.57. Companies will automatically receive the higher of the corporate tax rebate or the grant when IRAS assesses their tax returns. In total, this will cost the Government about $560 million.
Special Employment Credit
C.58. As a further measure, I will provide employers with a one-off Special Employment Credit for older Singaporean workers who are covered by the Workfare scheme. The Credits will be paid out over three years, and will encourage employers to attract and keep older workers. Employers will receive a Special Employment Credit of up to 50% of employer CPF contributions for workers aged 55 to 59. They will get a higher Credit of up to 80% of employer CPF contributions for workers aged 60 and above. The Special Employment Credit will cost the Government about $100 million.
C.59. In Budget 2011, we will make several major investments in our corporate ecosystem. We will help our companies make the most of opportunities in emerging markets, and entrench our position as a Global-Asia Hub. We will do more to groom globally competitive local enterprises. In addition, we will introduce incentives to strengthen our economic clusters, by deepening capabilities and enhancing their competitiveness.
Differentiating Support for High-Growth Enterprises
C.60. We are making major, broad-based commitments to help all enterprises upgrade and make productivity improvements. However, to restructure our economy, our fundamental approach towards the SME sector must ultimately favour companies that are more dynamic and innovative. We must provide them room to grow – to attract the managerial talent and skilled workers they need, and to expand internationally.
C.61. We will commit $850 million in grants under the Enterprise Development Fund (EDF) over the next five years, to be administered by SPRING and IE Singapore. This is a substantial increase of about 45% from the previous five-year tranche. One of the priorities of the EDF is to help high-growth enterprises in their overseas expansion.
C.62. Demand in Asia is growing rapidly for competencies and strengths that Singapore companies possess, in areas such as urban solutions and clean technology, as well as in service sectors including healthcare and education. We will boost support significantly to help our companies build capabilities and defray their costs when they venture into new markets in the region and elsewhere.
Foreign Tax Credit Pooling
C.63. I will also simplify and reduce the taxation of foreign income, so as to support companies that are globalising and earning a larger share of their income overseas. I will introduce foreign tax credit pooling to encourage remittance of foreign income to their Singapore bases. It will also give them greater flexibility in the use of their foreign tax credits, reduce their tax payable, and simplify tax compliance. This measure will cost the Government $22 million per year.
Catalysing Cross-Border Financing
C.64. Cross-border financing is another important enabler for our strategy of growing globally competitive enterprises. The Economic Strategies Committee (ESC) had recommended that a specialised institution be set up in Singapore to address current structural gaps in financial markets, namely the limited capacity for long-tenor project finance, as well as inadequate access to trade finance for SMEs, especially in their dealings in emerging markets.
C.65. We have developed our plans to plug these gaps. I will first explain our approach to strengthening project financing. Our aim is to work with commercial players, so as to catalyse and not crowd out market participants. The Government is working with Temasek Holdings to develop this initiative. Temasek is in discussions with potential partners on establishing an institution that is financially and commercially viable and sustainable. The Government is prepared to provide some initial support for such an institution during its start-up phase.
C.66. To complement this, we are also in advanced discussions with multilateral agencies to partner in offering political risk insurance for infrastructure projects. This is especially relevant for Singapore corporates venturing into unfamiliar markets.
C.67. The second area we are addressing is trade financing. Our review has concluded that a full-fledged, dedicated trade finance institution would not be ideal as it would require significant economies of scale to be viable. The Government is therefore exploring a model by which our trade finance schemes can be outsourced to existing specialist providers. As these providers have well-developed risk assessment and underwriting capabilities, they would be able to provide trade finance solutions that better meet the needs of SMEs. We will provide an update on this study by the second half of this year.
Reaping Economic Value from R&D
C.68. We will add to our investments in R&D, with an increasing share going towards supporting private sector R&D activity and commercialisation. These are long-term investments, but we have to keep up our steady commitments to R&D, if we are to make the transition towards a high-value economy with a broad base of innovative enterprises. Our Research, Innovation and Enterprise (RIE) 2015 plan for the next five years was announced by the Prime Minister in September last year so I will not expand on this here.
C.69. To support the broadening of our research agenda and increasing commercial outcomes from the RIE 2015 plan, I will top up the National Research Fund by $1 billion this year.
Becoming a Global-Asia Hub
C.70. We are making good progress to becoming a Global-Asia Hub - a location of choice in Asia for global companies as well as a launch-pad for Asian enterprises to globalise. For example, a study by the Business Times and the Accounting and Corporate Regulatory Authority (ACRA) found that about 51% of international companies registered in Singapore in 2009 were from Asia, up from 40% in 2000.
C.71. We will set aside $2.5 billion over the next five years under the Economic Development Assistance Scheme (EDAS) to enable EDB to further strengthen Singapore’s value proposition as an Asian base for corporate headquarters and other high-value activities. This will support new efforts, such as developing a talent pool of professionals and executives with a strong understanding of Asian markets and businesses, as well as attracting global mid-sized companies to set up their first Asian base in Singapore.
Enhancing Competitiveness of Our Business Hub
C.72. I will now highlight key tax changes in strategic business sectors to enhance our overall competitiveness as a Global-Asia Hub. The details, along with other minor tax changes, are set out in Annex A-2.
C.73. I will start with the financial sector. Banks are increasingly tapping funds from non-bank sources such as hedge funds and insurers which are not covered under the current inter-bank interest withholding tax exemption. To help banks access more diversified funding sources for their lending business and strengthen our position as a regional funding centre, I will exempt all interest payments made by banks and similar financial institutions from withholding tax. I will also extend the tax exemption schemes for Captive Insurers, Specialised Insurers and Marine Hull and Liability Insurers, to grow their technical expertise and underwriting capacity in Singapore.
C.74. Next, the maritime sector. The GDP contribution of the sector has increased from 5% to over 7.5% in the past decade. To further promote its growth, I will introduce the Maritime Sector Incentive (MSI) with effect from 1 June 2011. This scheme will streamline and enhance existing maritime tax incentives. New tax benefits such as certainty of withholding tax exemption for interest payments on loans to build or buy ships will also be introduced to further entrench international ship operators and encourage the growth of the shipping-related services sector in Singapore.
C.75. I will also expand the scope of GST zero-rating for repair and maintenance services performed on ship parts and components, so as to further promote our maritime sector.
C.76. The biomedical sector continues to grow in importance as a key contributor to our economy. Singapore is fast developing into a location for businesses to manage their clinical research and manufacturing. To support growth in the biomedical sector, I will grant GST relief for imported clinical trial materials, as well as enhance the Approved Contract Manufacturer and Trader Scheme.
C.77. I will allow GST zero-rating for specified services supplied to overseas persons, if they are performed on goods kept in qualifying specialised warehouses and eventually sent overseas. This scheme will help to promote the use of specialised storage facilities that store high-value collectibles such as art and antiques.
C.78. Lastly, to strengthen our commodity markets, I will enhance the Global Trader Programme to qualify all derivative trades under the scheme.
C.79. I will also introduce a few other tax-related changes.
C.80. First, to help start-ups. They often incur substantial costs before they begin generating revenue. I will now allow businesses to claim tax deductions on pre-commencement expenses incurred in the accounting year immediately before the year in which they earn their first dollar of trade receipts.
C.81. I will also make refinements to the current tax deduction scheme for companies that purchase shares for the purpose of their equity-based remuneration schemes. I will henceforth allow for tax deductions when they make such purchases through the special purpose vehicles that are set up as trustees to administer the schemes.
C.82. Next, I will raise the excise taxes by between 5% and 10% on two classes of non-cigarette tobacco products.
C.83. Finally, I will also extend the Green Vehicle Rebate scheme for another year till 31 December 2012. In the meantime, we will undertake a comprehensive review on the measures to promote the adoption of green vehicles, as part of our overall efforts to promote sustainable development.
1 Productivity growth over 2000-2010 averaged 1.8% per year. This was about one-third of GDP growth over the period. Productivity growth over 1999-2009 was lower, at 1.2% per year, which was about one-quarter of GDP growth over that period.
2 As announced in May 2010, the employer CPF contribution rate has been raised by 0.5% point in September 2010, with another 0.5% point increase due in March 2011, which will bring the employer CPF contribution rate to 15.5% in March 2011.