Speech by Mrs Josephine Teo, Minister of State For Finance And Transport, At The NTU-IIC Singapore Financial Conference 201228 Feb 2012
Mr Scott Tan (President, NTU-IIC)
Mr Marcus Gao (Chairman of NTU-IIC Singapore Financial Conference 2012 Organising Committee)
Ladies and gentlemen, good morning.
1. I am pleased to join you for the NTU-IIC Singapore Financial Conference 2012.
2. The organisers had asked me to speak about financial literacy. Looking at the line-up of speakers you will be hearing from later today, I don't think I can do better. Instead, I thought it would be more useful for me to share something about the way we manage Singapore's finances. It won't directly improve your personal finances, but is certainly relevant to you as key stakeholders of Singapore and future taxpayers.
3. As you know, DPM and Finance Minister Tharman Shanmugaratnam recently presented the Government's Budget for FY2012. Though the debate in Parliament will only start this afternoon, the feedback so far has been largely positive. We are particularly encouraged that young Singaporeans support the measures to build a more inclusive society, to better provide for the elderly, those with disabilities and the lower income through enhanced social investments.
4. Young Singaporeans have also asked thoughtful questions. Three of them come to mind:
i) The Government says it wants to help the lower income. Why then do you have the Goods and Services Tax (GST), which is regressive (meaning that it is a heavier burden on the lower income than on the higher income)?
ii) The income gap in Singapore has widened. How do we address this?
iii) We are taking steps to reduce our dependence on foreign labour, which will be felt most keenly by SMEs. Will the slower economic growth hurt our job prospects? Will those of us aspiring to be entrepreneurs face greater difficulties?
A progressive fiscal system
5. On its own, GST is indeed a regressive tax i.e. it is a heavier burden on the lower income because they spend a larger part of their income on daily necessities. This has led to some calls for GST to be waived or reduced for essential items, such as rice, sugar, milk, so that lower-income families do not have to pay GST on these items.
6. However, the fact is that better-off households spend much more on these essential items than the lower income do. Waiving or reducing GST on such items would mean considerably lower GST collections, not just from the poor but also from those earning much more. To raise the same amount of tax revenues, the GST rate would have to be higher on other items.
7. We have therefore opted to keep the GST system simple with a flat tax rate and with virtually no exemptions. This is both efficient from a tax administration perspective and least costly for businesses to comply with.
8. It is, however, important to address the impact of GST on the lower income. Previously, when GST was raised from 5% to 7%, the Government provided temporary offsets over several years to give relief to lower-income individuals and households. This year, we introduced the GST Voucher which is a permanent scheme to provide continuing assurance that our GST does not hurt the poor.
9. This GST Voucher will fully offset the 7% GST that the lower half of retiree households pays on their expenses. For lower-income families (who do not have elderly members), the GST Voucher will offset about half their total GST bills.
10. Furthermore, GST is an important source of revenue that has enabled the Government to introduce permanent schemes like Workfare to provide continuing support to the lower income. Together with other subsidies for healthcare, housing and education, lower-income households receive benefits worth about three times what they paid in taxes.
11. To summarise, while GST is regressive on its own, our fiscal system of taxes and benefits is a progressive one which provides very substantial support to the lower income. They receive far more benefits compared to the taxes they pay.
Preserving Social Mobility
12. The Gini coefficient is often cited as an indicator of income inequality. Over the last 10 years, the Gini coefficient for Singapore has increased from 0.433 to 0.452. You might ask why, even with the many measures to help the poor, is our income gap widening? Does it mean our measures are not working?
13. First, we should examine why our Gini coefficient is high. It is largely because, besides being a country, we are also a global city. If you look around the world, global cities that compete with us especially – Hong Kong, New York – they all have high Gini coefficients.
14. The reason lies in the nature of the economy of a global city. They require a significant pool of highly skilled people who are on the upper end of the income ladder – professionals, executives and entrepreneurs. Cities are also highly exposed to global competition, so wages are influenced by what competitors are offering. This means high wages to retain top-tier talent, but lower wages for lower-skilled workers, to keep labour costs for companies low. This is why the Gini is high – yet the solution cannot be to unplug ourselves from the global grid. We need to remain open to the flow of talent, good investments and free trade with other countries.
15. What matters, then, is how we deal with the lower income; how we ensure that Singaporeans across the board, and not just some groups, share in the fruits of growth and level up together.
16. Our basic approach of dealing with the widening income gap is to focus on improving opportunities for those at the lower end of the income and social ladder, and preserving social mobility in each generation. We are making a determined, multi-year effort to raise the prospects of success for lower-income families.
17. We are doing this by providing better-quality, more affordable pre-school, and by expanding pathways to a university education, to match the aspirations of our students and give them skills that will find them good jobs. We are also investing heavily to give every adult worker the opportunity to keep upgrading their skills, or even return to a tertiary institution, mid-career, to enrich his or her knowledge.
18. We still see evidence of considerable social mobility, as students from all backgrounds flow through our education system. Of those from low-income homes, nearly half get into polytechnics and universities. This enables their families to improve their circumstances considerably.
19. But it will get more challenging to keep up this mobility, mainly because we have achieved a very high degree of mobility in the past. We must therefore work harder at this.
Keeping Singapore Strong
20. Some young Singaporeans have perceptively pointed out the risks as we move to reduce dependence on foreign labour. Although labour force will grow more slowly, Singapore can still grow between 3% and 5% per annum over this decade, and can continue to create good jobs, if we successfully make the transition to an economy characterised by higher skills, productivity and innovation.
21. We are taking a longer-term view of the kind of economy that Singapore must have to generate the kinds of jobs our people want. The survival of SMEs today is important. Equally or perhaps more important is their ability to adapt to a permanently tight labour market, where two out of three Singaporeans have tertiary qualifications and aspire to do work that is meaningful and rewarding.
22. For aspiring entrepreneurs, it will mean learning to operate on business models that are less labour-intensive and which create more enterprise value with the sa me labour inputs. It is how entrepreneurs in developed societies do it. We will have to do likewise.
23. The period of transition is not easy but we are making available a whole range of assistance available to businesses. We will flow significantly more assistance to those which are prepared to make the effort to re-design processes and jobs to raise productivity, increase skills content, and innovate their product and service offerings. By doing so, we aim to make a qualitative difference to the kinds of businesses in Singapore and jobs they offer to Singaporeans in the years ahead.
24. The step-up in our social programmes will help us build a more inclusive society. We can anticipate that social spending will increase over time. We are fortunate that there has not been a need to raise more revenues through higher taxes to pay for these increased social commitments. But this may not be the case for all time.
25. In other societies, there has been ongoing debate on what to spend on, and whether there is an over-commitment of resources to the current generation that will burden the next generation. In the U.S., Social Security, Medicare and Medicaid account for almost half of non-interest government spending. The journalist, Robert Samuelson, calls this "generational unfairness", because the U.S. Government is squeezing expenditure on other national priorities to finance these schemes, and will need to raise tax rates in the future to service the growing fiscal deficit.
26. While we need not think in terms of generational fairness, it is useful to challenge ourselves to design policies that are sustainable beyond the present generation. This has, in fact, been a hallmark of the way we manage public finances and what has served generations of Singaporeans well.
27. I hope I have shared something relevant and useful to you – if not to help you become wealthier, at least to enrich your knowledge in a modest way.
28. My best wishes to you.