Part II - Speech by Mr Tharman Shanmugaratnam, Minister for Finance, at the Launch of Economics in Public Policies The Singapore Story, at the Lee Kuan Yew School of Public Policy on 22 July 2009 at

33. Rather than rationing, which imposes uncertain costs on businesses and consumers, and will disadvantage many users arbitrarily, we have chosen to do so through the imposition of a water conservation tax. Having this tool in place allows us to manage demand in line with the costs of additional supplies, now and in the future. This has indeed been effective in reducing demand for water, reducing per capita daily water consumption from 165 litres in 2003 to 156 litres today.

C. Support for the poor - the best way is to help them directly rather than subsidise goods and services

34. Government in any society needs to provide support for the poor and needy - to help them level up and make the most of opportunities, and to avoid leaving a segment of society behind while the rest advance. Although "efficiency" and "equity" are often portrayed as being in tension with each other, efficient public policy solutions are needed to ensure that maximum benefits can go to those who deserve it. The fairest way of helping the needy is often the efficient way.

35. The GST offset package is a case in point. There are often calls for an exemption of "basic necessities" from the GST increase. However, this would be a very blunt way of helping the poor from the effects of increased GST. As a factual matter, the bulk of the GST revenues collected on basic necessities come not from spending by the lower income groups, but the middle income and upper income, who consume more of all goods. Revenue that would be lost by exempting basic necessities from GST is revenue that could go towards relieving the burden of GST on the poor many times over.

36. Mrs Tan Ching Yee shared a personal anecdote with me. When she was an undergraduate in the UK in the 1980s, she discovered the joys of being an Asian - smaller built than the average Westerner. Children's clothing in the UK were then charged a zero rate of value added tax (or VAT, like our GST), which compared to the full rate of 15% made for sizeable savings. So she focussed all her personal shopping efforts in the children's sections. Was she deserving? She thought so, but she was obviously not the intended beneficiary of the lower VAT rate.

37. We have therefore weighted our GST offsets especially towards the poor, and have used GST revenues to fund Workfare for lower income workers. We give GST credits in cash, so that recipients can choose how they wanted to use the benefit to met their own needs. Targeting the offsets this way allowed us to provide many more months of offset for the lower-income as compared to exempting necessities. After the GST offsets run out, the lower income group will still benefit from the Workfare Income Supplement, which the GST revenues made possible. The middle income and elderly will also benefit from the investments in healthcare and continuous education and training that are being made with the advantage of additional revenues from GST.

38. Indeed, from time to time, there are suggestions for prices of electricity, water, and other important essentials to life to be lowered so that lower prices will also benefit the poor. Instead of subsidising consumption by all, the government uses its revenues to provide direct assistance to the needy. It is how help can be channelled to those in need with maximum impact and minimal leakage.

Our Healthcare System Demonstrating all three principles

39. I have highlighted three economic principles (the 3 'S'):

a. Sustainability. Deficit spending helps in recession, but only if everybody knows it can be funded.
b. Scarcity. Pricing of common resources and infrastructure is the most efficient and fair solution
c. Support for the poor. The best way is to help them directly rather than subsidise goods and services.

40. Singapore's healthcare system is a case in point for all three principles. Healthcare systems can be a substantial drain on the economy. The US already spends 15% of its GDP on healthcare, and is likely to face structural fiscal deficits and is now projected to face growing healthcare costs. Several other Governments are in similar situations. We need to manage healthcare costs to maintain fiscal sustainability.

41. Healthcare costs tend to be high for at least a few reasons. First, doctors tend to know much more about the patient, and many treatments are very costly with relatively unknown efficacy. Second, healthcare is perceived as a necessity. Hence, there is immense pressure to provide it without a fee, regardless of the relative benefit of the treatment. Without pricing, the result all over the world is overuse. Finally, healthcare costs are lumpy and uncertain. This means that it is uncommon and difficult for people to save in advance for a costly healthcare procedure.

42. Different countries have various approaches to financing healthcare. The US approach is a one end of the spectrum, with high costs. It has a primarily privatised system of healthcare insurance, with little competition in the provision of medical services once you are on an insurance plan. In addition, doctors also tend to be paid per procedure in the US.

43. (There is little incentive to 'produce more with less'. Doctors know healthcare insurers are paying for the procedures, and have incentives to prescribe more. This has been exacerbated by high malpractice costs. In addition, the fragmented healthcare insurance market also leads to an inability to exploit economies of scale.)

44. Other countries, such as in Europe, have state-provided care. This is often priced so that it is less costly for the patient, but results in rationing through waiting times, as seen in the United Kingdom. In addition, it does not remove the pressure to spend more. Indeed, healthcare costs have been rising and using a larger share of resources.

45. Singapore has relatively low healthcare costs and good healthcare outcomes. It's not just because our population is younger than other developed countries. After adjusting Singapore's demographic profile and taking into account relative incomes, our national health expenditure (NHE) would still be relatively low.

46. We are able to keep our healthcare system sustainable because the 3M system puts in place the right incentives. Medisave helps people save for healthcare expenses, while ensuring they take responsibility for his own health. Complementing this is Medisheld, which allows for risk-pooling because illness is an uncertain event with potentially high costs. This system of co-payments and insurance helps to keep waiting lists sane, and prevent unnecessary treatments.

47. However, for the poor who are unable to afford high medical bills, we help them through a combination of targeted subsidies and assistance. Our healthcare subsidies are tiered by ward type. For the truly needy who are unable to pay, Medifund is there to help them.

48. Our healthcare system is enhanced by using competition judiciously in the right areas. There is price transparency for treatments, unlike the US. We also created competition across clusters, creating discipline in cost control and providing incentives to seek out efficiencies.

49. Finally, the dominant role and culture of the public health sector also helps to moderate over-servicing. Our doctors are responsible, and we have avoided the tendency to over-prescribe treatments on the scale seen in many other countries.

Conclusion

50. In trying to achieve the objectives of Government, we have stuck to a set of principles rooted in economic reasoning and pragmatism. The three principles I have highlighted ensuring policies are sustainable, m anaging scarcity through pricing, and supporting the poor by helping them directly - are not the only ones that have helped guide our policy formulation, but are central.

51. Some 85% of our pre-university students study Economics. This book provides a useful complement to your formal study, by setting out the economic reasoning behind public policy making in Singapore. I encourage you to critically assess the examples in the book, raise questions, and identify what you think may be gaps, mistakes or unrealised opportunities.

52. I hope that this book will enhance the quality of discussion and discourse on policy-making in Singapore. Perhaps some day, those inspired by this book would contribute to Singapore just as the illustrious alumni of this campus have done.