Here is an extract of Minister Tharman's Budget Debate Round-up Speech 2010 on,

Investing for Inclusive Growth - how are we helping the lower income group.

Please click here for the full speech.

C.  Investing For Inclusive Growth

Raising the Incomes of the Lower Income Groups

C.1     Let me now address the important issue of how we must help our low income families. This was rightly the focus of many Members, including MPs Masagos Zulkifli, Fatimah Lateef, and NMP Laurence Wee.

C.2     I want to start with the points raised by MPs Low Thia Khiang and Inderjit Singh and NCMP Sylvia Lim. They claim that wrong Government policies in the last decade depressed the incomes of our low income groups. They say the Government went for “growth at all costs” – a strategy which Mr Low Thia Khiang in fact says started in the late 90s – and that by allowing in more foreign workers, we reduced the wages of Singaporeans at the lower end of the income ladder. At first glance, the analysis has intuitive appeal. But their argument is wrong and misleading. 

C.3     We achieved an average growth rate of 5% over the last decade. It was a healthy rate of growth. Few economists would consider 5% to have been excessive or beyond Singapore’s potential. But we were only able to achieve this healthy average growth because we grew much faster from 2004 to 2007, when our GDP grew at an average of 8% per year. This offset the series of downturns that we experienced earlier in the decade – the global dot-com bust in 2000, then with 9/11, and again when SARS hit the region in 2003.  In other words, by achieving above-potential growth of 8% per year from 2004 to 2007, we were able to offset the below-potential growth of about 2% per year that we had over 2001 to 2003.

C.4    By allowing the economy to grow rapidly in the second half of the decade, we were also able to bring unemployment down and grow the incomes of Singaporeans. The resident unemployment rate, which was above 6.0% in late 2003, and stayed above 4% for a couple of years, gradually fell to 2.4% by the end of 2007. In the Budget Speech, I mentioned how median incomes per Singaporean household member had consequently grown over 2005 to 2008. The growth over those four years in fact accounted for all of the income growth that took place during the decade. Median incomes grew by about 20% over the decade, adjusted for inflation[1](see Chart 4). (Note that this refers to the median or 50th percentile of Singaporean household incomes; MP Inderjit Singhhad thought that these were average incomes, and reflected the growth of upper income salaries.)

C.5     Lower income households  also saw their incomes rise. Their incomes grew by less over the decade compared to the median household. But all their increase took place over the three years from 2006 to 2008 – when their incomes grew by about 16% in real terms. Taking into account the decline in their incomes earlier in the decade as well as during last year’s recession, they ended the decade with total growth of incomes of about 7% in real terms. 

C.6    But the improvement in unemployment, and the growth in Singaporeans’ incomes that we saw in the last decade, including the modest lift in real incomes at the lower end, would not have been possible if we had prevented businesses from expanding quickly in the second half of the decade. The external environment was favourable, but their growth would have been choked off if they had not been able to obtain more foreign workers.

C.7   Bringing in foreign workers allowed businesses to seize opportunities, accept orders and grow, and to create more jobs for Singaporeans. Wages rose as the labour market tightened. In fact, the three years from 2006 to 2008 in which wages showed healthy growth for our lower income families corresponded to the period when the foreign workforce was growing most rapidly (see Chart 5). This was how we were able to offset the decline in wages for our lower income group that had taken place in the first part of the decade.

C.8    There is another reason why it was sensible for us to have allowed businesses to invest and grow in Singapore when the opportunities presented themselves in the second half of the decade.

a)  The significant opportunities come in cycles, not every year or when we want them to come. In the case of the petrochemical industry, the cycle is once every seven to eight years. When the companies are ready to invest, and we say no, they go elsewhere.  If we miss them, we miss the whole cycle. And we lose not just one investment. We lose the opportunity to grow a whole cluster  – the critical mass of companies necessary for the industry to be in Singapore.

b)  Had we rejected leading investors like Shell or Exxon-Mobil when they wanted to expand here, Singapore would be weaker today. 

C.9     Our growth strategy in the past decade, therefore, was not wrong-headed. It illustrates the very real trade-offs we face in practice when deciding whether to allow the economy to grow rapidly and above its potential for a period. To do so indefinitely will lead to overheating. But it would have been ill-judged to prevent businesses from expanding in the name of avoiding rapid growth, even after having suffered a period of very weak growth in earlier years. Members would I’m sure recall that there were calls from many quarters a few years ago for the Government to relax the foreign worker rules so that industries which were unable to find enough Singapore workers would stay rooted in Singapore and grow. In fact, in the 2007 Budget Debate, MP Inderjit Singh himself had called for a relaxation of foreign worker rules to alleviate the shortage of labour that businesses faced. It illustrated the real pressures that the business sector faced at the time. 

C.10     If we had turned away investments and prevented competitive businesses that were already in Singapore from growing, we would have ended up with a decade of very weak income growth. In particular, low growth would have hit our low income families the hardest – as it did in the first part of the decade.

C.11     We cannot do away with foreign workers. If we had not brought them in, we would not have been able to ease the supply bottlenecks in the private property markets, build HDB flats, or expand our MRT network. Our essential services will also be affected. Our hospitals and nursing homes would be short of nurses and caregivers, and we would have one-third fewer bus drivers as MP Ong Ah Heng pointed out, even with good pay being offered to attract Singaporeans.

C.12    However, growing our dependence on foreign workers is not a sustainable strategy for the long term. It will reduce the incentive for employers to upgrade their operations and raise productivity. We will also run up against the social and physical limits that an ever-increasing proportion of foreigners in our workforce would bring.

C.13    This is why we are moving forward in a balanced manner. We are phasing in an increase in foreign worker levies so as to encourage employers to innovate, and improve productivity, and to keep our dependence on the foreign workers at about a third of the total workforce over the long term. The Government will however provide enterprises and workers with strong support at the same time – to raise skills, develop new capabilities and find new ways of creating value. Contrary to what MP Low Thia Khiang claimed about the increase in foreign worker levy being aimed at fattening the Government coffers, we are going to put back into the economy more than what we will be taking out by way of the increase in foreign worker levies. What businesses pay extra in foreign worker levies will be more than made up for by subsidies and grants they can receive to upgrade their operations and train their workers.

Inequality

C.14    NCMP Sylvia Lim raised a valid concern over inequality. If we are able to choose, we would want growth of incomes to take place without, at the same time, letting incomes become more unequal.  However, the reality that we face is that to create jobs and income growth for lower skilled workers, we have to first grow our economy. And we can only do so by enabling those with higher skills and entrepreneurial abilities to do well. 

C.15    This is also the situation faced by other global cities such as Hong Kong and New York. Their Gini Coefficients are in fact more than 0.5 – like several other American cities. The Scandinavians have avoided these levels of inequality in their cities. However, they have long histories as close-knit, homogeneous societies, with people accepting extremely high rates of tax on both consumption and income, in order to subsidise the middle and lower income groups. Denmark, for instance, has a 25% VAT rate and a headline income tax rate of over 60%.

C.16   Each country has to find a balance suitable to its circumstances. The solution for Singapore cannot be to grow slowly in order to reduce inequality. If we do that, it will only hurt the people we are trying to help. Slow growth will make everybody worse off, but it will have the harshest impact on those at the bottom.  Jobs will be lost and incomes will fall for those at the lower end of the workforce, while at the top end, those with the talent or entrepreneurial ability to seize opportunities elsewhere will up and go. Slow growth will not assure us of a more equal society, as long as we live in a globalised world.

C.17    Even New Zealand, with its wide-open spaces and attractive lifestyle that NCMP Sylvia Lim spoke about, has seen large numbers of its own talent move to Australia, the US and other countries in search of jobs and better incomes.

C.18    Our basic approach therefore must be to maximise opportunities for all Singaporeans – the opportunities to get a good education, to work or to start a business, to retrain and upgrade, and the opportunity to own a home and raise a family in a community they feel they belong in.  We should never reduce the incentive for people to work and to make the most of their skills and talents. That has to be the basis for our society, for how we keep our economy growing, and for how we must strive to raise living standards for all Singaporeans including those in our lower income groups.  

How We are Helping the Lower Income Group

C.19    We have substantially enhanced the Government’s support for lower income workers and their families so that they have the best chance to progress.

a) The main way we support them is to invest in their education and skills, and help them build up their assets through their HDB homes and their CPF.

b) We are also supplementing this by providing them with cash and support for their immediate needs – through the WIS cash component, subsidies for medical care and temporary financial support in difficult times.

C.20   If we add this up over a lifetime, the support the Government is providing is substantial. Take a family in the bottom 20% of household incomes. The husband and wife are in their mid-20s. He earns $1,000, while she earns $500 from part-time work. They have just purchased a 3-room HDB flat costing about $200,000 near their parents. Let’s say they have two children, one of whom eventually goes to a polytechnic, the other to ITE.

C.21   Over the next 60 years, this family can expect to receive transfers of about $460,000 in real terms (2010 prices) (refer to chart 6). About 60% of this would comprise Government subsidies for their education and skills and to help them build up their assets. (This excludes Government spending on education that goes to all children). The remaining 40% would comprise support to help them meet immediate needs, through WIS and discretionary financial assistance such as Work Support and Medifund subsidies. When we count in Government spending in education and other areas that all Singaporeans benefit from, the total transfers such a family would receive would be even greater.

C.22   Let me elaborate briefly on each of these forms of support. 

Investing in Skills and Education

C.23   We are doing more to help the lower income workers to build up their skills and capabilities so that they can participate fully in a growing economy.

a) Budget 2010 grows this commitment – through the development of the comprehensive CET system over the next five years, and through the new Workfare Training Scheme (WTS) that will help our older, low-wage workers to enhance their skills and stay gainfully employed.

b) MPs Halimah Yacob, Zainudin Nordin, and Amy Khor have made useful suggestions on how to help casual and contract workers go for skills upgrading. The Minister for Manpower will be addressing these issues in his Committee of Supply debate.

C.24   Second, we are increasing our investments in the education system itself, which remains the most basic lever that any society has in giving low income families the best chance of success in the future.  

a) Our investment in education for each student cohort will increase significantly.

i. For the entire cohort which entered post-secondary education last year – to JC, ITE, polytechnic, or university – we expect to spend about $4.5 billion between the time they entered Primary 1, till they graduate from the education system. This is over a third higher than for the cohort which entered post-secondary education five years earlier in 2004.

ii. For the cohort which will enter post-secondary education five years later, i.e. in 2014, we expect to increase spending by about 20% over the 2009 cohort.

iii. What this means is new and better facilities, improved teacher-student ratios, higher quality teaching, more opportunities to gain exposure outside the classroom and abroad, and wider cohort participation rates in our tertiary institutions including the universities.

b) We are also providing enhanced subsidies and support for a quality pre-school education for children from low income families, which as MP Indranee Rajah noted is an important part of how we help them to level up with other children when they enter primary school. We have also stepped up our bursaries for low income pupils throughout the school and education system, and have provided significant top-ups to their Post Secondary Education Accounts.

i. A student from a lower income family could receive more than $6,000 in bursaries and financial assistance over the span of his education from pre-school up to the completion of his polytechnic diploma. This works out to more than 60% of his total fees.  If we add in the PSEA top-ups over the past three years, he would receive over $8,000 in bursaries and top-ups or more than 80% of his total fees.

Building Up Assets

C.25  The second part of this strategy is to help low income families own a home that can appreciate in value over time and give them a nest egg that they can draw on in retirement, as well as to build up their CPF assets (through the CPF component of their WIS payments, the extra 1% interest on their balances, and periodic top-ups to their CPF accounts like the Medisave top-ups this year).

C.26  Taken together, Government’s support adds up over time to a large part of their retirement assets. Going back to the example of the lower income family I had referred to earlier, government investment in their assets would amount to about 50% of the total value of their assets in retirement.

Cash and Support for Immediate Needs

C.27  Our basic approach therefore is to focus on helping the low income group to build up their skills, capabilities and assets. However, many families will face difficulties from time to time and need additional support.

C.28  Let me go through the main prongs of this support for immediate needs:  

a) Our most important intervention was to introduce WIS. While the major part of this goes towards building up their CPF balances, a portion of the WIS is paid in cash to help them meet immediate needs.

b) Second, through heavy Government subsidies and the 3Ms (Medisave, Medishield and Medifund) framework, we will ensure that all Singaporeans can afford basic healthcare, including especially the lower-income and the elderly. Minister Khaw Boon Wan will be saying more about this during the COS.

c) Third, we provide a safety net for the most vulnerable and needy in our society. We render targeted help through the Work Support Scheme for the needy unemployed, CCC ComCare Funds for families in temporary financial distress, Public Assistance scheme for those unable to work and with limited means of family support, and Medifund. This year, we are also topping up both the Medifund and Eldercare Funds to help the lower income groups with their healthcare and long term care costs. Minister Vivian Balakrishnan will be announcing refinements to the Public Assistance scheme at the MCYS COS. 

C.29  Whilst our help must be flexible and adequate, we have to ensure that in providing assistance we never undermine the culture of self-reliance which remains a key strength of our society. In particular, we must continue to avoid the temptation of providing a permanent and unconditional social safety net.

C.30  Our current approach of providing discretionary help for individuals and families in need is working and we must keep improving it. We must keep providing real support where it is needed, to help individuals and families to get back on their feet. For any individual who is out of work, but is willing to adapt, pick up skills and do what it takes to get a new job, we will do everything we can to help him. But we must also encourage and grow the many useful initiatives by individuals, community organisations and corporates that will build an inclusive society. The Government is committed to helping this flourish. That is why in Budget 2010, I extended the 250% tax deductions for charitable contributions, which means that Government is literally contributing up to 50 cents for every dollar donated to charitable causes.

A Progressive System

C.31  Let me sum up.

C.32  Every society faces the challenge of uplifting those at the lower end of the skills and income ladder in a globalised marketplace.

C.33  We cannot determine the wages of Singaporean workers unilaterally, even if  there are no foreign workers physically in Singapore. However, the average Singapore worker already commands a significant premium compared to those in competing locations in Asia because we have built up their skills over time and because Singapore remains an attractive place for companies to invest and do business in. For example, in manufacturing, the total hourly compensation for workers in Singapore is about 25% more than in Taiwan, more than twice as much as in Malaysia and about 5 times more than in China. Even with the recent rapid rise in Chinese wages (of 25% in the past 2 years), the pay of a production worker remains far lower than in Singapore.

C.34  We should keep our premium in wages, even as other countries such as China, Vietnam, India and others catch up. In fact, it is precisely this catch-up in skills from those who have been behind us that makes it imperative that we raise skills and expertise across the board. It is why we are making this major effort.

C.35  We are also lending significantly greater support to those with low incomes so that all Singaporeans can take pride in standing on their own feet and progressing with the rest of society.

C.36  Our approach is helping lower income workers and their families in real ways. Their incomes have generally risen over the last decade, although by significantly less than the average Singaporean worker. Their incomes would remain under pressure over the next decade because there is no lessening in the competition in Asia and globally. But there is no short cut, no quick fix, and certainly no magic solution to raise and sustain higher wages by command, as Mr Low Thia Khiang seems to believe. The only way we can sustain higher incomes of those at the lower end is by investing in their skills and expertise so that they have the confidence to do well and contribute on the job. Employers must give them every opportunity to do so, and the Government will support them strongly.

C.37  However, the Government is also providing low income families with substantial direct support that has raised their standards of living by more than their wages have gone up.Our spending on direct transfers to lower income households has increased greatly in the last five years. On our current schemes of support, to help them build up their skills, own a home and grow their savings, and to supplement their wages and provide them relief where necessary to help them meet their immediate needs, a low income family can stand to receive $460,000 over a lifetime, as I indicated earlier.

C.38  We are able to do this because we have a progressive fiscal system where those with higher incomes or wealth contribute more than the rest, but where the overall burden of taxes on Singaporeans remains low so that we encourage enterprise, hard work and allow our economy to keep growing at a healthy rate.

C.39  The benefits we are providing Singaporeans this year alone also illustrate how we distribute more to the middle and lower income groups (see Chart 7). This is without taking into account HDB housing grants, which if included, would show an even larger redistribution in favour of the low income groups. 

C.40  Some members had asked about benefits for the middle-income. They too benefit significantly – from the shift to a more progressive property tax system, the enhanced income tax reliefs for families as well as the CPF Medisave and PSEA top-ups announced. The example of a middle income household that I gave in the Budget Speech, a 5-room household between the 60th and 70th percentile of incomes, showed benefits amounting to $1,700 this year.

D.CONCLUSION

D.1  Our approach has produced real results for Singaporeans. We have one of the lowest unemployment rates and the highest home ownership rate in the world. Our education and healthcare systems are among the best in Asia. And we are building a society where families of all backgrounds, including our lowest income groups have the best opportunities to progress and realise their hopes. 

D.2  We are fortunately in a different position from many other countries, especially following the crisis of the last two years. We are not in the situation where the net worth of our citizens has fallen over a whole decade, or where unemployment is stuck at 10% well after the crisis. We are not being forced to cut back on Government spending on essential services in health and education, or to raise taxes on our citizens to rein in Government debts.

D.3  We are instead investing in a new phase of Singapore’s growth and transformation. If we all play our part in the productivity effort, then as MM put it in the conclusion of his 1986 speech which I mentioned earlier, today will be better than yesterday. And tomorrow better than today. This is the way to prosperity and security.