Written by Ng E-Jay
23 Jan 2009
Finance Minister Tharman Shanmugaratnam delivered the 2009 Budget Speech at 3.30pm in Parliament on Thursday, 22 January 2009. He told Parliament that this year’s budget, aimed at helping Singapore through the worst recession since independence, is a significantly expansionary budget that will put us in deficit to the tune of 6% of GDP for fiscal year 2009 (before accounting for Net Investment Returns and transfers to endowments and trust funds).
Mr Tharman said that Budget 2009 will deliver a Resilience Package totalling $20.5 billion this year. One of the most important objectives of this package is to help Singaporeans keep their jobs and retain their ability to support their families. To achieve this, the package will focus on helping businesses retain workers by helping them meet their costs and strengthen their cash-flow, and by enhancing their competitiveness.
To encourage employers to retain workers, the Government will introduce a Jobs Credit Scheme in which every employer is provided with a cash grant amounting to 12% of the first $2,500 of the monthly wages of each employee who is on the CPF payroll. The Jobs Credit, which will be equivalent to a 9 percentage point CPF cut, is not intended to be a permanent scheme to subsidize employment. It is a temporary scheme to help companies through an exceptional downturn.
Will the Jobs Credit Scheme be effective in encouraging employers retain workers? My take is that it could be, provided the downturn does not become significantly worse than it already is. Thus far, we have seen some major companies, such as DBS Bank, retrench middle management and higher paid staff, only to re-employ cheaper, junior staff to replace them, in order to save on staff costs. The Jobs Credit Scheme could be of some help in dissuading companies from carrying out such practices. Also, some companies might be looking to make a deal with employees to reduce their salaries in return for continued employment. The Jobs Credit Scheme could take the place of such negotiations by providing a cash grant that amounts to an effective employee wage cut from the point of view of the employer. The benefit of this arrangement is that the employee gets to keep his original wage.
However, if the current downturn gets significantly worse, many companies will either be forced out of business or be forced to reduce the scale of their operations. The Jobs Credit Scheme would then be of little effect because companies would have no choice but to retrench regardless of effective wage levels.
The credit situation in Singapore has declined since October last year because several foreign banks, especially those with weak balance sheets globally, have been focusing on recapitalization in their head offices, and because our local banks have taken a step back to reassess their lending strategies as a result of uncertainties over the depth and duration of this recession.
In order avoid a situation where good and viable companies are unable to get the funding they need to stay afloat and grow due to the decline in credit conditions in Singapore, the Government has decided to take on a significant share of the risks of bank lending, although it will not take over the lending business itself. The Government will do this under a new Special Risk-Sharing Initiative (SRI) scheme, which will comprise two components, as follows:
Firstly, there will be a new Bridging Loan Programme (BLP) for working capital loans of up to $5 million (up from $500,000 currently), and the Government’s share of risk on these loans will increase from 50% to 80%. Furthermore, the new BLP will enable banks to set their own interest rates, allowing higher-risk borrowers to still gain access to credit, even if it is at a higher interest rate. The scheme will be in operation for one year and will cater to loans of up to four years maturity.
Secondly, the Government will take on a significant part of the risk in trade financing, including 75% for trade loans.
In my view, these measures taken by the Government to encourage bank lending are indeed far superior to the measures taken by countries like the US which consist primarily of increasing the central bank’s balance sheet, pumping liquidity into the financial system, providing easy money to banks and in some cases partially nationalizing them, and taking toxic assets off the balance sheets of financial institutions.
But my assessment of these measures to boost bank lending is much the same as that for the Jobs Credit Scheme, namely, if the economy manages to stabilize or not go down much further, these measures should help bring forward the recovery. However, if the downturn gets more severe, bankruptcies will soar and so will risk aversion. In this situation, businesses will be even more hesitant to borrow. Business do not care who is sharing the majority of the risks of the loan on the lending side. They only care whether taking on a loan makes good business sense to themselves. Consequently, it would be doubtful whether these measures will have much impact if the economic situation continues to spiral downwards.
In business, it always takes two hands to clap. Measures to encourage financial institutions to extend loans might have limited impact if businesses are unwilling to borrow to expand their operations, or opt to close shop and minimize their losses rather than risk further capital. Unless and until the global economic climate stabilizes, it remains to be seen whether the Government will be successful in inducing greater bank lending.
In order to lighten the tax burden of businesses in the coming year, the Government will provide a 40% property tax rebate for industrial and commercial properties for 2009. The Government strongly urges landlords to pass on the benefits of this rebate to their tenants.
However, as one astute reader of my blog has pointed out, it is the SMEs who rent or lease that are in more urgent need of rental or lease rebates. This reader said:
“If the (property) tax rebate is for the landlords, they are not bound to pass the savings on to the struggling companies. Note that rentals have not really fallen drastically and so the landlords do not yet need to be rescued. It is the companies who are struggling to pay the high rentals that need help to survive.”
To the Government’s credit, it was also announced that JTC, HDB and SLA will play their part by providing a 15% rental rebate to their tenants and land lessees. The rental rebate will also be extended to stallholders who are paying market rents in markets and food centres managed by NEA.
The onus is now on other Government agencies and statutory boards to follow up with similar measures to reduce the high rental burden on SMEs, and for the Government to enact stronger measures to pressure landlords to reduce their rents in the face of the severe economic downturn. It is only fair that rents that go up in boom times should come down when storm clouds gather.
In order sharpen Singapore’s competitiveness, the Government will reduce the corporate income tax rate from 18% to 17% effective from Year of Assessment 2010.
However, given that the corporate income tax rate is already very low, the cost of doing business in Singapore as well as the quality of the workforce could well be much more important factors for businesses to consider when investing and setting up shop here.
A one percentage point reduction in the corporate income tax rate may not have a measurable impact on business decisions to operate here if labour productivity continues its downward trend, as it has been for the past several years. The high cost of living and doing business in Singapore, especially rentals, must also be addressed.
The Government will also enact a slew of measures aimed at directly helping households cope during the downturn, such as doubling the GST Credits that households will receive in 2009, providing an additional one month of S&CC rebates for families living in one to three-room HDB flats, providing eligible households in public rental flats an additional one month of rental rebate, and giving a personal income tax rebate of 20% for tax residents for Year of Assessment 2009. The Government will also provide a 40% property tax rebate for owner-occupied residential properties in 2009.
While I certainly welcome all these measures, the longer term challenges facing working class Singaporeans is not merely the high cost of living, but also the suppression of wages due to the large import of foreign labour. Working class Singaporeans are not spared the ravages of globalization as they are neither provided the security of a minimum wage nor that of a comprehensive welfare programme. They have to compete with foreign labour willing to accept much lower pay due to the fact that the vast majority of them do not bring their families along to stay in Singapore.
Hence, in addition to directly helping low income households and working class Singaporeans by rebates and budget handouts, the Government must do more to protect their rights and enable them to compete for jobs on fairer terms. The case for instituting a minimum wage in Singapore has been argued here.
The Finance Minister is correct in pointing out that this is not a normal Budget, and not even a normal countercyclical Budget. Singapore is going through the most serious downturn since independence, and the Resilience Package, totalling $20.5 billion, is the largest the Government has undertaken in response to an economic downturn. The President has granted in-principal approval for a draw on past reserves to fund the Special Risk Sharing Initiative and the Jobs Credit Scheme. Furthermore, the Finance Minister has said that depending on how deep and long the recession is, the Government is prepared to do more.
My analysis of the key highlights of Budget 2009 is that some of the more outstanding measures stand a good chance of succeeding only if the economy does not spiral downwards further, turning a sharp recession into a soft depression. It is therefore imperative that the Government comes up with backup plans in case the worst comes to pass.
While reductions in corporate and personal income tax rates would go some way in making Singapore more competitive and helping tax payers cope with the downturn, longer term issues such as our declining labour productivity and high cost of living also has to be addressed.
A more dynamic and productive workforce whose participants have the drive to excel in the global marketplace as well as the mental fortitude to weather stormy times can only come about if we make a deliberate effort at cultivating a more open and tolerant society, one that fosters creativity, teamwork and loyalty, and respects the civil and political rights of its members.
Finance Minister Tharman Shanmugaratnam has pointed out that Budget 2009 is not simply about the short term, but also about building up our capabilities and infrastructure for Singapore’s next phase of growth. I strongly believe that Singapore’s next phase of growth should include a respect for diversity of opinion, a culture of openness, tolerance and regard for human rights, and an end to the political aristocracy that has for far too many decades silenced our voices and deadened our thoughts.