A consolidation of my views on Budget 2009

Written by Ng E-Jay
05 Feb 2009

This is a consolidation of my views on Budget 2009. Most of the material in this article can also be found in the following posts which are written by me:

Singapore’s economy: Has the Government been caught with its pants down? (01 Feb 2009)

Will our business-centric budget benefit GLCs and big businesses more than consumers and working class citizens? (26 Jan 2009)

Will the use of past reserves set a precedent for future drawdowns? (23 Jan 2009)

My take on the key highlights of Budget 2009 (23 Jan 2009)

1. The main thrust of Budget 2009: Saving jobs by aiding businesses

Budget 2009, touted by the mainstream press to be “generous”, “decisive”, “bold”, and “scoring on superlatives”, is designed to benefit businesses first and foremost, in the hope that by helping companies cut staff costs and gain easier access to credit, jobs can be saved.

But will jobs really be saved by such measures? The current sharp downturn in the global economy has been accompanied by a collapse in global demand. Given that our economy is still very much export oriented, helping businesses cut costs and gain access to credit would not necessarily translate into job gains because companies have no reason to expand but every reason to scale down to survive. If no one out there is buying your goods and services, the cheapest labour in the world or the easiest source of credit is not going to help your company stay afloat.

2. The Jobs Credit scheme

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 Singaporean and Permanent Resident employee. According to Finance Minister Tharman Shanmugaratnam, 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, but a temporary scheme to help companies through an exceptional downturn.

But will the Jobs Credit scheme really work as advertised?

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 Jobs Credit scheme benefits businesses directly because it places cash in the hands of employers rather than the employees. As larger companies tend to have more employees, it is clear that the Jobs Credit Scheme would end up benefiting big businesses the most. Also, with the continued entrenchment of GLCs in almost every major aspect of the economy, the Jobs Credit Scheme will amount to using taxpayer dollars to help Temasek-linked companies stay afloat. Big Brother is about to gain a bit more muscle.

3. The Special Risk-sharing Initiative (SRI) scheme

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.

The Bridging Loan Programme has also been extended to include foreign SMEs, defined as corporates with less than 30% local shareholding and a maximum of $15 million worth of fixed asset investment. In other words, foreign investors now can benefit from this scheme as well.

Is it wise to use taxpayer’s dollars to fund schemes in which foreign investors benefit? One may argue that this would encourage foreigners to invest more in Singapore and in so doing, create more jobs and open new markets here. However in this economic climate, would this necessarily translate into more jobs for Singapore citizens? That remains to be seen.

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.

The sum of $5.8 billion spent on the Special Risk-sharing Initiative is more than double the $2.6 billion allocated to help households directly. Will the Risk-Sharing Initiative really translate into more jobs for Singaporeans, or will it be merely used to bail out failing companies?

4. Other help for businesses

(a) 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, SMEs are suffering under the crushing burden of office rentals which still remain very elevated after the run-up in the past two years. Lack of regulation have allowed office rentals to run amok, hurting SMEs in the upturn and further damaging them in the downturn.

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.

Exorbitant office rentals constitute one of the major overheads of SMEs and is one of the primary reasons why the Singapore economy has become uncompetitive. The Government should 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. The current situation benefits landlords disproportionately whilst leaving tenants squeezed for cash.

(b) 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.

5. Help for households

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 has touted that the amount of rebates given to lower income households will exceed the amount that would have been saved by these households if instead of the rebates, the Government had merely reduced the GST by two percentage points.

Such a statement paints a misleading picture, because a significant part of the budget rebates goes into the Post-Secondary Education Account (PSEA) and Medisave Account, and hence are not available for day-to-day usage.

In other words, households are not given full discretion as to how to allocate or spend their budget rebates. The Government is dictating how much should go to what purpose. Lower income households also spend a larger percentage of their take-home income on basic necessities like food. It is therefore perfectly reasonable for the Government to eliminate GST on essential items rather than continuing to tax the poor with the ostensible reason of helping them.

6. Lack of retrenchment benefits

Budget 2009 does not provide any unemployment benefits for workers who have been retrenched apart from offering them a 24-month instalment plan on income tax payments.

Given that this is likely to be a very sharp recession, or even a soft depression, the lack of any substantial unemployment benefits for retrenched workers is very surprising.

7. Use of past reserves

In his 2009 Budget Speech in Parliament on Thursday 22 Jan, Finance Minister Tharman Shanmugaratnam said that “like other governments and the vast majority of private forecasters, (the Government) did not anticipate the speed and scale of the deterioration in the global economy in the last six months.” Clearly, the Government has been caught off-guard with regards to the depth and severity of the current downturn. According to Mr Shanmugaratnam, the Government has decided to draw on past reserves to fund a portion of this year’s expansionary budget “in view of the extraordinary circumstances, which require a commensurate response“.

The draw on past reserves will be used to fund the Jobs Credit scheme for businesses as well as Special Risk-sharing Initiative (SRI) for bank lending, the total cost of which will amount to $4.9 billion, comprising $1.1 billion in FY2008 and $3.8 billion in FY2009.

The first thing that came to mind when I read the figure of $4.9 billion is that it is not that large an amount compared to the size of a typical Government budget. Given Singapore’s top-notch credit rating and sound financial system, the Government could easily have raised that amount in the debt markets without even raising an eyebrow. Why is there a need to draw on past reserves to fund two temporary initiatives when in fact the total expenditures of the Government this fiscal year will be many multiples of that?

The Government has obtained the President’s in-principle approval to draw on past reserves to fund the Jobs Credit scheme and the Special Risk-sharing Initiative, rather than wait till the savings of the current administration accumulated since the 2006 General Elections has been exhausted. According to Mr Shanmugaratnam: “Tapping on past reserves now gives us the resources that we need to deal decisively with the current economic crisis and also ensures that we have all the resources we need to respond to the considerable uncertainties that lie ahead. It will allow us full flexibility to respond as the situation requires, and to pre-empt the severe consequences that this crisis could have for our economy and society.

In other words, the Government’s tapping on past reserves appears to be a pre-emptive measure that gives it the flexibility to deploy its current remaining resources in whatever way it sees fit in the future, rather than as a “last resort” when all other measures have failed. This is a departure from the Government’s previous position that dipping into reserves is strictly a last resort.

Will this use of past reserves set a precedent for future drawdowns, with the rhetoric of pre-emptiveness replacing the rhetoric of tapping into reserves only as a last resort?

8. An overly grand statement of the Government’s fiscal prudence?

According to the Finance Minister, the Government does not borrow to fund the budget, and the Government’s borrowings in the Singapore Government Securities market “serve only to develop our capital markets and to provide a safe investment vehicle for the CPF Board“.

Is the Government making an overly grand statement of its fiscal prudence? To be sure, our fiscal prudence and emphasis on savings and the development of a stable revenue base has given us a large war chest with which to combat the current unprecedented downturn. However, given our high soverign credit rating and the prevailing low interest rates in Singapore, it would not be a burden at all for us to borrow the sum of $4.9 billion from the debt markets to fund the two temporary initiatives rather than make a draw on the past reserves. The money in the reserves might be put to better use buying high quality assets such as AAA-rated or AA-rated corporate debt at current distressed prices.

To me, the Finance Minister seems to be overly hyping the Government’s fiscal prudence, especially after a series of failed investments by Temasek in Thailand and in US financial institutions. Why didn’t the Government talk about fiscal prudence earlier, when we were pumping down untold billions of our hard-earned reserves into Citigroup and UBS? Why didn’t the Government talk about fiscal prudence earlier,when PAP Town Councils were investing their sinking funds in dubious structured products, only to find the financial crisis wiping out their values?

9. Longer term concerns

(a) Transparency and accountability in the Government’s cashflow and accumulation, investment, and use of our reserves

The Government’s operating revenue for FY2008 is $40.5 billion and that for FY2009 is estimated at $33.43 billion. However, this does not include all the revenue obtained from land sales, which is estimated at $8 billion to $10 billion. When the Government sells land on short leases, the proceeds are treated as operating revenues. But for longer leases, the proceeds are placed into the reserves and not accounted for in the budget statement.

If the Government had opted to use even a fraction of the proceeds from land sales for the current budget, it need not go to the President for approval for a draw on past reserves to fund Budget 2009.

Besides land sales, how much more income is not reported as operating revenue but is siphoned off into the reserves without passing through public scrutiny?

It is these kinds of questions that we should ask before buying into the praise heaped by the mainstream media on Budget 2009.

Issues like accountability and transparency are long-term concerns that need to be addressed, and they should not be overlooked amidst the euphoria over a budget that is touted to “score on superlatives” but which does not really offer anything superlative directly to the average joe.

(b) The need to address structural defects in the way the Government manages our economy

Our economy is structured in a way that frequently allows a couple of major players or sectors to dominate the scene. The Government is fond of picking winners. It has essentially governed the economy in a top-down fashion, an approach which is increasing outdated and inefficient in this globalized era. An interventionistic approach to economic management interferes with free-market forces and often results in misallocation of capital, as can be most clearly seen in Singapore’s biotech space. In addition, the continued entrenchment of GLCs in most parts of the economy has crowded out many small-time players. GLCs render our economy uncompetitive because they are government-sponsored monopolies often run by bureaucrats with limited business sense.

Unfortunately, Budget 2009 is tailored to benefit these companies the most. The Resilience Package will make Big Brother even more resilient.

Budget 2009 reinforces the top-down, interventionistic approach to economic management that so far has been inadequate in helping Singapore cope with the new challenges of the 21st Century.

Despite the restructuring of our economy that was supposed to have taken place in response to the previous downturn in 2000-2002, Singapore was still the first economy in ASEAN to fall into a recession last year. Our diversification away from electronics manufacturing to the biomedical and services industry proved to be a double-edged sword, as the biomedical industry was severely hit last year due to exposure to its counterparts in US and Europe.

Consumption accounts for only about 40% of our GDP — far less than other developed Asian economies whose share of GDP in consumption is nearer to 55% (read Wall Street Journal’s commentary here).

Singapore is thus hit by a double-whammy, in that efforts to stimulate consumption by putting cash into people’s pockets will have less results as compared to similar measures employed in other economies like Hong Kong, and our over-reliance on exports for growth leaves us acutely vulnerable to the sharp global downturn.

Clearly then, efforts to remake the Singapore economy in recent years have not made us more resilient. They have instead only further entrenched our GLCs and other Government-sponsored monopolies and made us less competitive as a nation.

The entire economy and the Government’s hand in it needs a serious overhaul. Unfortunately, Budget 2009 only entrenches the status quo.

The Government’s investment in infrastructure, healthcare and education is of long-term value to the nation. But we also need independent and effective labour unions and a strong political economy to help translate this into a narrowing income gap, and rising living standards for all and not just a few.

The Government has truly been caught with its pants down, both in its inadequate response to deteriorating global economic conditions, as well as its failure to put Singapore’s economy on a sound footing in what has proven to be a very volatile start to the 21st Century.

Yet today, even after the recent pay reduction, our Ministers are still drawing salaries several hundred times that of their US counterparts when compared to the size of the nation’s GDP (see here).

Perhaps it is time that they vacated their seats for politicians who are able to recognize that the old top-down approach to economic management that allows bureaucrats to pick winners via administrative edicts is no longer relevant in the 21st Century, and who reject as false the choice between a strong political economy and a sustainable one.

(c) Singapore’s next phase of growth

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.