Dissecting Budget 2010

This article was originally written for The Online Citizen

Written by Ng E-Jay
23 Feb 2010

Finance Minister Tharman Shanmugaratnam delivered the Budget Statement in Parliament on Monday 22 Feb.

In the opening paragraphs of his budget speech, the Finance Minister acknowledged the vulnerability of Singapore’s export-oriented economy which caused it to suffer a 10% GDP contraction during the most recent recession. However, it is disappointing to note that the budget statement did not mention ways in which Singapore’s economy could be diversified so as to make it less reliant on exports.

Mr Shanmugaratnam said that Budget 2010 aimed at positioning Singapore’s economy to deliver growth based on productivity gains rather than ever expanding use of manpower, as per the Economic Strategies Committee (ESC) recommendations.

Emphasizing the need for transforming our economy and raising worker skills has been a constant refrain of the Singapore government since the late 1970s. The initial success of the government in the early days of nation building was due to the fact that we started off from a low base in terms of worker skills and overall educational level of the workforce. By the late 1990s, growth in productivity had stagnated after a couple of boom decades.

What has the Finance Minister said to convince us that it will be different this time, especially when the proposed measures in Budget 2010 are nothing novel or radical, but are merely variations of what the government is purported to have been doing in recent years?

According to Budget 2010, the government will spend $5.5 billion over the next 5 years on sustained initiatives to help businesses and workers raise productivity. While $5.5 billion may sound like a lot of money, it is just half the amount spent on defence in a single year. It is also a tiny fraction of the amount of money lost by GIC and Temasek during the 2008 financial meltdown. Is the government truly serious about its latest initiatives at raising productivity?

Mr Shanmugaratnam said that the government will support the growth of globally oriented companies including those involved in R&D. While that sounds positive on the surface, the government’s poor track record at picking industry winners casts doubt as to whether it should really be in a position to decide who should succeed or fail.

Very often, the free market makes much better choices compared to a team of ivory-towered bureaucrats. There are also conflicts of interests because many of Singapore’s globally oriented companies are Government-Linked Corporations.

The Finance Minister also acknowledged in his budget statement that reducing the dependence on foreign labour will pay off in higher productivity over the longer term, but impact growth in the short term.

The undesirable outcome of having to deal with reduced growth in the short term could have been avoided had the government calibrated the inflow of foreign workers right from the start, as opposed to waiting till the population had become saturated with foreigners before narrowing the valve. In this instance, the government has shown itself to be reactionary rather than proactive.

The Finance Minister also said that median incomes rose by 20% in real terms from 2005 to 2008, justifying the government’s growth strategy of importing large numbers of foreign workers.

Unfortunately, Mr Shanmugaratnam has neglected to consider the fact that wages at the lower end of the income spectrum are still stagnating. Therefore, contrary to what Mr Shanmugaratnam has said, the government had indeed embarked on a “growth at all cost” model of economic management in recent years, because the growth strategies contributed to larger income disparities and failed to take into account the strain on the social fabric of our nation as a result of uncontrolled population expansion.

The Finance Minister’s proposal for the government to facilitate mergers and acquisitions (M&A) through enhanced tax benefits and waiver of stamp duty on transfer of unlisted shares is disconcerting. M&As are good for an economy only up to a certain extent. While they help weed out companies that are not so competitive, in a small economy like Singapore’s, they also have a tendency to create monopolies that eventually retard productivity growth because of reduced competition and crowding out of smaller players.

The Finance Minister also spoke about nurturing the next generation of business leaders, such as spending money to enhance SPRINGS’s Business Leaders Initiative, which is a grooming programme for young business talents.

In order to successfully groom the next generation of entrepreneurs and risk-takers, the entire educational system has to be overhauled to encourage creativity and innovative thinking. The stigma of failure has to be removed. The stifling political climate which infects the civil service and our educational institutions must also be addressed, because vibrant minds cannot flourish in an oppressive environment. Unfortunately however, the ruling party does not seem to have the political will to make the necessary changes.

The government has made the right decision to focus on productivity and reduce the reliance on unskilled foreign labour. The Finance Minister also made the right connections in asserting that future productivity growth can only come about by a concerted effort by businesses, individuals, and the government.

However unless fundamental issues concerning our educational and political system are addressed, the government will only be able to go so far before it hits a brick wall and has to retrace its steps all over again.


Read the finance minister’s full budget speech here: http://www.channelnewsasia.com/budget2010