Singapore said it will spend S$9 billion ($7 billion) on health care and other benefits for the elderly, while providing companies with more funds to increase efficiency as the economy adjusts to a tighter labor supply.
Foreign-worker growth has slowed “significantly” in the past two years, and curbs on the inflow of overseas labor have prompted companies to improve the way they do business, Finance Minister Tharman Shanmugaratnam said in his budget speech in Parliament yesterday. Such changes are needed to sustain wage increases while keeping the economy competitive, he said.
“Without good productivity growth, if we try to push wages up, we will end up with either higher consumer prices or squeezed profit margins that hurt both businesses and ultimately jobs,” Shanmugaratnam said. “Firms will either pass on higher wage costs to consumers through higher prices, especially in the domestic service industries, or else they will become less competitive.”
Singapore is nearing the midpoint of a 10-year economic transition strategy to move away from dependence on cheap overseas workers while attracting new industries such as research and development. Prime Minister Lee Hsien Loong has in recent years tightened the hiring of foreigners, after an influx led to voter discontent over infrastructure strains and increased competition for jobs, property and education.
“The two key areas of greater social spending and increasing productivity will continue to be the direction of fiscal policy in the years ahead,” said Irvin Seah, an economist at DBS Group Holdings Ltd. in Singapore. “The measures outlined in this budget to increase productivity are a more targeted approach that the government is taking.”
The island’s unemployment rate held at 1.8 percent in the three months through December, matching a five-year low reached in the last quarter of 2012. Labor productivity climbed in the second and third quarters of 2013, after consecutive declines in the six previous ones. The government said in 2010 it wants to achieve annual productivity growth of 2 percent to 3 percent.
A survey of companies by KPMG and the Singapore International Chamber of Commerce released in January showed more than 65 percent of 159 respondents said the pace of economic restructuring was too fast. Shanmugaratnam said yesterday the government is extending a program to help small and medium-sized companies spur productivity for three years, and the move will cost it S$3.6 billion.
He also announced levy increases for construction workers, and said the government will monitor other industries to see if further tightening measures are needed for 2016 and beyond.
“Two years ago, the predominant mood among businesses was to call for government to slow down or postpone tightening of foreign worker inflows,” Shanmugaratnam said. “Most have now accepted the reality of a tight labor market, and are seeking assistance to upgrade, bring in new techniques and grow internationally. Many more firms are taking advantage of our schemes to invest in productivity and to expand abroad.”
Companies will be required to increase contributions to employees’ pension funds by at least 1 percentage point from January 2015, the finance minister said. At the same time, it will extend support for businesses to expand overseas, he said.
Efforts since 2009 to cool the property market are working, Shanmugaratnam said. Home prices slid for the first time in almost two years last quarter. Housing values had risen in the past five years to a record amid low interest rates, raising concerns of a property bubble.
“We are not engineering a hard landing,” he said. “Given the run-up in prices in the last four years, it is too early to start relaxing our measures. The government will continue to monitor the property market and adjust our measures when necessary.”
The government said yesterday it will raise duties on betting, tobacco and liquor, as part of its “social objective of avoiding excessive consumption or indulgence in these areas.” The so-called sin taxes will increase revenue by about S$445 million annually.
Shanmugaratnam forecasts a surplus of S$3.9 billion in the current fiscal year ending March 31, and expects a budget deficit of S$1.2 billion, or 0.3 percent of gross domestic product, in the year starting April 1.
The island will celebrate its 49th year of independence in August and Lee has said the country is at a turning point and must make a strategic shift in its approach to nation building. That includes strengthening social safety nets and sharing “fruits of progress more widely” through support for low-wage earners and homeownership programs, he said in a New Year message.
In a so-called Pioneer Generation Package, the government said it will set aside funds for about 450,000 Singaporeans who were at least 16 years old in 1965, when the country gained independence. The nation’s number of elderly will triple to 900,000 by 2030, according to the National Population and Talent Division.
Shanmugaratnam also announced more education subsidies and financial aid for kindergarteners to tertiary students from households that need support.
Singapore has entered a “new phase” where incomes are rising less quickly, disparities between different groups are becoming a greater concern and there is a growing population of older citizens who often have fewer children to support them, Shanmugaratnam said.
“Our thinking has shifted in this new phase, and our initiatives are helping to level up our society and mitigate inequalities,” he said.