Singapore’s Darwinian Budget Sparks Employer Ire: Southeast Asia

Singapore tightened curbs on foreign labor for a fourth straight year and unveiled measures that will raise wage costs for companies through 2015, as the government steps up efforts to increase productivity among businesses.

Companies must pay higher levies for lower-skilled foreign employees over the next two years and cut the proportion of overseas workers in some industries, Finance Minister Tharman Shanmugaratnam said in his budget speech yesterday.

“This is really killing a lot of businesses, many companies are dying,” said Max Lee, managing director of Plasma Precision Technology Pte., which makes and repairs equipment used by offshore marine companies. His wage costs have risen 15 percent in the past year. “We are losing competitiveness and productivity.”

After years of letting firms bring in thousands to work at hotels, shipyards and restaurants, the push by Prime Minister Lee Hsien Loong’s government to reduce dependence on imported labor has forced some companies to delay expansion plans. The clampdown, in part because of voter unhappiness over the influx of foreigners, has led the government to warn that such curbs will hurt growth in Southeast Asia’s only advanced economy.

“This is a Darwinian budget for businesses in Singapore,” said Adrian Ball, head of tax services at Ernst & Young Solutions LLP. “Survival of the fittest!”

Population Surge

The Singapore dollar was little changed at S$1.2395 against its U.S. counterpart as of 5:46 p.m. in Singapore. The benchmark Straits Times Index of stocks fell 1.1 percent, the biggest decline in more than three months.

The number of people in Singapore has jumped by more than 1.1 million to 5.3 million since mid-2004 as the government used immigration to make up for a low birth rate. There are 3.3 million citizens and 2 million foreigners on the island smaller in size than New York City. Foreign workers made up 33.6 percent of the total workforce, the finance minister said yesterday.

The increase in foreign-worker levies and higher salary thresholds for some skilled employees will have an immediate impact on business costs, the Singapore Manufacturing Federation, which has more than 3,000 companies among its membership, said in a statement yesterday.

“We cannot cut off the flow of foreign workers abruptly, but we have to slow its growth,” Shanmugaratnam said. “We are therefore making these further adjustments, and we have to do so in full knowledge of the difficulties they will pose for many of our companies.”

Productivity Target

Yesterday’s announcements were the latest in a series of measures by the government since 2010 to restructure the way companies operate and make productivity a cornerstone of the economic blueprint for this decade. Officials blamed some industries’ use of cheaper, low-skilled foreign labor as a reason for low productivity in the last decade.

The Economic Strategies Committee in 2010 said the city state must double its productivity rate by 2020 to between 2 percent and 3 percent annually.

“I worry about the longer-term trend of companies moving out,” said Tan Su Shan, a non-elected member of Parliament and managing director of wealth management at DBS Group Holdings Ltd. “You can throw all you want at productivity schemes, but if all your customers are moving out, what good is it? Productivity has not only not improved, it’s deteriorating.”

In the 2010 budget, the government said it will impose higher levies on foreign workers in industries from manufacturing to services in phases over three years. In his 2011 budget speech, Shanmugaratnam announced such increases will also take place in 2013. Last year, he said the maximum proportion of foreign workers to local ones that companies can hire will be reduced.

Manpower Strains

An Association of Small and Medium Enterprises survey last year showed more than eight in 10 firms faced labor strains. In a white paper published last month and endorsed by Parliament, the government predicted total workforce growth will ease to 1 percent to 2 percent annually through 2020, compared with an average rate of 3.3 percent per annum in the last three decades.

“Businesses have to respond in new ways to the tight labor market,” Shanmugaratnam said. “We cannot carry on in the same way. If we pause now and postpone the restructuring of these industries, we will face the same problems of low productivity, low wages and low profitability in the future,” he said, referring to businesses including those in the construction and marine industries.

SMRT Corp., the island’s biggest subway operator, said in January that its profitability in the next 12 months will deteriorate in part as staff costs “significantly increase.” Dozens of SMRT’s bus drivers from China held Singapore’s first strike in 26 years in November over a wage dispute.

Tax Rebates

Unit labor costs rose 4.1 percent last year, and the central bank said in October they may climb as much as 4 percent in 2013. The Singapore economy grew 1.3 percent in 2012, the slowest pace in three years.

The government will implement a S$3.6 billion ($2.9 billion) wage credit program to help companies cope with rising salaries, and give about S$1.3 billion in corporate tax rebates over three years, Shanmugaratnam said yesterday. Standard & Poor’s said today Singapore’s expenditure on various support programs will have a limited structural impact on its budgetary position, supporting its AAA credit rating.

“There will be some loss of cost competitiveness and for companies that cannot adjust to this new cost structure, they will consolidate and some of them may even relocate overseas,” said Kit Wei Zheng, a Singapore-based economist at Citigroup Inc. “To be fair, there has been quite a bit of effort to minimize the transition cost.”

At Plasma Precision, where 40 percent of workers are foreigners, Lee said productivity is being compromised as trained workers are repatriated and local replacements remain scarce.

“Our job is to develop the business,” Lee said. “But we are fighting fires every day.”

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