Below are two letters recently posted on Sammyboys Alfresco Coffee Shop about the report of the Economic Review Committee. We reproduce them here.
ERC glosses over economic problems
The CPF and high land cost are the 2 sacred cows that didn’t get killed in the Economic Review Committee (ERC) and that’s no big surprise. Spore Inc have been relying on cheap capital and land sales profits for their investments overseas. Set below are observations of the 2 “immortal” albatrosses:
I. CPF – Pension fund or perpetual government Bond?
The CPF in fact looks like a compulsory perpetual government bond which pays very little interest to the lender. It’s not a serious pension scheme as the CPF holder makes the investment decisions and the CPF funds has restricted investment application.
The redemption of CPF funds looks uncertain with the withdrawal age looking to shift its goalposts beyond 65 years old. Also, retained CPF balances looks to be increasing over time.
II. CPF and its influence on property prices.
The CPF funds had been responsible for the property bubble which started in the early 90s. The high returns attracted many Singaporeans to use CPF funds as equity to buy properties. The liberalisation of the HDB resale market, attractive loans and liberalised CPF rules all conspired to send property values rocketing.
When Spore experienced double digit GDP growth (up to 1997) and with a tight labour market, rapid salary increases occurred. With higher salaries, Singaporeans reinvested their CPF and income on second or even third properties using rental income to pay off their monthly mortgages.
Sadly, the property bubble started to deflate with the 1996 property restrictions and ended once the Asian crisis struck in 1997/98! Five years on, the property landscape has changed dramatically but Singaporeans are still clamouring for the go-go days to return.
Singapore Inc – Land Baron.
Singapore Inc owns the largest land bank in Spore. The land policies are no different from that of a land baron. The compulsory Land Acquisition Act allows tracts of undeveloped freehold land and/or subdivided private plots to be acquired cheaply and resold with limited tenure to developers at great profit for the State’s benefit.
Furthermore, land reclamation also increases the land stock abide at rather higher cost but is mitigated by cheap funds (CPF?) Therefore, it is of great interest to keep the land value high.
“Land is scarce in Spore and land prices are therefore high” is simply not true today. With globalisation, investment flows to the places with the lowest aggregate input costs ie. land, labour, capital and management. Furthermore, mobility is greater these days with talented people willing to uproot to places which provides greater lifestyle values.
Where do we go from here?
Frankly, it’s hard to have answers! I also believe the ERC report does not address the root of the problems. The CPF issues are a ticking time bomb that will grow louder as demographic and economic changes takes place. CPF polices were probably based on a growing work force and gradual salary increases to sustain paying out the earlier CPF holders’ retirement sum.
However, changes in the workplace, slower economic growth and reduced jobs creation coupled with a declining birth rate may conspire to wreck the CPF’s objective. Uncertain property values will also affect the eventual retirement of CPF holders leaving very little to retire on. Rapidly reducing land prices is not a solution because of the stakes involved.
Singaore Inc, GLCs, banks and foreign investors will be severely hurt if land prices were to suddenly collapse. A gradual deflation or stable prices would be preferable. However, if one uses CPF and bank borrowings to acquire a 99 leasehold property, you would have to contend with forgone CPF interest/bank interests inflating the property’s value on one end and probable declining values of a 99-year old property (classic financial mismatch). Even if we promote entrepreneurship to create more jobs, high land prices will continue to be a factor against success.
In conclusion, CPF and high land cost continue to limit options to restructure Spore’s economy. The future prognosis looks grim with CPF and high land prices look set to continue its unsustainable path.
Ministers are clueless about economy
I think we are in deep trouble. The Economic Review Committee is supposed to come up with directions and plans for future generations. If all they could come up with is just mere “fiscal” adjustments to the tax system so far, then we are really seriously in trouble.
Normally such a committee will identify our competitive and comparative advantages in the next five to ten years so that we can plan our human resources through manipulating the education system to cope with our next phase of development.
I think they were harping about the biotechnology stuff in the previous years so much that they would have come up with something to “accommodate” the new era of biotech stuff.
We have already given so much tax allowances and incentives to MNCs in the past that there is really very little room for adjustment on the whole.
They are more interested in maintaining at least a balanced budget or best, a surplus budget, by increasing GST rather than giving out directions to where we will be heading in the next five years.
Shifting the tax base from a small one to a larger, broader tax base will indeed help government maintain steady and less volatile tax revenue. Whether such measures will really help us out from the present economic woes is really doubtful, the reason being that many corporations aren’t earning money and many will be in the red.
They won’t be able to “enjoy” or benefit from such “bold” tax cut in the short term, i.e. if companies are suffering a loss and decide to move out of here, they will still move out, with or without the tax cut which doesn’t really benefit them now.
The problem lies in the high cost of business which includes many areas like COEs, high rental, high labour cost despite the “cheap” “foreign talent” policy, indirect charges by government departments and statutory boards, etc.
It seems that the government is very reluctant to touch on the main items that deals directly with the high business costs, namely transportation (COEs) and rental. They have provided “help” to lowering labour cost under the name of “foreign talent” policy which allows large MNCs to employ cheaper sources of alternative labour from third world countries to replace local labour who are more expensive.
However, despite the economic downturn, rentals controlled by the various GLCs had hardly come down because it will affect government coffers directly. They are even reluctant to lower CPF contributions, not because they are afraid of people complaining (they aren’t afraid of Singaporeans complaining with increase in GST!) but basically it will mean a disastrous effects on CPF’s cash flows in the long run.
Nothing was mentioned about our future strategic economic alliances that we should make to ensure our survival amid mounting competition from China. Nothing was mentioned about the direction of trade and economic development we should make for our future economic well-being.
It seems that it is really just like all ministers are clueless about what will happen next. We are just hanging on the outcome of US economy!