Asian Wall Street Journal
04 Feb 07
DURING rush hour in Singapore’s ultramodern subway system, wrinkled old ladies squat on the underpass floor with handfuls of small tissue packets that they sell at one Singapore dollar, or 65 US cents, apiece.
These are the poor of Singapore, left behind by the boom that has transformed this tropical island of 4.5 million people into a regional business, finance and technology hub. Poverty here isn’t nearly as desperate as in its Asian neighbors, or even many Western societies. But it has become an increasingly sensitive political issue, prompting new tax and social policies that the government is expected to unveil in the annual budget presentation Feb 15.
According to official statistics, at least 40% of Singapore’s households saw their real incomes decrease from 2000-2005 – while the overall economy posted some of the world’s highest growth rates, surging by 7.7% last year.
“The question is, who is all this growth for?” says Manu Bhaskaran, an adjunct fellow at Singapore’s Institute of Policy Studies and a partner at the Centennial Group, an advisory firm. “Shouldn’t the government be aiming for lower growth, but better distribution?”
The government’s strategy so far is to pursue a balancing act of generating more revenue for helping the poor without scaring off the global investors who have long been attracted by the city-state’s low-tax regime. “The dual objective is to ensure that the Singaporean economy continues to remain competitive, and to strengthen the inclusiveness of Singaporean society,” says Lim Swee Say, secretary-general of the National Trades Union Congress and a government minister.
Most of Singapore’s poor are in their 50s or older, and many are onetime manufacturing workers who lost their jobs to cheaper competitors in China, Vietnam or India. Many lack education and English-language skills that are needed to prosper in expanding sectors such as services and finance.
It is only in recent months that senior officials began to speak out on the problem of structural poverty, recognizing the potential perils for a multiracial, multireligious society such as Singapore’s. “It is essential for us to tilt the balance in favor of lower-income Singaporeans, because globalization is going to strain our social compact,” Prime Minister Lee Hsien Loong said in a speech last fall.
Singapore’s People’s Action Party, founded by Mr Lee’s father Lee Kuan Yew – who is still a senior government member with the title of Minister Mentor – has controlled the island since independence in 1965, winning nearly every seat in parliamentary elections. The country’s mixed population of Chinese, Malays and Indians has accepted decades of the PAP’s often authoritarian rule in exchange for phenomenal economic growth that has transformed this former British trading outpost into one of the world’s most prosperous states.
While providing subsidized housing and health care, Singapore’s government has long resisted calls for European-style unemployment benefits for the poor, describing welfare as a “dirty word” and rejecting the idea of a minimum wage. Instead, the government has come up with the concept of “workfare” – a large-scale program to top off the incomes of those Singaporeans who accept low-paid work. Details of the program will likely be given in the budget presentation.
“We can’t stop the income gap from widening because the wages are determined by the global competition for knowledge workers, and by the excessive supply of unskilled workers,” says Mr. Lim, the minister and union leader. “But what we’re trying to do is to make sure that the widening income gap doesn’t necessarily translate into a widening social gap.”
Most developed economies fund such social programs by redistributing wealth through progressive taxation: the top-bracket federal income tax rate is 35% in the US, and at least 40% in most of Western Europe. But Singapore is ideologically opposed to this model: the island-state has been steadily slashing its top income-tax rate, from 55% at independence in 1965 to 28% in 2000, to 20% today. Making up for the shortfall in revenue, Singapore established a general sales tax, currently at 5%.
It is the sales tax that the government is planning to tap again to pay for the “workfare” initiative. According to Mr Lee, with the new budget the sales tax is likely to rise to 7% – a measure that, economists calculate, will generate some S$1.5 billion of extra government revenue.
The plan is far from popular. In the two months since Mr Lee in November first mentioned a likely sales-tax rise, the proposal elicited unusually vocal criticism from Singapore’s corporate world and opposition leaders alike. The influential Singapore Chinese Chamber of Commerce and Industry complained the sales-tax increase is “likely to have an immediate and detrimental effect on local spending,” undermining Singapore’s long-term competitiveness.
Sylvia Lim, leader of the Singapore Workers’ Party and an opposition Parliament member, also pointed out that the poor – the ostensible beneficiaries of the proposal – would be hurt the most. “We need to strengthen our safety nets through some redistributive policies,” she asserted, adding that consumption taxes, such as the sales tax, “are generally regressive and likely to compound the underclass problem.”
While the government usually ignores the minuscule opposition in this tightly regulated country, the business community’s pleas found a receptive audience. Aware that corporate taxes are even lower in rival business centers such as Hong Kong and Ireland, Singapore signaled it would sweeten the pill for businesses: To compensate for the higher sales tax, the corporate tax rate, currently 20%, would be shaved by at least one percentage point.
“This is a tough and competitive world,” Minister Mentor Lee told Singaporean journalists as he explained the planned corporate-tax cut. “People don’t come here because they like Singapore – they come because the returns are better.