Singapore to spend S$5.5 billion to spur productivity

February 22, 2010
Singapore Democrats

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Shamim Adam, Andrea Tan & Shiyin Chen
Bloomberg

Singapore will spend S$5.5 billion ($3.9 billion) in the next five years to spur productivity amid an attempt to reduce dependence on foreign workers, as the government shifts its focus from minimizing the impact of the global slowdown to boosting long-term growth.

The government will pledge S$1.1 billion annually through tax benefits, grants and training subsidies to improve efficiency, Finance Minister Tharman Shanmugaratnam told Parliament today in the nation’s budget speech. He also announced companies must pay higher levies to hire overseas workers, who currently account for one out of every three people in Singapore.

Singapore is considering ways to ensure its economy expands in a more sustained manner after three recessions in the past decade, with its most recent slump the deepest since independence in 1965. A government-appointed panel this month outlined seven proposals to restructure the economy including raising productivity and relying less on foreign labor, a move that may increase costs for companies such as oil-rig builder SembCorp Marine Ltd.

“This year’s budget shows that Singapore is no longer in a crisis mode with the evolution of government spending to one that is supportive of long-term growth,” said Vishnu Varathan, a regional economist at Forecast Singapore Pte. “Productivity is the core theme as the government tries to enhance Singapore’s competitive edge.”

‘Major challenge’

At last year’s budget announcement, the government cut corporate taxes and said it will tap the country’s reserves for the first time in part to fund S$20.5 billion in expenditure. Among the spending plans in 2009 was a S$4.5 billion program that gave employers cash grants to retain local workers.

Productivity growth of between 2 percent and 3 percent annually, while “a major challenge,” will help gross domestic product increase by 3 percent to 5 percent per annum in the next 10 years, Shanmugaratnam said. The rate averaged 1 percent in the last decade.

“We have to restructure our overall economy towards higher-value activities and exit from less efficient ones,” the minister said. “We will give significant tax benefits to businesses that invest in skills and innovation, thereby lowering their effective tax rates. We will also provide grants for customized, industry-based initiatives.”

Higher productivity

The government has said it wants to boost productivity to make up for an anticipated slowdown in growth as the nation becomes more developed. Singapore’s productivity rate lags behind that of the U.S., Japan and other countries, the Economic Strategies Committee said this month. Productivity in manufacturing and services is about 55 percent to 65 percent of the levels in the U.S. and Japan, it said.

“Raising skills and productivity is the only viable way we can achieve higher wages, and is the best way to help citizens with low incomes,” Shanmugaratnam said. “If we achieve this goal, we can raise real incomes by one-third in 10 years. The scope to improve is clearly there, but the easy gains in productivity are over.”

An influx of foreign workers, currently accounting for one out of every three people in Singapore, has been blamed for the slowdown in productivity.

Singapore will increase levies for companies hiring foreign workers as the country attempts to depend less on overseas labor, Shanmugaratnam said. Levies will be increased in a phased manner over the next three years, he said.

Foreign workers

Construction companies have hired tens of thousands of workers in recent years amid a property boom in the city state and as companies such Genting Singapore Plc and Las Vegas Sands Corp. rushed to complete their casino resorts.

“We now need to take calibrated steps to manage our dependence on foreign workers,” Shanmugaratnam said. “They already comprise almost a third of the total workforce, and there are social and physical limits to how many more we can absorb.”

Singapore will introduce additional tax incentives for industries including legal services, finance, ship broking and maritime financing, Shanmugaratnam said today. The government will introduce a one-time tax allowance to help companies expand through mergers and acquisitions, he said.

The island will shift to a so-called progressive property tax regime from a flat rate for owner-occupied homes as a “means of redistribution” in Singapore which will help form a “fair system” of taxes in the nation, Shanmugaratnam said.

The government will spend S$1.8 billion of its budget this year on households, including the so-called Workfare Income Supplement plan, with lower and middle-income families benefitting most, he said.

Shanmugaratnam expects a budget deficit of S$3 billion in the year starting April 1, and forecasts a shortfall of S$2.9 billion in the current fiscal year ending March 31.

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