Bloomberg News

Singapore Shifts Priority From Growth to Curb Income Inequality

February 28, 2012

Feb. 18 (Bloomberg) -- Singapore intensified efforts to address the island’s income gap in its budget, with measures to boost aid for the poor and curb foreign-worker inflows that signal it’s putting less priority on pursuing high growth rates.

The government will cut the proportion of foreign workers that companies can hire and may consider further increasing levies for employing them, Finance Minister Tharman Shanmugaratnam said in his budget speech in Parliament yesterday. It will partially reimburse businesses for older Singaporean workers on their payrolls, and low-income and elderly households will receive cash and utility rebates.

“The government is paying more attention to the standard of living for Singaporeans instead of just headline growth,” said Kun Lung Wu, a Singapore-based economist at Credit Suisse Group AG. “Tightening the labor supply in the short-term will lower the growth potential. In the longer term, we will see adjustment.”

Prime Minister Lee Hsien Loong has moved to address public discontent over rising prices and an influx of foreigners after his ruling party suffered its smallest electoral win since independence in 1965. Measures announced yesterday to tighten the inflow of foreigners follow similar steps taken in the past two years which have increased the cost of hiring overseas workers at hotels, offices, factories and construction sites.

“We are making important moves to build a fair and inclusive society,” Shanmugaratnam said yesterday. “We have to reduce our dependence on foreign labor, and do much more to build an economy driven by higher skills, innovation and productivity, as the basis for achieving higher incomes for Singaporeans.”

Competition for Jobs

Singapore, ranked by the World Bank as the easiest place to do business, has cut taxes in recent years to spur investment, prompting companies to hire hundreds of thousands of people from overseas. Foreigners and permanent residents make up more than a third of the nation’s 5.2 million-strong population and opposition parties have said that the large numbers of overseas laborers have depressed local wages.

Since the middle of 2010, the government has increased levies imposed on companies such as SembCorp Marine Ltd. and Genting Singapore Plc every six months for hiring non- Singaporeans. Still, the foreign workforce has grown 7.5 percent annually over the last two years, Shanmugaratnam said. The country may consider further increases in the levy beyond July 2013 depending on the growth of overseas labor in the next 12 months, he said yesterday.

“We have no alternative but to slow down the growth of our foreign workforce,” he said, adding that the increasing dependence is unsustainable. “It will test the limits of our space and infrastructure, despite our efforts to build more housing and expand our public transport system.”

Tight Labor Market

Singapore will reduce the maximum proportion of foreign workers that companies can hire in the manufacturing and services industries, Shanmugaratnam said. From July 1, they won’t be allowed to bring in new foreign workers beyond the new ceiling, he said.

Businesses must “adapt to the permanent reality of a tight labor market,” he said. The jobless rate averaged 2 percent in 2011, a 14-year low.

Companies will also have to pay more into the state-run pension fund for employees aged 50 years to 65 years, who are currently receiving lower rates of employer contributions than younger workers, the finance minister said. The retirement savings can be used for mortgage payments, hospital bills, education fees and investments in assets such as stocks.

Pension Payments

The increase in pension payments will cost companies an additional S$190 million a year, the finance minister said. Still, the government will spend about S$470 million annually for the next five years to subsidize the hiring of about 80 percent of workers aged above 50, he said.

“Inequality has increased significantly over the last decade,” Credit Suisse’s Wu said. “Given the structure of the economy has been changing quite rapidly, many people, especially the older workers, are at risk of being left behind because they are less educated.”

The government predicts a surplus of S$1.3 billion for the financial year starting April 1, or about 0.4 percent of gross domestic product, Shanmugaratnam said. The surplus for the year ending March 31 is estimated at S$2.3 billion, or 0.7 percent of GDP, he said.

The city has added about 1 million people since the beginning of 2005 as the government allowed more immigration to make up for a declining birth rate. The influx contributed to crowded public transportation and more competition for jobs, public housing and places in schools, fueling voter anger.

Gap Widens

The gap between Singapore’s most affluent and poorest people widened last year. The government will introduce a permanent program that will provide cash, utility rebates and a contribution to the medical component of the pension fund annually for the elderly and low-income households, he said. The administration will set aside S$3.6 billion to fund the initiative over the next five years.

The government will help public transport operators increase their bus fleets by 20 percent over the next five years by funding the cost of 550 such vehicles, Shanmugaratnam said. Transport companies, which include ComfortDelGro Corp., the biggest operator of buses and taxis, will add another 250 buses, the minister said.

Singapore will double its annual health-care expenditure to S$8 billion over the next five years, adding hospital beds and increasing subsidies for nursing homes, he said.

--With assistance from Lars Klemming, Sunil Jagtiani, and Linus Chua in Singapore. Editors: Rina Chandran, Stephanie Phang

To contact the reporters on this story: Shamim Adam in Singapore at sadam2@bloomberg.net; Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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