Dissecting Budget 2013: Part 1 (Key Points)

In this article, I will outline the key points highlighted in the longer version of this article. You can read the longer version of the article here.

Increase in Foreign Worker Levies

Even though the levies for foreign workers are raised, for Singaporeans, the government has implemented the Wage Credit Scheme (which is supposed to theoretically raise the wages of Singaporeans) and increased the employer’s CPF contribution for the Singaporean low-wage worker. However, after taking into account the supposed wage increase and increase in CPF contribution of the Singaporean worker, will it still be cheaper to hire a foreigner?

After July 2015, if you look at the levy for the S Pass holder, the lowest levy is $350. If we compare this to the Singaporean worker, where if the employer has to make a CPF contribution of $350, or 16% of the employee’s salary, this means that the employee will earn $2,062.50, which is lower than the $2,200 that the employer should pay for the foreign worker. This means that the foreign worker will be $137.50 more expensive than the Singaporean worker. Will $137.50 be enough a deterrent to hiring a foreign worker? Not only that, if you hire a worker at higher wages, the Singaporean worker will increasingly become more expensive. If the employer were to hire a worker at $2,500, the employer would have to pay only $350 for the foreign worker levy but $400 for the Singaporean worker’s employer CPF contribution. This means that the Singaporean worker will be more expensive than hiring a foreign worker. According to the Ministry of Manpower, “The Foreign Worker Levy, commonly known as ‘levy’ is a pricing mechanism to regulate the number of foreign manpower in Singapore.” Clearly, this is not the case. It is still cheaper to hire foreign workers, at high salary ranges.

What if we were to look at the highest foreign worker levy in the construction industry? In June 2012, there were 104,500 Singaporeans working in the construction industry, of which, 38.8%, or 40,546 were in the category of production and transport operators, cleaners and labourers. In comparison, there were 293,400 work permit holders in the construction industry. There are 7 times more foreign workers than Singaporeans in the “lower-skilled” areas of the construction industry. Is the foreign worker levy here used to “regulate the number of foreign manpower in Singapore”? In 2012, based on the number of work permit holders in the construction industry, the government would have collected a revenue of a maximum of $147 million from the foreign worker levies, just from the construction industry itself. Instead of collecting this $147 million as foreign worker levies, what if some of it could be channelled back into investment in productivity growth? And this $147 million is not yet accounting for the 1,268,300 foreigners in Singapore, at the end of 2012.

Theoretically, the raising of the minimum S Pass qualifying monthly salary is a good move because essentially, the government is saying that if businesses want to employ a worker who will be paid the same wage, businesses should be more likely to employ a Singaporean over a foreigner, with the same wage. However, as can be seen, in reality, this will not occur. A better initiative would be to tier the foreign worker levies according to the salary ranges, so that at each salary range, the foreign worker will continue to be more expensive than the Singaporean worker, and so that Singaporeans will continue to be employed if they are equally qualified. Also, the foreign worker levies implemented to industries with a high reliance on foreign workers shouldn’t be so high that it heavily increases the costs of operation for the businesses.

A better policy would be to also implement a minimum wage law, so that businesses will not undercut the wages of the workers, and will be required to pay them a fair wage that is commensurate to the cost of living in Singapore.

Wage Credit Scheme

The government had introduced the new Wage Credit Scheme, where the government will co-fund 40% of wage increases for Singaporean employees over the next 3 years, for Singaporean employees earning up to a gross monthly wage of $4,000.

According to Annex A-3 the Budget 2013 Documents, “At the end of 3 years, the employee (who receives an annual increase of $200 every year) will receive a total of $14,400 more in wages, of which the Government would have co-funded $5,760.” “The Wage Credit Scheme is estimated to cost the government about $3.6 billion over 3 years,” which means that if every worker has an increase of $200, 625,000 Singaporean workers would be able to benefit. There are about 380,000 to 400,000 Singaporeans earning less than $4,000, which means that some Singaporeans would be able to obtain an increment of more than $200 every year. The question is, would businesses bite?

Theoretically, businesses might take advantage of the government’s co-funding of the wage increases to further increase the wages for Singaporean employees. However, in reality, because of the high operational costs, businesses might, in effect, continue to pay employees the same wage increase that would be originally planned for, and absorb the 40% government co-funding as savings. Otherwise, they might only make incremental increases, and still be able to earn from the co-funding. For example, the government might have presupposed that if an employer were to plan to increase the wage of an employee by $100, given the co-funding, the employer might then increase the employee’s wage by $166, so that the employer continues to pay $100 of the increment, which would represent the 60%, and the government forks out another 40% to pay an additional $66. In reality, the employer might continue to increase the wage by $100, but claim the 40%, or $40, of this wage increase as cost savings. Otherwise, the employer might increase by a bit more, say by $120, which means the employer still saves.

The problem with the Wage Credit Scheme is first, there isn’t a minimum amount that businesses are expected to increase the employee’s wage up until, and second, that there isn’t a minimum amount or proportion that businesses are expected to increase the wages by. There is simply no incentive for businesses to increase the wages of employees by more than they had planned for, because businesses would want to make as much profits as possible. The government has also not explained to businesses why they are expected to increase wages, so there might be no buy-in from businesses as to why they need to do so.

Also, to ensure that there are higher wage increases for the lower-wage workers, the government should implement this scheme in a tiered manner, such that there will be a higher proportion of co-funding for businesses which intend to increase the wages of the low-wage earners. By doing so, this will be more likely to benefit low-wage workers, which this scheme is supposedly to rightfully help. However, the government has not included this as part of the scheme. Has the government not thought about this, or does this say something about the government’s perceptions of “low-skilled” workers?

Finally, and most importantly, what has not been taken into account is how the 40% co-funding will work. Of this 40% co-funding, 20% will go back to CPF. Also, of the increased salary, the employer would have to pay another 16% of the employer’s contribution to CPF. If this 40% co-funding doesn’t account for the employer’s contribution to CPF, what this means is that out of the 40% of the co-funding, if 20% goes into the employee CPF contribution and 16% goes into the employer’s CPF contribution, the government only needs to fork out 4% of the co-funding, which means that out of the $3.6 billion set aside for this scheme, the government will only need to spend $360 million.

Conclusion

In summary, you can see that the government’s said aims to increase foreign worker levies to protect Singaporeans, and to implement the Wage Credit Scheme to increase the wages of Singaporeans, will come to almost nought for Singaporeans, because first, the Wage Credit Scheme lies in the hands of the businesses and there is no regulation that the businesses are held against, which means that they will look at how the scheme will affect overall business costs and adopt the scheme in that light, rather than to observe the rights of the Singaporean worker. The wages of Singaporeans might therefore not increase by more than what was originally planned for increase by businesses.

Also, for the initiatives discussed here, the government ultimately benefits because the foreign worker levies are used in tandem with CPF contributions, which the government has carefully calibrated to allow them to earn maximally. By creating a deception that the foreign worker levies are created to protect Singaporeans, the government has increased the levies, which even with slightly fewer foreigners coming in, will still allow them to continue to earn. Together with CPF, where most to the wage increases for the Wage Credit Scheme will be channelled into, the government will continue to earn revenue from all sides, even as they claim to be on Singaporeans’ side.

You can read the full article here.

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6 comments

  1. descended

    1) govt gets money by taxing people
    2) govt proposes to co-pay employers to increase their employees’ salary.

    This is a stupid and messed up complexity.
    Just reduce taxes such as GST, etc and people will have more money.

    • My Right to Love

      Exactly what I think – there’s too much complexities.

      But the complexities are there for political reasons. As a government, you want to channel money back to yourself then dispense it, so that you gain credit for it.

      Also, it’s there for revenue. But the problem is – you can’t be maxing the people out for revenue. What else do they then live on?

      There needs to be more simplified, direct and sustainable measures for wealth distribution, and a diversification of revenue sources.

  2. Damian

    Instead of tier levy according to the foreign workers’ salary, just implement levy of percentage that is the same (or slightly higher) as employer CPF contribution rate. If the employer CPF contribution rate is 20%, then the levy is 20% too.

    Together with minimum wage law, this will help the bottom percentile of the population greatly because it’s level playing field between locals vs foreign workers. If minimum wage is $1500, the employers will be paying the same $1500 + 20% to either CPF or government for each worker, regardless who they hire.

    However, even if government implement the above suggestions, more regulations are needed to level the playing field between local and foreign workers. For example when the jobs command way above the minimum wage. Theoretically, employers can still prefer to hire foreigners by offering a lower salary (and thus, lower levy of 20%, rate is the same but amt would be lower) to foreigners. Then the locals would still be disadvantaged.

    • My Right to Love

      Dear Damian,

      My sentiments exactly! The framework that MOM is looking into to protect the employment of Singaporeans should cater for that.

      At the same time, the government has imposed such heavy foreign worker levies, also because these further increase our revenue, as well as with the CPF.

      This would mean that the government need to identify new income sources for our revenue, so that the people are not made use of for revenue accumulation, and we can start according to the people wages which are commensurate to the cost of living in Singapore.

      Thanks!

      Roy

  3. Pingback: Daily SG: 28 Feb 2013 | The Singapore Daily
  4. Pingback: Dissecting Budget 2013: Part 2 | The Heart Truths

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