Dissecting Budget 2013: Part 2

This is part of a series of articles to understand Budget 2013 and its significance for businesses and the people in Singapore. You can read Part 1 of the article here and the summary of Part 1 here.

For Part 2 of this article, we will focus on the budget for businesses. For the first part, in the table below, I will summarise the budget for businesses, and discuss broadly about the thinking behind the budget and the broad impact at the later part. Where possible, I have also included links to the initiatives, for easy reference.

Budget 2013 for Businesses: “Restructuring for Quality Growth”

Budget 2013 for Businesses: “Restructuring for Quality Growth”

Broad 3-Year Transition Package Initiatives:

  • Productivity and Innovation Credit (PIC) Bonus: Businesses that invest a minimum of $5,000 per Year of Assessment (YA) in PIC qualifying expenditure will receive a dollar-for-dollar matching cash bonus. The bonus will be up to $15,000 over three Years of Assessment, YA2013 to YA2015. The PIC Bonus is expected to cost $450 million over three years. According to the Annex A-4 in the Budget 2013 Documents, “This is in addition to existing PIC benefits of: (i) 400% PIC tax deductions up to $400,000 in expenditure for each PIC qualifying activity; or (ii) Cash payout at 60% on up to $100,000 of the qualifying expenditure.”
  • 30% of corporate tax rebate, payable up to $30,000 per Year of Assessment. This is expected to cost $1.3 billion over three years.
  • Allow owners of commercial vehicles who choose to renew their ten-year COEs for another five years in the first instance to extend their COEs further for another subsequent five years.
  • One-year 30% road tax rebate for goods, vehicles, buses and taxis. The rebate will take effect on 1 July 2013 and save businesses $46 million.
What will actually happen:

  • Seen in totality, there are other cost-saving measures which the government had introduced in Budget 2013, which businesses can look at on the whole to base their business decisions:
    • Wage Credit Scheme: 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 ($3.6 billion over 3 years)
    • Productivity and Innovation Credit (PIC) Bonus ($450 million over 3 years)
    • 30% of corporate tax rebate ($1.3 billion over 3 years)
    • 30% road tax rebate for goods, vehicles, buses and taxis ($46 million over 1 year)
    • Land Productivity Grant: support companies which intensify their use of land in Singapore. Help will also be given to those who choose to relocate some operations offshore, including to the immediate region, while retaining core functions in Singapore and saving land ($60 million)
  • Though this has to be balanced in light of the additional costs that businesses will have to fork out:
    • Higher Foreign Worker Levies across the board in July 2014 and July 2015: revised levies range from $315 to $1,050 (see link for breakdown)
    • Minimum S Pass qualifying monthly salary raised from $2,000 to $2,200 from 1 July 2013 (which might represent higher costs)
    • MOM will put in place a framework to ensure that firms give fair consideration to Singaporeans in their hiring practices (which might represent higher costs)
    • Employer contribution rates for low-wage workers will be restored from below 11% to 16% from 1 January 2014 (cost employers $83 million in 2014)
  • All in, businesses have been asking for lower operational costs and more assistance to boost productivity, and Budget 2013 seems to have catered to that. Though, this has to be seen in light of the additional labour costs that will be incurred.
What needs to be done to make sure initiative(s) work:

  • Budget 2013 has catered for this as well. To ensure that the initiatives to boost productivity will be successful, previous feedback and requests from businesses has been to reduce the barriers to receiving such assistance and to provide further assistance on the adoption of new equipment. The government has announced the following initiatives, in light of this:
    • Improve the accessibility of government support schemes for our SMEs. Amongst other things, SPRING will enhance the Enterprise Development Centres into one-stop, integrated SME Centres ($32 million)
    • Make it easier and faster for businesses to make Productivity and Innovation Credit (PIC) claims. For example, restaurants will be able to claim for dishwashing machines and contractors can claim for scissor lifts ($130 million over 3 years)
    • Collaborative Industry Projects: consortia of firms will develop solutions to industry-specific productivity challenges  (Estimated $100 million over 3 years)
    • PACT scheme (Partnerships for Capability Transformation): foster SME collaborations with large enterprises so as to enable co-innovation, capability upgrading and sharing of best practices within the supply chain (Estimated  $60 million over 3 years)
    • Link up SMEs with public-sector research institutions and private sector technology providers to identify and develop productivity solutions that give them a competitive advantage ($51 million)
    • Help SMEs who are expanding their overseas footprint by mitigating the risks inherent in such ventures. In addition to the Political Risk Insurance Scheme introduced last year, IE Singapore is working with Asian Development Bank (ADB) and private insurers to expand the Asian Development Bank’s Trade Finance Programme for Singapore exporters. This will provide credit guarantees to facilitate exports by our companies.
    • Set aside land for Integrated Construction and Precast Hubs to promote prefabrication in construction, and enhance grants to encourage adoption ($10 million over 2 years)
  • On top of this, businesses had also requested that the government provide support to invest in manpower, education and training for their employees to enhance their work productivity and efficiency. Again, this has been catered for in Budget 2013:
    • Enhance the Workfare Training Support (WTS) scheme for lower-wage Singaporeans as well as programmes to help PMEs to develop further expertise or to make mid-career switches.
    • Launch an SME Talent Programme, developed by SPRING Singapore, together with the industry chambers and trade associations. The programme will provide awards to encourage polytechnic and Institute of Technical Education (ITE) students to join our SMEs upon graduation.
    • Top up the Lifelong Learning Endowment Fund (LLEF) by $500 million. (In 2012, $121 million was spent and in 2011, $136 million was spent, so $500 million should be able to provide for another 3 years or so.)
  • Not only has the government identified a need to work with businesses to boost productivity among the current businesses in Singapore, on the whole, there is a need to identify new areas for innovation, to boost Singapore’s productivity in new areas:
    • EDB will set aside $500 million over the next five years to support a Future of Manufacturing plan, by working with key industry partners, universities, polytechnics and Research Institutes to test-bed new technologies and develop applications that can be commercialised and tapped on by firms, including SMEs. The Future of Manufacturing is “a report by the World Economic Forum (and) written in collaboration with Deloitte Touche Tohmatsu Limited,” which describes how, “Talent, the ability to innovate and the strategic use of public policy will play a significant role in defining manufacturing sector competitiveness in developed and emerging economies going forward.” The report can be found here.
    • Set up Satellite Industry Development Fund ($90 million) to support the emerging satellite industry
    • Develop a pool of 2,500 analytics professionals over the next five years to support this new area of professional services industries through programmes such as NTU’s recently launched Business Analytics degree.
Are these good initiatives? What are better initiatives?

  • As I have mentioned at the start of this article, this budget is a budget for businesses, and it is a very good budget for businesses. The budget looks holistically into the needs and wants of the businesses, and try to provide for them as far as businesses want.
  • However, some businesses might argue that they would have preferred if direct cost reduction measures in rents and transport costs be provided. However, the government had preferred to provide tax breaks, such as the 30% corporate tax rebate and 30% road tax rebate, which enable businesses to have more flexibility towards managing costs. For example, the Land Productivity Grant is also an innovative way which the government is encouraging businesses to continue to locate their businesses in Singapore, whilst moving out lower-end manufacturing needs to neighbouring countries. Instead of lowering rents which might not have the effect on retaining businesses in Singapore if rents are not low enough, the government aims to use this grant to shift Singapore up the value chain by doing away with labour-intensive industries, whilst retaining core business interests in Singapore. This is an ingenious move. In effect, the government has tied business interests to Singapore through rooting businesses here, by way of financial incentives. The other reason for using tax breaks is also because tax breaks are a financial instrument which can be adjusted more flexibly. A specific reduction in land costs or transport costs might make it more difficult to adjust the costs in the longer term.
  • As to whether the initiatives in the budget will succeed will lie in the details and execution. When the government talks about assisting SMEs to grow, which SMEs is the government talking about? Are there only specific industries or SMEs of specific sizes that will be assisted? Will smaller SMEs be driven out of the competition? As to whether these initiatives will benefit all businesses in Singapore, we would need to know how they will be executed.
Why did the government plan these initiatives in this way?

  • The Singapore government has always prioritized the growth of businesses and creating a supportive environment for businesses as the key to Singapore’s economic growth and longevity. Budget 2013 is definitely a budget aimed at regenerating growth among businesses in Singapore. It also showed renewed focus and re-prioritisation by the government back into productivity innovation to restructure the Singapore economy, and to move Singapore up the value chain.
  • This restructuring is long overdue, though. In 2005, the government shifted gears to open up our borders, which allowed businesses to employ cheap labour, which had led Singapore into becoming a labour-intensive economy, where other social ills, such as depressed wages and inequalities have also arisen. The government had also focused on attracting high net worth individuals to invest in Singapore, so as to accumulate wealth through foreign investment into Singapore, which has driven up housing prices and others costs in Singapore. Budget 2013 represents a shift in mindset by the government to seriously move into the restructuring the economy, which the government has postponed for at least the past 8 years.
  • After the tightening of foreign workers last year and with the threat by businesses leaving, the government had to act to stamp the outflow. One might argue that in 2012, the government had pandered towards populist sentiments and wasn’t able to convince businesses sufficiently on how, even as the government had seemingly pandered towards populist policies, if businesses were to understand deeply, the Singapore government had never changed its course in supporting businesses. Budget 2013 was really to affirm to businesses on the Singapore government’s commitment to them.
  • In the Singapore Population White Paper 2013 that the government had released earlier this year, the government had seemed to want to continue on the focus to increase the number of foreign workers into Singapore. Even though the government had projected for a slower population growth in the decade preceding 2030, it did not seem that the government was sincerely committed in traversing Singapore’s economy towards the knowledge economy, and in restructuring the economy. Whether or not the uproar among Singaporeans against the government’s economic direction in the population white paper had any cause to do with the announcements in Budget 2013, Budget 2013 shows the first serious and holistic push by the government to restructure the economy, in recent years.
  • As for the people, there are 3 more years before the next general election. The government is in no hurry to introduce any drastic policies which will favour Singaporeans, as it is too early at this point to do so, since the impact of Budget 2013 will be lost by the next general election. If anything, the government would save any massive change in policy direction for the people in Budget 2015 or Budget 2016, which is unfortunate, because the people’s well-being is then held ransom by the government’s peg of any initiatives of their well-being to votes. And not only that, budget initiatives which will favour the people will therefore come only once every five or six years. Which also means that the government has also tied businesses to increasing their productivity and restructuring their businesses within 3 years, because this is how long they have before they need to act in accordance to the people’s wishes. 
  • Finally, if Singapore was to want to position itself firmly as a knowledge economy in the next decade, the government would need to start making a very serious push towards reforming the education system, so that we will be able to produce workers who will be able to think innovatively and expansively for the knowledge economy. As it is, some employers have shared on how they would not hire a Singaporean graduate, but would hire a graduate who had studied overseas, because of how the overseas graduate would be able to think more expansively, and in diverse ways. The flaw of Singapore’s education system, which has very much focused on rote learning and conservative teaching methods, has created a worker population which some might label as “waiting to be spoon-fed”. A knowledge economy requires workers which think in multiple ways and who can bring about innovative thinking. The Singapore economy needs to move up the value chain to become a knowledge economy and the government knows that. However, the government would need to move away from creating an education system that will protect their political security and move towards an education system that will support vibrant discussions and critical thinking abilities among the people. This also means that the government has to shift its thinking to recognize that an empowered and critically-thinking people can be an asset towards enduring its power, rather than to afflict it.   

On the whole, you can see that Budget 2013 aims to do the following:

  • Increase businesses’ productivity through investments, training and education, and through increasing labour costs to reduce the reliance on cheap labour
  • Provide incentives to root core businesses in Singapore whilst assisting them to expand non-core activities into the region. This is also why Singapore has heavily invested in the Iskandar region in Malaysia and in strengthening transport links to their capital, Kuala Lumpur.
  • Reduce overall business costs through tax breaks and other financial assistance

Also, from the way that Budget 2013 is framed, you can see that there are certain industries which the budget is targeted to grow:

  • Major businesses
  • Businesses with strong capital
  • Businesses which are nimble and with expansion plans
  • Businesses which are able to boost productivity and restructure
  • SMEs of a certain size and with strong capital
  • Transportation companies
  • New industries

But this doesn’t mean that businesses which are not part of these industries will not benefit from the budget. The government is really sending a signal to encourage businesses in Singapore to find ways to restructure themselves, and as long as they are willing to come on the bandwagon to increase productivity, they will ride on the change together.

You can see that the government is also stricter with some industries, namely the manufacturing, marine, construction and process industries, where the foreign worker levies have been raised significantly. The government has done so, in part because these industries might be the most labour-intensive, and while the government anticipate a slowdown in the growth of these industries, they hope that the productivity measures and the tightening of the foreign worker curbs together, can spur the change among these industries. For example, in the construction industry, the government anticipates the demand and output to reduce, from $32 billion to $20 billion, and $33 billion to $22 billion respectively, so this is a good time for the construction industry to restructure itself. At the same time, the government isn’t saying that the industry isn’t important. By setting aside “land for the integrated construction and precast hubs to promote  to promote prefabrication in construction, and enhanc(ing) grants (of $10 million over 2 years) to encourage adoption”, the government is signalling to the construction industry that the government is committed towards restructuring the industry in the next 2 years, albeit at a tighter pace.

Then, there’s the third group of businesses, where the government continues to value their core investments in Singapore and while the government would encourage them to maintain their core business functions in Singapore, would also want to provide financial support to them to expand into the region, so that if businesses might intend to ship out, or to move a majority of their functions into other region, the government will can use these incentives to motivate them to stay in Singapore. The Land Productivity Grant and the assistance to SMEs to help them expand their overseas footprint is intended to do that.

On the overall, the budget is really intended to spur business innovation and productivity, but the key as to which businesses will move up the value chain will really depend on whether the cost cutting measures are enough to make up for the increases in labour costs. Thus labour-intensive industries will be the most hard-hit. But if they are able to find innovative ways to improve their productivity, they will continue to thrive in the business environment in Singapore.

Budget 2013: A Budget for Businesses

To summarise for Part 2 of this article, Budget 2013 is a budget that has considered business interests very thoroughly, and has introduced initiatives meant to assist businesses on all fronts, towards reducing costs, investing in productivity, increasing accessibility and reducing barriers towards obtaining financial incentives, so that businesses can efficiently restructure themselves in an environment that is conducive for the change to take place.

Essentially, what the government is saying to businesses is this – we will reduce your costs, but you need to hire fewer people, and we will help you to restructure your business by improving productivity – so we will provide you with funds to increase your investment in equipment, and the training and education of your employees. At the same time, you need to move up the value chain and maximise the land use in Singapore by intensifying your core business interests in Singapore, but at the same time, we will help you to expand into the region by providing money to support your expansion. In doing so, the government hopes to build trust with these businesses. In a way, the cost saving measures are broad, in terms of the tax breaks, yet they are targeted towards achieving certain objectives, such as for productivity innovation and land use maximisation and intensification.

Of course, the Singapore government is known for micro-planning, and thus even as these broad initiatives have been introduced, there would be some qualifications that would need to be met, before businesses would be able to benefit from all the initiatives. Some businesses or SMEs might fall out of the system and a further analysis would need to be done to understand the details of the initiatives and their loopholes.

Also, as much as the government would like to have control, everything might be so controlled that we might be over-doing it. Some room for organic innovation can allow for growth areas which the government might never have thought about to blossom. Also, current budget initiatives to enhance innovation takes a top-down approach. If the government provides more leeway for bottom-up innovation, there might be new ideas as well.

Finally, the coverage of The Straits Times of the budget for businesses is actually quite comprehensive. When it comes to sharing information with businesses, it is interesting how the government is actually quite open. Sadly, that’s not the case with the people.

To also read up more about how the budget can impact a small SME, Mr Leong Sze Hian has written a very good article. You can read it here.

Budget 2013: Not A People’s Budget

Unfortunately, the same cannot be said for Budget 2013’s initiatives for the people. Even as the government aimed to close the loopholes and gaps for businesses and to increase their accessibility to financial assistance, as well as to provide even more financial assistance to them, the government isn’t interested to increase accessibility to financial assistance for the people and remains conservative in the financial assistance it renders to the people.

At the heart of the matter is that the government does not believe that the people, by themselves, are able to be productive. The government believes that productivity growth is only in the realm of businesses, and thus they are only willing to invest heavily in businesses to reap productivity benefits and profits. This can also be seen in the measures that the government has introduced in Budget 2013, where initiatives to boost the productivity of businesses are hinged upon partnerships with larger entreprises and public-sector research institutions and private sector technology providers.

In order for Singapore to dramatically shift away from the current mode of working, it requires that this government acknowledges that every individual in Singapore are able to be innovators and creators for the economy, as well as for the country. What this means is a fundamental shift in thinking by the government towards its outlook on the people, and in investing in a population, which will be trained to think critically and drastically differently from the current way of thinking. For example, if you look at the older people in nursing homes, can they also take on the responsibility of being peer-caregivers for the other older people, so that we can hire fewer caregivers for these homes? Or perhaps, how can we explore generating electricity from an individual’s activities, so that the individual also contributes to the electricity network in Singapore?

In the next part of the article, I will discuss Budget 2013’s initiatives for the people.

One comment

  1. Pingback: Dissecting Budget 2013: Part 2 (Key Points) | The Heart Truths

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