Singapore Budget 2014 striving for "inclusive and sustainable" growth: DBS

By strengthening productivity and social safety net.

The Singapore Budget 2014 continues to focus on reinforcing the productivity drive and strengthening the social safety net so as to ensure that growth is inclusive and sustainable, according to DBS senior economist Irvin Seah.

"Productivity growth continues to be a key focus. While not deviating from the notion of alleviating the pain of restructuring through productivity enhancement, Budget 2014 is more carrot than stick," he said.

"Fostering inclusive growth remains in the spotlight. Measures were targeted towards alleviating the cost burden of the lower and middle income groups and in facilitating social mobility," he added.

Here's the complete commentary from DBS's Seah:

A Well-tuned Budget

Budget 2014 was unveiled by Deputy Prime Minister Tharman Shanmugaratnam earlier today. Following the previous budgets to restructure the economy, it continues to focus on reinforcing the productivity drive and strengthening the social safety net so as to ensure that growth is inclusive and sustainable.

Raising the game on productivity and restructuring

There has been no further broad-based tightening in foreign labour policies, which has been a pain-point for companies in past years. Instead, more assistance has been announced to help companies upgrade their technology, harness innovation and ultimately enhance productivity. This is much in line with our long-held view that appropriate and targeted assistance to companies will yield much better outcome in the longer term than broad-based tightening in labour policies, which undermines Singapore’s competitiveness.

The PIC scheme has been extended and enhanced, and this will definitely be welcomed by businesses. Qualifying SMEs can now claim up to SGD 1.8mn tax deduction over 3 years under the PIC+, up from SGD 1.2mn over the same period previously. However, what has been lacking is perhaps further easing in qualifying criteria to allow smaller companies to benefit from the PIC scheme. Survey has shown that the take-up rate for smaller companies has been lower than the bigger ones. With less resources at their disposal, the smaller companies will need just as much, if not more help from the government to enhance their productivity.

Beyond that, additional tax incentives to encourage SMEs to adopt innovative IT solutions was rolled out. The government is also taking more forceful steps to alleviate the funding needs (i.e. crowd-funding) and internationalisation attempts by SMEs. This will surely go a long way in fostering entrepreneurship in Singapore and in helping local SMEs grow through bigger overseas markets.

In addition, productivity enhancement measures in the construction sector has become more calibrated. Requirements for construction companies to leverage on new techniques and technologies, as well as new measures to encourage companies to upgrade skills of their workers and retain staff, will likely result in more positive impact in the longer term.

The hikes in employers’ CPF contribution rate (into Medisave accounts) will hurt companies’ bottomline in the form of higher employment costs. However, the overall net impact of this measure on the economy is more positive compared with the hikes in foreign workers’ levies (FWL), particularly if it is viewed as an attempt to force companies to raise productivity. Both have the same outcome of raising business costs. Yet, the hikes in employers’ CPF rate will benefit Singaporeans directly, whereas, previously the hikes in FWL benefited only the official coffer.

Another push on inclusive growth

Fostering inclusive growth remains in the spotlight. Measures were targeted towards alleviating the cost burden of the lower and middle income groups and in facilitating social mobility. Indeed, while there has been a decline in the Gini coefficient, narrowing the income gap remains the key to fostering inclusive growth. Tax rebates and more GST vouchers have been given. More subsidies have also been announced in the areas of healthcare and education. These two cost components have been the two fastest rising cost factors within the CPI basket behind transport and private accommodation costs.

More forceful subsidisation in medical care will go a long way towards the well-being of the disabled and children with special needs. The increased subsidy on education is consistent with the economic principle of creating equal opportunity for all and to facilitate social mobility. In addition, while the hikes in employers’ CPF contribution will hurt companies, it will help Singaporeans to meet their medical needs going forward. But beyond higher subsidies, a review on costs in our medical and education institutions may help too.

The Pioneer Generation Package has taken centrestage in this budget. Heavier subsidies on healthcare, medical insurance and transport costs have been introduced. Significant Medisave top-up has been all been announced. Beyond giving due recognition to the pioneer generation for the sacrifice that they’ve made in nation building, this also marks another step in fiscal policy towards preparing the nation for the challenges of an aging population. However, the relatively larger hike in employers’ CPF contribution rate for elderly workers may hurt their employability. This will warrant some attention especially given that the number of unemployed older workers (above 50 years old) has been rising despite the labour crunch.

The year 2014 marks the halfway mark of this journey to restructure the economy. The economy is at a crossroads. Pain has been incurred even as some success has been achieved. Budget 2014 is a well calibrated continuation of the effort to steer the economy towards Singapore’s longer term economic goals. Success in the next phase of the restructuring will require a mindset change. Singaporeans must adapt to a new social norm, a new way of life. And companies must embrace the paradigm of conquering new challenges in order to survive.