Singapore's Economic Strategies Committee Calls For Fiscal Changes

by Mary Swire, Tax-News.com, Hong Kong

04 February 2010

The Economic Strategies Committee (ESC), which was established in May 2009 to develop strategies to enable Singapore’s sustained economic growth, has completed its work and submitted its report. Its key recommendations have been accepted by the government, whose specific responses will be contained in the 2010 budget later this month.

The ESC has established that Singapore must achieve higher productivity growth of between 2% and 3% per year, enabling its gross domestic product (GDP) to grow on average by 3% to 5% annually over the next decade. Increased productivity is to be achieved, it says, not merely through increased efficiency, but also by restructuring the economy through fiscal and other measures, to provide more room for rapidly growing and innovative enterprises.

It sees a globally competitive, knowledge-intensive manufacturing sector representing 20-25% of the economy, together with a trusted regional financial and modern services hub, and looks to the development of a deeper base of globally competitive Singapore enterprises - to grow 1,000 Singapore enterprises with revenues over SGD100m (USD70m) by 2020.

The ESC believes that the size of Singapore’s workforce will be a major constraint. Although a large part of the city’s GDP growth of 5% per year in the last decade was achieved through the expansion of its workforce – both resident and the foreign – it has become more dependent on foreign workers, who now make up almost one-third of the total workforce.

This dependence, it says, will have to be managed in the future. It believes that the best way to achieve that would be to rely on the price mechanism - by progressively raising the foreign worker levies. That would give companies time to adjust and to invest for productivity.

This approach would also allow flexibility for the employment of foreign workers to fluctuate in response to business cycles. The levy mechanism will enable competitive businesses which run short of workers to grow, without being hamstrung by rigid quotas.

At the same time, it is necessary to raise the quality of the foreign workforce, giving employers an incentive to retain experienced and skilled foreign workers. Employers should be encouraged to bring in and retain skilled foreign workers by increasing the skilled levy differential and promoting good management of foreign workers.

Without going into details, the ESC also requested the government enhance fiscal incentives for companies to innovate and improve efficiency. It should introduce strong economy-wide fiscal incentives for companies to invest in productivity enhancement and innovation.

It should also provide substantial support for efforts to upgrade worker skills. This should also include greater support for low-wage workers – by enhancing the workfare income supplement scheme to encourage continued employment, and by giving them further support for participating in training to raise their skills.

The ESC recommends that the government further strengthens Singapore’s position as a leading global-Asian financial hub. To do so, it should build on the city’s strengths in risk management and trading; asset management and private banking; loan syndication; project and infrastructural financing; and capital-raising.

In addition, the government should seek to integrate physical trade with related services such as trade and project finance, credit insurance and guarantees, risk management, supply chain management, certification and distribution. In the aviation and maritime areas, it should enhance activities in the insurance, financing, legal and arbitration services.

Finally, while overall, government expenditures are bound to grow, they must remain fiscally sustainable so that the overall burden of taxation on individuals and enterprises remains low.

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