Battening down the Hatches

By David Sandison, Tax Partner, PwC Services LLP (Singapore)

The Budget was delivered early this year, in response to the parlous state of the world economy and the need for the government to spring into action and batten down the hatches of Singapore’s own fragile economy. I think there had been a suggestion that it would be an expansionary Budget; however “expansion” in the current situation is the word of an irrepressible optimist. Keeping the economy afloat was really as much as any realist could have hoped for. By and large, the measures that were announced will go a long way to doing just that.

The Budget focus therefore, quite correctly, was on preserving jobs. There is no use talking about stimulating an economy plagued by rising unemployment. But a secondary and no less important focus was on freeing up the credit logjam and getting the banks, sitting like rabbits in headlights as they are, to start lending again. Only in this way can the economy stand a chance of early recovery and getting back on its feet.

But the prospect of a rosier future was not ignored. Attention was paid to ensuring that the economy not only weathered the storm, but also emerged from it stronger than it went in. In other words, the Budget kept its eye on “Building for the future”. In this context, there is no doubt that Singapore has a significant advantage over most of the developed nations in that the Budget measures will all be funded out of the government’s own pocket. We will not, like many, have to resort to increased borrowing, or even worse, printing money (as has already been suggest by many, including “Helicopter Ben” (Bernanke)). It is not difficult to see how this sort of behaviour can end up in a stagflationary spiral. Singapore is therefore in an ideal position to rebound quicker than most, in a more stable and sustainable fashion, and take advantage of the distressed state of the other less agile, debt laden economies of the world.

Jobs, jobs, jobs

The main thrust of the job preservation strategy was the jobs credit scheme, where some $5.1 billion has been earmarked to help businesses retain local staff. The scheme is aimed at the lower paid and consists of an automatic cash hand out to all businesses in Singapore by reference to staff on their CPF records. The credit is based on 12% of the employee’s salary up to a maximum monthly salary of $2,500, which means up to $300 per month per employee, paid quarterly. The scheme therefore puts a premium on retaining lower paid staff. It is cheaper, if layoffs are inevitable, to make a higher paid worker redundant, as greater salary costs are saved, for no greater loss of credit.

Taking this to a logical conclusion means that foreign talent will be in the firing line, which in some ways contradicts one of the main pillars of the Budget offering, which is building for the future. This perhaps suggests that short term emergency measures aimed at stabilising the economy and helping it through the worst is the more important thrust. There will always be the opportunity, some may argue, of luring the talent back, particularly in the context of Singapore’s expected “speedier-than-most” recovery. It is to be hoped however, that employers will not get into this mindless mathematical analysis of who should, and who should not, be laid off.

One criticism of the scheme could be that it is indiscriminate. It is not clear what the position might be with companies that have no need for lay-offs (yes, there are still some profitable businesses!). Essentially the handout goes into an honesty box, where the employer has the choice as to whether he puts the money back through the payroll, or retains it to bolster his shareholder returns. As with property tax rebates which should, in spirit, be passed back to tenants, there is no real way of monitoring the extent to which this is done, if at all.

Foreign talent and demographic distress

The focus of the jobs credit initiative on lower paid Singaporeans brings me on to another aspect of the Budget and perhaps touches on part of what I think was missing. Certainly there were measures aimed at building for the future, but these were largely localised initiatives aimed at families and education – eminently worthy causes for sure – but in the context of the future of the economy, still local.

The country, it is clear, is in a state of demographic distress. It is simply not replacing itself. Amusingly the Japanese government have predicted the date by which they will be down to their last Japanese citizen. But this has a serious message. Singapore is in the same boat, and it seems inevitable that significant immigration efforts will be needed in order to avoid the same fate. But Singapore not only needs to increase its population in order to maintain its economic growth, it also needs the so-called foreign talent in order to keep the pipeline of intellectual property and ideas flowing in.

Given the likelihood of an expat exodus (some were predicting some 200,000), perhaps some emergency measures were, or are, required, to stop this potentially damaging outflow. In other words, this is not just a “building for the future” issue, but an emergency that needs to be attended to right away. The other demographic issue of course is the aging population. I was very pleased to see that there was no attempt to cut the CPF rate. This would have been a move in the wrong direction for the following reasons:

1 A rate reduction will be very difficult to reverse in the future. I cannot remember a year (even a good one) where Singapore businesses have not been complaining about rising costs of doing business (True isn’t it?).

2 Most people use their CPF for their housing, so a reduction in the employer rate would have been robbing Peter to pay Paul;

3 Finally, the CPF is already at dangerously low funding rates and cannot take any more downward pressure if it is to remain of any relevance in long term pension planning.

It is on this last point however, that I was again a bit disappointed to see that there were no new measures, initiatives or enhancements to employer sponsored pension schemes, to supplement the ever decreasing value of the CPF.

Liquidity measures

The credit crunch is a global phenomenon and Singapore has not been spared its consequences. Banks are still extremely reluctant to lend, even in many cases to their most loyal and sound business partners. Clearly this is not a state that can persist for ever as banks will simply have to start lending or go out of business themselves. However, liquidity is all about timing; and if businesses are unable to gain access to cash to pay their short term expenses, they can go under overnight.

Amongst other co-sharing initiatives, the government had earlier introduced a bridging loan program under which they would share up to 50% of the loan with a bank. The loan limit then was $500,000 which clearly showed that the aim was the smaller end of the business scale. However, in recognition of the all pervasive nature of the problem, the stakes were raised in the Budget. This was done by increasing the government’s risk share to 80%, and the loan limit to $5 million. For reasons that are understandable, the government has stated its intention to have the commercial lending decisions remain with the banks. It remains to be seen whether the initiative will have any meaningful impact. You can lead a horse to water, as they say, but you cannot make it drink.

Income tax

As far as income tax was concerned, there was little to get excited about. There was a pleasant surprise, with the reduction of the basic corporate tax rate from 18% to 17%, although one wonders why this was particularly necessary. Reduced tax rates will likely enhance competitiveness going forward, but will be of little use for those with losses piling up around them and who need immediate help.

In this context, it was encouraging to see the extension of the loss carry-back provisions and an administrative streamlining aimed at making refunds early. However, the retention of a maximum carry-back (increased from $100,000 to only $200,000 – or just over $30,000 in tax terms) has all but emasculated the benefits of the other improvements.

Against the expectations of many however, personal tax rates were effectively left where they were from last year, with a similar 20% tax rebate capped at $2,000. It had been thought (at least hoped) that, if nothing else, the top marginal rate would come down from 20% to align itself with the corporate rate of 18%, with the usual cascading downwards of the lower rate bands. This is something that has always happened in the past, either in the same year or with a one year lag. It is now a two year gap since the last alignment.

In the context of an economy that is in need of some domestic stimulus, freeing up personal take-home could have had some beneficial effect. On the other hand, cutting the top rate of tax may have been seen as politically sensitive; and there is no guarantee that the additional funds thus made available would have found their way into Singapore shops rather than cheap real estate assets in the UK. It is also true to say that stimulating local demand is only likely to have a marginal effect, given the comparative size of the domestic market, and Singapore’s almost all-consuming reliance on external markets whose performance is beyond its control.

Nevertheless, stimulating some demand is better than none. In addition, there is no doubt that personal tax rates are a very big draw for expatriates who in some cases are seeing rates in their home countries move in the other direction (for example, the UK that is proposing a 5% hike up to a top rate of 45%). A further move downward in personal rates would have made Singapore almost an irresistible proposition for those able to choose their own fate, if given half the chance.

For those that had been advocating a tax holiday (whether seriously or not it is hard to tell) this inertia on the personal tax rates must have come as a bit of an additional blow. We can only hope that there will be a reversion to tradition next year with a 3% drop in the top rate to 17% in conjunction with the new corporate rate. In the context of maintaining Singapore’s competitiveness, there must surely be pressure for that to happen. What we have to be careful about, in calling for such reductions, is that we are not faced with the charge that it must somehow be paid for; and the easiest funding for this is of course the GST rate. The free lunch will continue to elude.

Overall

Taken as a whole, the content of the Budget was largely predictable although the amounts that were handed out were not. While the aim of the measures announced was to also build for the future, it is clear that the main thrust was aimed at short term survival for businesses and jobs. There were certain areas that could have been given more attention, most notably the outpouring of our much needed foreign talent, however, in a crisis of this magnitude, it is accepted it is not possible to solve all problems at once. We shall see over the next year however, the extent to which the measures announced have been successful. In particular a very close watch needs to be kept on the banks, to see if there are signs of movement.

One thing is for sure. Singapore’s ability to pay for all these initiatives out of its own pocket will certainly give it a first mover advantage when the storm has passed over, as it inevitably will.