Yawning Bread. 8 October 2008

With recession coming, what social safety nets have we in place?


    

 

 

I recently received, like many Singaporeans, a letter from the Central Provident Fund, telling me they were creditting a small amount of money into my bank account. Apparently it's called a "Growth Dividend" and is one of the many schemes the government has devised to put a bit of cash back into people's pockets. These tend to be so complex and ad hoc, I have a hard time understanding them. In any case, given the small sums involved, and the fact that I may not even qualify to get anything at all, I'm rarely moved to make an effort to find out.

 

For this particular payout however, I found a story in the Straits Times (see box at right) which informs us that the money is coming out of a massive budget surplus announced earlier this year, for fiscal year 2007. At the time, many bloggers took the government to task for being unable to anticipate its revenues. They asked: Why tax people so much in 2007, only to discover heaps of money in its coffers in 2008?

Here however, I won't get into that debate again. Instead, I wish to talk about the bigger picture of a tax policy that we have -- the one built around the Goods and Services Tax (GST) -- and the social policy that is called for, but which we do not have.

Indeed, tax revenues in 2007 were boosted by the 2 percentage-point increase in the GST, which went up to 7 percent in July last year. How long it is going to stay at 7 percent, I don't know. The GST started in the mid 1990s at 3 percent, then went up to 5 percent and now it's 7.

This has been part of a strategic shift in tax policy. In a nutshell, the objective was to lower corporate income taxes to make the tax environment in Singapore globally competitive. Lowering the rate for corporate income tax [1] must mean that the top rate for personal income tax should also fall [2], otherwise rich businessmen and executives would arbitrage between them.

To make up for the loss in tax revenues, the government had to introduce, and then increase, the GST.

 
Effect on social equity

What is the effect on social equity? There has been a reduction in progressivity in taxation in Singapore. Whereas income tax has higher rates for the well-off, the GST is a flat tax - the rate is the same for all. The rich, who used to pay more in taxes, now pay less with the reduction in income taxes. The poor, who didn't have to pay taxes before [3], now in effect pay tax each time they purchase even a bottle of soya sauce from the market.

Someone who earns just S$20,000 a year need pay no income tax. But he is likely to spend all of what he earns just to survive. This means he pays 7% of what he has as GST.

But someone whom we might describe as upper middle class, earning S$200,000 a year, might spend only about half his income, which means that effectively, he parts with only 3.5% of his income through the GST.

Of course, he would have to pay income tax, and at that income level, it would be about 10%. His total tax burden is thus 13.5%, which is not even twice the tax burden of the first example.

Moreover, over the last two decades, we've seen an enormous widening of the salary gap between the high flyer and the low-skilled worker. Coupled with the trends in taxation, what is beyond debate is that there has been a net reduction in social equity.

 
Compensating for increasing social inequity

We haven't really had a good political debate about the appropriate response of the state to this situation. Even as we changed our tax policy so drastically, even as income gaps have widened, we have stuck to the anti-socialist principle that everybody pays his own way. No unemployment benefits. No state pension for the elderly. Sure, there are subsidies for medical care, but you have to co-pay.

With another economic recession coming, it is time to talk about this issue.

 


Nation Builders -- a short documentary by Martyn See. In the filmmaker's words: "The wealth generated by Singapore's much-touted economic success story has not benefited everyone, least of all its senior citizens, a.k.a. the nation builders. Filmed on the streets and back-alleys of downtown Singapore in July 2007, this video does not contain any enactments or acting."

 
In principle, the government has been aware since the 2006 general election that to compensate for the adverse tax trends on the lower-income, there has to be a greater effort at doling out help to them. However, all their schemes have been piecemeal and time-delimited, as if determined not to compromise the sacred principle mentioned above. The schemes take the form of one-time pay-outs under various names, with varying qualifying criteria.

The piecemeal nature has three unsatisfactory results:

1. Tends not be counter-cyclical 
2. Feeds insecurity and stress 
3. Breeds political patronage

 
1. Tends not to be counter-cyclical

One of the expressed reasons why the government prefers ad hoc schemes is that help will only be given out when the budget can afford it. Yet, this is not needs-based. It is when the economy is bad and people are thrown out of work, that the need for social support is at its highest. Yet that is also the time when the state budget is likely to be under strain, collecting less corporate income tax or property tax. An economic recession, after all, is marked by companies making losses and falling real estate values.

This philosophy of giving help only when state coffers are full is misplaced.

 
2. Feeds insecurity and stress

The second effect of this ad hoc style of giving help is that nobody can plan. Nobody who has been retrenched knows ahead what help there is available. This is compounded by a tendency of some help schemes (e.g. Workfare) to be linked to remaining in employment, the philosophy being to help the low-income top up their earnings. The Singapore government is completely against helping anyone unemployed, lest it breed a class of loafers. But in the times ahead, we're going to see people lose their jobs. How will Workfare benefit them?

How do the retired elderly benefit from Workfare? Their children should support them, goes the official mantra. But what if they have no children, or their children have also been retrenched?

What happens when someone has no job, and due to some illness, exhausts his savings, including the compulsory Medisave savings? Most wards are susbsided, the government says. Yes, but you still have to co-pay. And if you have no money to co-pay? [4]

Piecemeal schemes result in unnecessarily high stress levels for many people. Even when the government stands ready to help, there is no predictability in how much help one can get, or for how long. There is no regular social support to rely on.

With stress and pervasive insecurity, social graces and cohesion may suffer. Is the infamous Singaporean lack of civility due to this? Is our high suicide rate due to this?

 
3. Breeds political patronage

One reason why I suspect the People's Action Party (PAP) government is keen on a plethora of mini ad hoc schemes is precisely because it's hard for anyone to grasp the whole picture. To get any help at all, most people will have to go begging to their constituency Member of Parliament, whose assistants would then inform them what they are eligible for.

This will help boost the MP's image as a dispenser of sympathy and largesse, and gain him a grateful voter at the next election. With 82 of 84 constituency MPs belonging to the PAP, the motivation to stick to such a model is obvious.

But is this kind of political culture good for Singapore in the long run?

 
 

11 Sept 2008
Straits Times
(Online Breaking News)

S'poreans to get growth dividends

SINGAPOREANS aged 21 and older will receive between $75 and $450 in cash from the Government on October 1.

Current and former National Servicemen will get an extra $50.

These payouts are the second instalment of the Growth Dividends and are 50 per cent more than originally announced in February.

The increased amount is aimed at helping people cope with the higher-than-expected inflation and an uncertain economic outlook.

It was announced last month by Prime Minister Lee Hsien Loong at his National Day Rally. At the same time, he said that come November, HDB dwellers will get a 50 per cent boost in their utility rebates.

Singaporeans are receiving Growth Dividends because of following last year's better-than-expected Budget surplus of $6.45 billion, arising from the robust growth of Singapore's economy.

The first payout was made in May to 2.4 million people.

How much each person receives depends on their age, annual income and value of their home in 2007. People who are 60 and older and making $24,000 or less a year will get the most.

A statement from the Finance Ministry yesterday said Singaporeans can check online how much they will get at www.growthdividends.gov.sg

They can choose to get the money in their bank accounts or through a cheque.

Those who had received the first payout will automatically get the cash next month and need not sign up again.

Those who qualify but have not signed up can do so online or on forms available at community centres, community development councils and CPF service centres.

The ministry also said people who wish to donate all their cash to charity should do so at the Growth Dividends website.

Families can calculate how much cash and other benefits they will get this year, using a table in the letter they will receive from the CPF Board.

Singaporeans can also check their allotment figures online at www.growthdividends.gov.sg

Note by Yawning Bread: This story was accompanied by a table showing the various ad hoc aid schemes. See Table

 

More comprehensive social schemes needed

It's high time that we have a thorough review of social support schemes, from medical care to education, old age support and unemployment assistance. We need schemes that are simple to understand, automatic and comprehensive.

For too long, Singapore has been in awe of American capitalism. Our political rhetoric tends to be dismissive of "sclerotic, over-regulated Europe" with its "welfare-state" mentality, the latter term wielded as some kind of indictment..

Now, look at what the excesses of American capitalism have wrought. Towards the country's social needs, the American state has generally been irresponsible; for all their wealth, they still do not have a comprehensive national healthcare system. For the last 30 years, politicians of every stripe have been promising tax cuts (disproportionately benefitting the rich), but no one seriously addresses welfare needs.

Shouldn't we ask whether we in Singapore have been following the wrong example? Shouldn't we give ourselves a dose of the European welfare state? 

Yawning Bread 


 

Doctor ordered, so you must pay

Six years ago, I recounted a heart-breaking incident at the Singapore General Hospital pharmacy that my father witnessed with his own eyes, in The new healthcare insecurity

QUOTE
The old man asked the pharmacy clerk if he could take just a quarter of the medicines prescribed. The young woman said no, that would be foolish. The old man said, but I've no choice, I don't have enough money. The prescription is $600, and all I have is less than $200.
ENDQUOTE

What role was the state playing in this incident? Think about it.

 

Footnotes

  1. The corporate income tax rate is currently 18% with various exemptions. 
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  2. Currently the top tier is 20%, for the income band above S$320,000 per annum.
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  3. Currently, the tax rate is zero for the income band under S$20,000 per annum.
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  4. There is Medifund, which acts as a charity helping the indigent pay for their share of medical expenses, but as someone has pointed out, to qualify for assistance, you first have to spend every cent you have. How realistic is that? Won't people worry about being broke after discharge from hospital? How will they survive? Fearing this, poor people who are ill won't seek medical help because they know they can't co-pay; they suffer in silence. What sort of society is this?
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Addenda

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