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  must mean that the top rate for personal income tax should also fall , 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.
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 , 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.
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."
The piecemeal nature has three unsatisfactory results:
1. Tends not 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.
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? 
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?
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?
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