Behind Singapore Inc (Part II): ‘Gov’t must rethink delivery of public services’

In a wide-ranging interview with former GIC chief economist Yeoh Lam Keong, Yahoo! Singapore’s JEANETTE TAN  finds out what he thinks are the key challenges Singapore faces in its quest for continued economic development. This is the second of a three-part series entitled “Behind Singapore Inc.” that takes a look at the country’s key policies and governance.
[Read Part I and III of this series.]

Why peg public services to market prices?
 
In a recent hour-long interview with Yahoo! Singapore, former chief economist at the Government of Investment Corporation Yeoh Lam Keong asked this question.
 
A former schoolmate of Deputy Prime Minister Tharman Shanmugaratnam’s at the Anglo-Chinese School, and later the London School of Economics, Yeoh spent almost all his adult life working on government economic policy, and in that time experienced a social awakening to what he feels are inherent problems in the system.

“(The current model is) essentially relying on individual and family savings to fund these public services,” said the 54-year-old economist, who left GIC last June after 26 years to spend more time with his family.

“At the same time, it pegs the price of these public services to market prices when they don’t have to.”
 
Acknowledging that the majority of Singaporeans do have access to these three areas through the HDB scheme, subsidised and compulsory primary school education, as well as subsidised hospitalisation wards, he said nonetheless that the current model used in the delivery of these three services in particular needs to be rethought.

‘Lower cost of housing’

Yeoh gave an example of how Build-to-Order (BTO) flats are linked to general market prices by being pegged to the cost of resale housing.
 
“Once you do that, BTO prices will rise as general property prices rise, and resale prices are already often five to six times that of low to median (annual) incomes, making housing very unaffordable by most conventional housing industry measures,” he says.
 
Property market prices tend to be pulled up by the cost of upscale, private and landed property, he explains. These are subject to speculative forces and can be bought by people all over the world, so it tends to move toward price levels in other major cities such as Hong Kong and Beijing, where property prices are notoriously sky-high.
 
“That will then price out everybody else who falls below the top 20 to 30 per cent of households,” he adds.
 
In light of this, Yeoh, who himself stays with his wife and two children in a five-room flat in Marine Terrace, says BTO flats should be priced at a range of between two and three times of low to median annual incomes instead of between five and six times, where BTO prices currently stand.
 
This artificially lower subsidised price would be available only to Singapore citizens. In this situation, however, he notes further measures will be needed to prevent excessive speculation, recommending for example that Singaporean buyers should only be permitted to purchase flats at these lower prices once — for their housing needs — and suitably long “no resale” periods should be imposed.
 
What about the cost of land, an argument frequently used in favour of market pricing? Yeoh notes in response that Singapore’s government owns over 80 per cent of the country’s land area, and had acquired a large portion of it historically at low prices.
 
“So they have a big land bank at very low values, and they can use this land (more wisely)... for housing,” he adds.
 
He also said more cooperation and communication between ministries could help free up land space for public housing, however. Using the space taken up by an airbase for a BTO project, for example, would require the Ministry of Defence to work closely with the Ministry of National Development, which he said does not appear to happen very often.
 
“Although land is indeed a scarce resource for us especially in the long term, if you’re serious enough (to fix the land scarcity problem for housing) you can probably do it,” he says. “They’ve probably got enough land to do it.”
 
The real cost of education

Turning to Singapore’s education system which is heavily subsidised, Yeoh said the cost of private tuition is skewing matters out of whack.

Currently, a Singaporean child going through government-aided mainstream schools pays roughly $11 per month at primary school level, about $21 at secondary school, and about $27 per month at junior college or at a centralised institute.
 
Even at university level, Singaporean and permanent resident (PR) students attending local university courses benefit greatly from substantive grants provided by the Ministry of Education.
 
But these benign fee structures mask the real cost of schooling in Singapore when one takes in the cost of private tuition, says Yeoh.
 
“If you have a kid who has tuition in two or three subjects, that easily costs close to $1,000 (per month) or often even much more,” he says. “A lot of people also feel that at primary 6, they need to send their kids for tuition in three to four core subjects, so that adds up to more than $1,500 per month, perhaps even $2,000.”

But is private tuition really necessary?

Yeoh argues it is because of two key reasons — first, because of insufficient teaching resources for what is becoming an unnecessarily difficult curriculum and second, because class sizes are too large.

Making matters worse is the various possible paths in primary and secondary education alone — from the gifted programme to the through-train, and a wide range of elective programmes offered at secondary and junior college level.

It is no wonder parents become “kiasu” to ensure their children get the best opportunities and the most choices, said Yeoh.

His solution? Cut down class sizes and do away with unnecessary streaming.
 
“This would require higher education expenditure, but it will be less stressful for both students and teachers, and (the former) can actually be taught in school instead of at home (through tuition),” he adds, pointing out that the average OECD country spends about 6 per cent of its GDP on education, as compared to Singapore, which spends roughly 3.8 per cent.
 
‘Make healthcare universally affordable’

Much more can be done when it comes to healthcare, too, says Yeoh.
 
According to statistics from the World Health Organisation, private expenditure on healthcare in 2010 came up to a hefty 63.7 per cent of Singapore’s total healthcare costs, while the government covered the remaining 37.3 per cent.
 
This comes up to almost double the industry’s existing recommendations of roughly a third — the threshold for it to be considered “universally affordable”, he adds, especially when citizens of most other South Asian countries including Taiwan and Korea pay between 25 and 35 per cent of healthcare costs.
 
“But we have chosen to say, ‘No, the government should not pay for such a high share of healthcare costs; instead people should pay closer to the real costs of it themselves.’” he says.

“In doing this, we have made it very difficult to make healthcare universally affordable.”
 
Yeoh believes that Singapore’s current situation with respect to healthcare puts people at significantly higher risk of being bankrupted by their own illnesses — in particular where they suffer from chronic diseases that are not covered by insurance.
 
“I think the people shouldn’t have to pay (so much) for healthcare because it’s too much risk to pay for illnesses that could bankrupt them,” he says. “That’s the reason why the government should pay (for it), which is the fundamental rationale for universal healthcare affordability.”
 
How can this be done? Yeoh says the government should take a leaf from other Asian countries like Taiwan, Korea and Hong Kong and increase its expenditure on healthcare so as to bring down the private out-of-pocket share.

Pointing out that government healthcare expenditure in Singapore has stood at about 1.5 per cent of GDP for roughly the past decade while Taiwan’s government spent 4 per cent of its GDP on healthcare a decade ago, he said, “Why not spend more to make healthcare more affordable universally? We can afford it better than Hong Kong and Taiwan and Korea, so why aren’t we doing it?”
 
Where will the money come from?

So with his wide-ranging proposals, where will all the money needed to improve Singapore’s provision of housing, healthcare and education come from?
 
Yeoh says it can be a combination of surpluses and slightly higher taxation.
 
Noting that the International Monetary Fund estimates our structural budget surplus from the past two years to be about seven per cent of GDP (which amounts to nearly $15 billion), as compared to the figure given by our government: less than 0.1 per cent, Yeoh acknowledges that the government does mean well by its “over-conservative” accounting approach.

“But let’s face it, the IMF is hardly a tax standard,” he says. “We probably have at least four to five per cent of GDP we can use sustainably from the structural budget balance, let alone the full, long-term potential of investment income from reserves.”

He also thinks fiscal resources from Singapore’s reserves are similarly used too conservatively, but understands where the government comes from in its prudence.

“For one, they’re genuinely worried about a big disruption, a crisis or a deep depression, that they may need the money for a rainy day, and also for the needs of future generations,” he says. “But I think you can provision reasonably for that and still have enough to further supplement the needs of current citizens,” he points out.

“After all, these are the people who built modern Singapore with their sweat and tears — without their welfare, support and cohesion, a good society for future generations will not be possible,” he adds.

Another way to compensate tapping on the country’s surplus would be to raise Singapore’s low tax rates, he said.
 
“Even if you move taxes to 25 or 30 per cent, it is still very low, and you’ll still be able to save for a rainy day,” he says.
 
But won’t that deter top talent from working in Singapore?

Yeoh disagreed, saying that taxes for annual earned incomes exceeding $320,000 continue to stand at 20 per cent in Singapore, one of the lowest in the developed world.

“If you look at the literature on labour economics, it doesn’t seem to work that way. Talented people from other countries as a whole don’t seem to be unduly put off. But it’s a fear, and a belief they hold strongly perhaps without having looked at the evidence very hard,” he said.

Having said that, even with the additional revenue through taxes and budget surplus, improving these public services requires strategic vision and long-term planning, says Yeoh.
 
“You have to think five, 10 years out, not just two or three,” said Yeoh.

“To move from 1.5 per cent GDP in healthcare spending to 4 per cent over 10 years, for example, you get there by increasing spending by 0.35 per cent per year. You get there steadily, without inflation, at a rate that helps us absorb without going crazy, but it needs to be planned.”
 
In Part III of “Behind Singapore Inc.”, Yeoh reflects on the changing personality of the ruling People’s Action Party and its leaders.

Click here to read Part I, and here for Part III.