How govt could tackle Singapore’s income gap problem: panel

(From left) Sembawang GRC MP Vikram Nair, EIU analyst Sudhir Vadaketh, economist Donald Low and blogger Alex Au. (Photo courtesy of Lui Zhi Jing)

Is there room to grow our domestic economy organically? Would strengthening our social safety net and raising taxes help to nurture entrepreneurship spirit?

These are some of a few out-of-the-box questions raised by prominent blogger Alex Au and economist Donald Low at a forum on income inequality earlier this week.

Organised by the National University of Singapore’s Political Association in conjunction with the university's Tembusu College, the forum saw Au, Low, Economic Intelligence Unit analyst Sudhir Vadaketh and Sembawang group representation constituency Member of Parliament Vikram Nair share their respective views on why Singapore’s income gap is as wide as it is — currently among the highest in the world — and possible ways to remedy the problem.

Speaking first, Au said the government could explore the possibility of developing its domestic economy in order to reduce its dependency on foreign investments and workers.

He also suggested the extended retention of foreign workers instead of importing them on short-term work permits in order to allow them to use the skills they have learned from working here to boost productivity.

“We’ve got to lengthen the stay of any (foreign) worker so that their skills remain here,” he said. “We’ve got to break that link (between work permits and employers) so that if this employer doesn’t need the worker any more, at least the worker stays here and works for another, and we keep the skills in Singapore. That’s how we improve productivity — retaining experience and skills.”

Income inequality: a deep-rooted problem

Low, who is a senior fellow at the Lee Kuan Yew School of Public Policy, argued that income inequality is a problem much larger and systemic than poverty, the latter of which he said can be solved fairly easily by targeted transfers.

“Income inequality is not something that can be fixed by a subsidy here, a tweak there, a use of incentives, raising foreign worker levy somewhere else,” he said. “I think it’s a far deeper problem that is deeply rooted, not just in domestic policy but also in our political economy.”

Noting the prevalence of inequality in almost all developed countries, Low acknowledged that it is not a ‘uniquely Singapore’ problem.

“But our experience is not reflective of every other developed country’s experience,” he pointed out. “There are unique factors domestically that explain our worsened inequality situation in Singapore.”

These factors, he says, include the structure of our economy, which incorporates a low wage share of GDP relative to capital holders, the ineffectiveness of trade unions, and the government’s approach to policies — be they to growth, social security or to industry development.

Strengthening social security

One key policy change both Low and Au suggested, though, was to strengthen the government’s social safety net through the enhancement of childcare and healthcare subsidies, as well as retirement coverage — something Low added can be made room for through moderate increments in taxation.

“Our country has one of the lightest, lowest tax regimes in the world... so our welfare system has to be extremely small and has to be tightly targeted,” he said, noting that most middle-income Singaporeans do not pay any income tax.

“But the question is, what kind of society do we want to be? Do we want to be a Dubai, where you have a two-tier system — lots of foreign workers on extremely low wages, or do you want to be like Denmark, which has much more generous benefits but also much higher levels of taxation?” he asked.

Low pointed out that Denmark’s taxes may be higher, but also is a much more generous welfare state, and remains “very economically competitive”.

“We shouldn’t say if you want to do more for income inequality it means higher taxes and less economic competitiveness — that’s not the road we want to go down,” he said. “There are countries that seem to have managed that dilemma quite well, combining economic competitiveness with high degrees of social protection.”

Au added that a stronger social safety net could also promote entrepreneurship and innovation, thus helping to nurture a domestic economy in Singapore.

“In other words, when people feel that even when they fail, there is that basic security of getting healthcare, of getting housing, of getting old age pension... so they are therefore actually more prepared to take risks in their working life,” he said. “There is an argument now that building a social safety net helps a society become more innovative and entrepreneurial — really, that may be the answer to the question (of how to grow our economy domestically and organically).”

Inequality 'is an issue': govt

Responding to the points and suggestions made by his fellow panellists, Vikram stressed that the government does feel that income inequality is a pressing problem.

He reiterated the government’s existing methods of dealing with the issue, which include clawing back on foreign worker quotas and hiking levies, as well as partnering with multinational corporations to train locals up to take up senior and managerial positions, so that locals can take on more skilled jobs.

Vikram also shared the wide range of measures the government has taken to help the poorest of our society — workfare income supplements, free textbooks, free healthcare and subsidised rental housing, among others.

“As a matter of philosophy, we believe people at the lower income end should be given all the help they can so that they can improve themselves and also so their children can better improve themselves,” he said. “And I think that is a value we stand very strongly by.”

Singapore currently faces a severe income gap, with one of the world’s highest Gini coefficients — a figure of 0.45 when adjusted to include government transfers, and excluding the incomes earned by foreign workers here.

The government’s aggressive influx of low-skilled and lowly-paid foreign workers has also been blamed for a depression in wages for local workers at similar-skilled levels, as well as increased competition for jobs at the professional, managerial, executive and technical level.

Amid rising discontent among citizens, the government’s National Population and Talent Division released a population white paper on Tuesday that called for a continued reliance on foreigners to boost the country’s otherwise declining and ageing population to ensure sustained economic growth. An annual average of 30,000 foreigners would be allowed in to help boost the size of the population size to 6.9 million by 2030.

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