Building capacities for the future (Amended)

THE 2017 budget presented in parliament yesterday by Finance Minister Heng Swee Keat was widely expected to be a follow-up to the recent report of the Committee of the Future Economy (CFE), of which Mr Heng was the co-chair. It has delivered on that promise.

At its core, it is a budget aimed at building some of the capacities needed for Singapore's economic transformation, and it ticks many of the boxes consistent with that goal. It is also very SME-focused - which is appropriate, as these are the companies that most need help to transform and grow in a changing economy.

The employment picture already reflects some of the changes underway. While the unemployment rate at 2.1 per cent is quite low, as Mr Heng noted, workers are taking longer to find jobs. This suggests two possibilities. One is that the level of skill mismatches is relatively high. The other is that an increasing number of workers, while not in full-time jobs, are joining the so-called "gig economy" of part-time, self-employed work - a common feature in economies in the throes of transformation.

On the first, the minister has rolled out some constructive and pragmatic new measures to help workers adapt to structural changes (the "Adapt and Grow" initiative) and get trained in industries with good growth prospects (the "Attach and Train" initiative).

But the rise of the gig economy suggests that Singapore's informal sector is growing. The challenge here is to formalise it, by documenting these workers and what they are doing, bringing them into the tax net if they are eligible, and finding ways to extend social benefits to them.

On the enterprise side, companies will benefit from the wage credit scheme (essentially a wage subsidy aimed at helping firms cope with rising wages) and the Corporate Income Tax (CIT) rebate, which were originally part of the Transition Support package launched in 2013.

The CIT has been enhanced and extended to 2018, which companies should welcome - although it does not help loss-making businesses, as some tax specialists have noted. But the wage credit scheme is in its last year. From next year, companies will have to either count on higher productivity or a more lax labour market.

To strengthen enterprise capabilities, Mr Heng has unveiled a targeted, three-pronged programme to help companies go digital, innovate and scale up. A lot of institutional aid - both specialist advice and funding support - will be available here from the Info-Communications Development Authority, Spring, dedicated SME Centres and A*Star.

But tax incentives would have helped as well. For example, digitalisation can involve massive upfront costs - in hardware and labour related to data migration and management. Tax reliefs on such expenditures would have been welcomed.

To help SMEs internationalise, Mr Heng has rolled out a particularly interesting initiative: a S$600 million International Partnership Fund, which will co-invest with Singapore firms in overseas (especially Asian) markets. The fund will be managed by Temasek subsidiary Heliconia Capital, which in the past has partnered a number of companies including the Jumbo Group of restaurants, the gaming company Razer and the mixed martial arts promoter One Championship. Its wide and varied experience will now be available to more SMEs.

Ageing and health

The minister has also offered more support for firms that hire older workers through the special employment credit scheme (which subsidises part of the wages of older workers) and an "additional special employment credit". Under the two schemes, employers stand to get support of up to 11 per cent for wages of their eligible older workers. However, these schemes, too, are holding operations both will end after 2019), which suggest that in the medium term, we will need to see measures to slow the ageing of the workforce and/or stronger measures to incentivise companies to hire older workers.

The ageing phenomenon is now clearly reflected in the budget numbers, specifically relating to health care, which is now the third highest expenditure item after defence and education. Mr Heng noted that healthcare spending has more than doubled over the last five years and "will continue to rise as the population ages".

The government has been generous in expanding health subsidies in previous budgets. But for the future, prudence demands that some of the expenditure be shifted away from the public sector: for example, by providing incentives to people to take up private medical insurance - there are no tax deductions for this at present - and by abolishing caps on employers' deductibility of medical benefits provided to their staff.

Ageing and other rising social needs, coupled with the ambitious infrastructure projects underway, will increasingly strain the government's finances. The proposed permanent 2 per cent cut in the budget caps of government ministries and organs of state from this year onwards is a welcome interim measure. But as Mr Heng noted, in the future, the government must strengthen its revenue base. This would have to be done either by raising the GST rate (which is low by global standards), widening the direct tax base or some other means. But those are challenges for another day, another budget.

Amendment note: An earlier version of this story incorrectly said that only the Special Employment Credit will end in 2019. The MOF has clarified that both the Special Employment Credit and the Additional Special Employment Credit scheme will end afrer 2019 after the extension announced at this buget. The article above has been revised to reflect this.