A financially sound step in right direction

IN the Year of the galloping Horse, there is a market sense that the macroeconomic environment has turned more benign and big tail risks in the US and Europe have largely faded. With the Singapore economy having expanded a better-than-expected 4.1 per cent in 2013 and households enjoying real income growth and easing inflation, Singapore policymakers can stay the course and focus more strategically on the medium-term structural challenges of economic restructuring and cultivating an equitable and inclusive society.

Given the bumper Budget surplus, it is no surprise that one of the fiscal priorities has been to address the issue of healthcare affordability - one which is closest to the hearts of Singaporeans, especially the elderly generation.

The key highlight of the FY2014 Budget is clearly the Pioneer Generation Package (PGP). Targeted at Singapore citizens who were 16 years or older in 1965 and who had received citizenship by Dec 31, 1986, the PGP comprises healthcare subsidies, Medisave top-ups and other benefits. This PGP is strategically important on three points, in my opinion.

First, the PGP is timely recognition that increasing social welfare spending, especially in terms of prioritising healthcare, is a step in the right direction for an ageing society. At more than $9 billion, the size of the PGP is more than double that of the $3.6 billion Wage Credit Scheme (WCS), and will benefit around 450,000 Singaporeans and cover them for life without any differentiation of income levels for the Pioneer Generation and regardless of future economic circumstances. Basically, this is a very generous measure to recognise their contributions to Singapore in the founding years.

Second, the decision by the government to fully pre-fund the Pioneer Generation Package in the current Budget through establishing an $8 billion fund so as to allow future Budgets to focus on other longer-term fiscal needs is a financially sound one. Given the surprise size of the PGP, it is indeed a testament to Singapore's fiscal prudence that it can be pre-funded at one go within the FY2014 Budget.

Moreover, apart from targeting sin taxes such as duties on cigarette and tobacco products and liquor, there were also no immediate hikes to the income tax or Goods and Services Tax (GST) to fund the PGP. In addition, there will not be any adverse supply impact to the Singapore Government Bond market in order to finance the PGP amount.

Last but not least, there was also no stinting on extending the scope of healthcare benefits and other assistance to elderly Singaporeans who do not qualify for the PGP. They will also enjoy a five-year CPF Medisave top-up as well as a one-off GST voucher in the form of Cash: Seniors' Bonus. This strikes a careful and calibrated balance between the pioneer generation and other elderly Singaporeans who are similarly concerned about healthcare affordability in time to come.

The FY2014 Budget initiatives essentially span the whole spectrum of controlling healthcare cost inflation by reshaping the healthcare system, reducing the concentration at acute hospitals, developing long-term care systems and quality people for the social sector, collective risk-pooling through MediShield Life, and putting in place the right and equitable incentives for promoting healthy living and healthy ageing so as to provide quality healthcare for all Singaporeans on a sustainable basis well beyond the next decade.

Consistent with this principle, the surprise one percentage point CPF contribution rate hike for all workers will go to the Medisave account to help save for future healthcare expenses, while employers will enjoy a 50 per cent offset through a one-year Temporary Employment Credit (TEC).

On balance, it is encouraging that some progress has already been made in terms of improving social equity. The latest household survey revealed that the Gini coefficient had declined from 0.478 in 2012 to 0.463 in 2013, the lowest since 2005. Adjusted for government transfers and taxes, the 2013 Gini coefficient fell even further to 0.412, suggesting that the ongoing redistributive efforts have paid off.

This is an ongoing journey, and it will be critical to see that Singaporeans rally to the government's call for this to be both a personal and collective responsibility.

The writer is head of treasury research and strategy at OCBC Bank