Avoiding the Robin Hood trap

WHILE the details may have been far more nuanced, the big picture ideas behind Budget 2019 have been well-flagged. Modestly counter-cyclical in the headline - from a surplus of S$2.1billion (0.4 per cent of GDP) in FY18 to a deficit of S$3.5 billion (0.7 per cent of GDP) in FY19 - and in the details, replete with multi-faceted measures to boost competitiveness, productivity and up(or right-)skill workers. Arguably, the most ambitious dimension of this Budget, and many to follow, pertains to daunting socio-economic challenges derived from rapidly greying demographics and inequality. And of the two, inequality, which has been notably reframed in a timely manner, is worth examining more closely.

In addressing the issue of inequality (manifesting in both income and wealth), it is critical that the solution was identified at the outset.

Specifically, Finance Minister Heng Swee Keat's allusions to social mobility, within the constraints of (financial) sustainability, are critical preconditions to tackle a problem as multi-dimensional and complex as inequality.

To be sure, by definition, one of the main purposes of the Budget is for re-distribution. In other words, in recognising the economic realities of uneven distribution of resources, fiscal policy is meant to facilitate a slightly more equitable re-distribution of resources across the economy. So admittedly, further enhancements to fiscal transfer packages such as the ComCare Long-term Assistance, and Workfare Income Supplement, alongside longer-term commitments such as the S$6.1 billion Merdeka Generation Package and S$5.1 billion in long-term care support initiatives, form a vital safety net.

But on its own, fiscal transfers that stop short of opportunities to transform economic circumstances are remiss in failing to address underlying causes of inequality. Point being, policies focused narrowly on short-term redistribution are not only unhelpful but may inadvertently increase social tensions if the debate on inequality devolves into a zero-sum game tug-of-war between the haves and have-nots. Afterall, the ultimate goal of inclusive fiscal policies is not merely some variant of Robin Hood-type of social transfers.

Instead, a more holistic approach to inequality is incomplete without an eco-system of measures and programmes, which can ensure that social mobility; which is a far more potent catalyst of socio-economic progress. And to this end, programmes such as KidSTART, Global Ready Talent Programme, SkillsFuture, Adapt and Grow and PCP (to name a few) provide a suite of schemes, built upon a pre-existing system of high-quality public education, to improve the chances of climbing the economic ladder.

But these schemes are merely the start of a long journey on battling inequality - a pervasive problem across many developed countries - and one can reasonably expect that further enhancements in coming budgets will be inevitable. And along with it, an increasingly urgent question of how to sustainably fund these efforts will be hard, if not impossible, to avoid.

Sustainability of financial commitments, already being addressed at the aggregated budget level, will of course share common solutions such as an (impending) increase in the GST rate alongside other measures to broaden the tax base (be it via "Netflix" tax and Pigouvian taxes such as sugar tax).

But two additional considerations will factor very sharply from the inequality angle. First, whether these additional taxes enhance or deteriorate progressivity of the overall tax framework, especially for the lowest income households.

Second, and more interestingly, as the population ages and consequently inequality tilts towards wealth, rather than income (as the proportion of working population shrinks), then the question of whether some sort of wealth-based tax becomes more pertinent, if not necessary, also cannot be ignored. Admittedly, the argument that consumption taxes could capture these is not entirely without merit. But the wider point is that differentiating between the means of addressing wealth and income inequality may demand nuanced changes to the tax solutions and funding propositions; which may offer progressive, but not prohibitive, wealth tax contribution.

To sum up, Budget 2019 manages the tough and delicate balancing act of being sufficiently counter-cyclical, appropriately strategic and unwaveringly committed to tackling structural challenges posed by ageing and economic transformation. Above all, the inclusive thrust actively looking to tackle inequality is as encouraging as it is welcome. Looking ahead, focus on social mobility and measured tax solutions will go a long way in avoiding socially divisive Robin Hood-type reflexes in political debates.